Goatmug Blog - Financial Perspectives from the Mountain Top

WHAT IS IT LIKE TO BE POOR?

noreply@blogger.com (Goatmug) — Fri, 10 Feb 2012 04:26:00 +0000

WHAT'S FAIR?
I've been thinking about how our President continually describes people in the US as though they are treated unfairly and they don't receive everything they deserve. Mr. Obama often suggests that "those people should pay their fair share", and I guess the assumption by folks that listen and believe his comments must believe that the "fair share" will somehow be spent on funding services for others, perhaps even themselves.

As readers know, I am absolutely fine with wealthy people paying taxes, I just want someone to tell me where the limits of "fair share" are and then make a constitutional amendment to mandate that taxation cannot ever exceed "fair share". What I'm getting at is that Obama's "fair share" today may be 50% of earned income or 60%, but we all know that the amount will go up in time as entitlement programs and benefit services skyrocket and the need for revenue increases dramatically in the future. In other words, without some cap, there will always be someone that thinks those rich folks don't contribute enough to the poor people.

WHAT'S IT LIKE?
I often wonder about the lives of the needy in our country as I tend to pay attention to the amount of services that are available to low income earners because my health insurance business often allows me to speak with desperate people that have no income that need medical care. In my practice I am able to guide them to services and programs in our state that are available at low or no cost to provide medical care. As I educate myself on these topics, I often find other services that are made available to our poor and down on their luck citizens.

WHAT CAN YOU GET FOR BEING POOR?
A recent article I found summarizes one program that I've known about for some time called the Lifeline program where people below the poverty level can obtain cell phones or phone lines. The "grant" provided in this plan will cover about 250 cell phone minutes per month for free to the qualified user. I found this program because I saw a commercial on television that was advertising to seniors and suggested that they could qualify for a free cell phone!

WASHINGTON FOOTS THE CELL PHONE BILL FOR OUR POOR

Obviously a program like this was started with great intentions, but as you read the article, you will find that there is some segment of the recipients of the program that have the services, but don't qualify, or have obtained cell phones at multiple carriers, therefore abusing the free system. Ultimately those in either camp are stealing from the US taxpayer and our government oversight is clearly lacking. As a cell phone or land line user, you pay significant taxes each month to fund this program, you should know about it and should be pissed off that the government assumes there is about $200 million in theft or mismanagement going on in this $1.6 billion program.

Ok, cell phones are paid for and we know that food stamps are available through the SNAP Program that I report on monthly. (See the most recent post where I outline that 46 million of our fellow citizens are receiving benefits - WHAT'S UP WITH THE PO' FOLK?). We know that states offer Medicaid services for health insurance for low income earners. We also have heard about housing benefits for those that live in low-income housing (section 8 housing). Essentially, I'm painting the picture here that many of the basic and not-so basic needs of a person are being met for individuals and families that are below the poverty line in the USA.

Let's dig a bit deeper then and examine the life style of our poor. I recently found a book that reveals several key statistics about our poorest and highlights while they are "relatively poor" they do live quite comfortable lives. The life-style of many of these people is not quite like the poverty-stricken, dirty, and hunger-ridden life we might expect. Scott Rasmussen's book, "The People's Money: How Voters Will Balance The Budget and Eliminate the Federal Debt", highlights some facts that illuminate just how well off our poor really are. - WHAT IS POVERTY IN THE US?

FOOD PROGRAMS -

Parent report they have kids that go hungry - (only .25% of US homes)

1% of households report that they miss a meal in the day

CAR OWNERSHIP -

70% report they own a car

30% report they own two or more cars!

CABLE TV

63% state that they have cable tv or some other tv service

Rasmussen highlights other items like the fact that 23% use TIVO, 50% have a computer, and 53% have a gaming system. I guess where he is going here is that these are absolutely not necessary and they are considered luxury items....if you are really poor. I don't really get to worked up about these, but I do get fired up about cable tv subscriptions. Both car ownership and cable tv come along with monthly costs. Clearly car insurance is expensive, but you can use a car to work and pull yourself out of poverty. Unfortunately, cable tv expenses for our least fortunate is not defensible and is really the thing that makes me the most angry. Cable bills can range from $50 to $200 a month and this service has become a "right" for our poor. I've met and counseled many struggling families that need assistance with budgeting and debt management. One of the first items I challenge them to cut is cable and you can't believe the resistance that I receive. Perhaps I am nuts, but people that are poor don't "deserve" cable television, it is a luxury and that income could be spent wisely on anything else!

WANT THE BOOK?
Buy the book by Scott Rasmussen from our Amazon Link - The People's Money
(Oh yes, and if you buy anything from Amazon, please go through our search box at the upper right hand of our page!)

US POVERTY RATES BY RACIAL MAKEUP - http://ardd.sph.umich.edu/about_diabetes_disparities.html

25.9 percent for American Indians
25.8 percent for African-Americans
25.3 percent for Hispanics
9.4 percent for non-Hispanic whites.

CORPORATE PROFIT MAXIMIZATION
Unfortunately, we are a nation of entrepreneurs. (I don't really mean unfortunately in that sense, I mean that we are so good at it we tend to over do it). Because we have a system where the great big generous government will meet our poor's needs, we have created an incentive for corporations and organizations to try to maximize sales to the beneficiaries of these governmental services, that often could care less if there is waste or fraud involved. We've seen this example with the Scooter Store, a Texas wheel chair company that misled senior citizens and filed many false Medicare claims.
http://www.justice.gov/opa/pr/2007/May/07_civ_344.html Ultimately the Scooter Store paid millions to the federal government and the cause of the problem comes back to the fact that the users of the services didn't pay for them! When you are spending your own money, you actually care how much things cost.

By creating programs that are paid for and "monitored" by the federal government, cell phone companies advertise heavily and attempt to maximize the number of folks using the "free" system. This is why the Lifeline program is full of waste, companies are marketing to the user, not the payer, and in this case the payer has no limit on how much they will spend. While I expect more from businesses and owners, you can't help but to admire a firm that recognizes there is an untapped opportunity to harvest gains in the business landscape by exploiting the demands of users who will not pay for the services.

MEETING ALL NEEDS WILL MAKE KEEP SOME PORTION OF PEOPLE.....POOR FOR EVERMORE
Is the welfare life a good life? I don't think so, but maybe it is compared to working hard and receiving little or no incremental benefit for your labor. In other words, if I find a job paying $8 an hour and I have to pay for my own cell phone, food, rent, and other basics by myself with no assistance, I may have a bit more money, but I'm worn out and haven't made any real growth. I can imagine that this is the logical exercise that many participants go through when evaluating their decision to find a job or two or three. If you are killing yourself and you are worse off compared to receiving benefits and not working, you'd probably make the rational choice to make less or give less effort. I think this is the problem with making benefits so generous, it clouds the decision making process and makes the decision less clear cut.

The killer here is that if you provide just enough subsistence benefit to placate some people you will create generations of poor that learn to "work the system" and never get out. I think the best example of this was New Orleans before Hurricane Katrina. There were many families with three and four generations receiving benefits from governmental agencies providing for all of their needs. This corruption of the system ultimately hurt an entire city of people that were stuck in a system of poverty for years and years. Rather than changing the system and educating the public there, we created a legion of benefit experts that could exploit all of the provisions of social security benefits, welfare benefits and all other types of assistance. Ultimately, the creation of an entire class of people in the USA that receive subsistence help forever was not the design of the safety net system.

BEING POOR....SHOULD SUCK
Finally, I know that this post may be perceived as a "rich goat" not wanting to share his money with the poor guy, and frankly it isn't. What this post is about is that we as a nation need to determine what level of life-style we will support for our poorest men, women, and children. If we decide that at x-income level we will provide food, shelter, healthcare, cellphone, cable television, and a car, we are going to actually attract a whole lot of people that decide that level of "minimum life-style" seems quite fine. Bad incentives often result in poor outcomes. For example, if we pay women more section 8 housing allowances, SNAP dollars, and other benefits based on the number of children they have, we'll probably end up with more poor children!

I'm attacking the notion that poverty should be comfortable. Being poor sucks,.....and it should stink enough to prod the marginally poor to improve, work hard, and strive to become productive. The problem with an ever-increasing demand for the rich to provide their "fair-share" through taxation is that government mechanism for that payment process is inefficient and sucks away a large amount of resources in waste (federal government cost, fraud, and time). Federal programs have a tendency to get larger and larger and the aim of the programs should be to be so successful that their use declines.

Unfortunately we don't see declining participation in these programs as free money usually only attracts more and more free money takers. I'd have less of a problem with many of these programs if they were tied to technical and vocational job training certification programs. We hear from our large manufacturing employers that the skills they need are not met here in the USA and therefore they go to emerging countries to set up plants to find that skilled labor force. Why not make technical job training programs mandatory to receive housing, SNAP, cellphone, or medicare benefits? Why not make the poor life-style with paid housing, healthcare benefits, two cars, cable, a DVD player, game system, VCR, and monthly food payments a temporary program that lifts people up into the next group of earners and make a life long stay in an impoverished state a little less attractive?

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

INSIDER TRADING BY THE REAL INSIDERS

noreply@blogger.com (Goatmug) — Sun, 05 Feb 2012 05:55:00 +0000

60 Minutes produced this video about our wonder government class and how they have been able to perform investment related acts that would land the rest of us in jail. The work of 60 Minutes added to the investigations of others to finally push our corrupt representatives to make laws that prohibit what is really insider trading. Last week, the Senate passed a bill to make illegal these acts by members of the elected class and their aides and Congress says they will pass their own version next week.

IT TOOK THIS LONG?
I applaud these measures, but one has to ask why it took so long? It reinforces the notion that we absolutely need term limits and I would suggest that a maximum term amount would be two. Professional politicians have run our country right into the ground while they find "legal" ways to profit from the system.

EVERYONE GETS A PIECE
They disgust me (elected officials from top to bottom) and unfortunately the more I see and hear about our government. I believe we no longer hold the high ground in comparison with backward banana republics, except in the fact that we are becoming more backward and we are a heck of a lot bigger.

Enjoy the video. While I personally am astonished to have posted two videos in the Theater Of The Mountain Top from some of the most liberal sources over the last couple of days, you've got to get them where you find them!

GOATMUG

MOUNTAIN TOP THEATER - NUCLEAR AFTERSHOCKS

noreply@blogger.com (Goatmug) — Fri, 03 Feb 2012 14:27:00 +0000

PBS FRONTLINE GOES NUCLEAR

I finally was able to find an embedded version of PBS' expose on the Japanese nuclear nightmare resulting from the earthquake and tsunami off the coast of the island country. I'm too busy to write much on this right now, but will do a follow up shortly.

The video is in six parts or you can go directly to pbs' website... but it is in 6 parts there as well, so you might as well stay here and hit fullscreen.
- http://www.pbs.org/wgbh/pages/frontline/nuclear-aftershocks/

PART 1

Watch Nuclear Aftershocks on PBS. See more from FRONTLINE.

PART 2

Watch Nuclear Aftershocks on PBS. See more from FRONTLINE.

PART 3

Watch Nuclear Aftershocks on PBS. See more from FRONTLINE.

PART 4

Watch Nuclear Aftershocks on PBS. See more from FRONTLINE.

PART 5

Watch Nuclear Aftershocks on PBS. See more from FRONTLINE.

PART 6

Watch Nuclear Aftershocks on PBS. See more from FRONTLINE.

GOATMUG

WHAT'S UP WITH THE PO' FOLK? - FOODSTAMPS

noreply@blogger.com (Goatmug) — Thu, 02 Feb 2012 17:13:00 +0000

It has been a while since I got in the mode of doing monthly macro-reviews. This lack of posting the monthly update has been related to my end-of-the-year business cycle as it is my craziest time in my work each December. In an effort to get back in the swing of things I wanted to check in on the SNAP data which is a Federal summary of the Federal Food Stamps Program. Each state creates their own rules for the distribution of these benefits, but the bill is paid for by you and me (if you pay taxes!). I really wanted to focus on this data today because I am working a follow up post that will shed some light on who the recipients of these benefits really are.

HALF FULL OR HALF EMPTY?
In America, we have a tendency to lean only two ways when it comes to federal benefits and entitlements. One side always thinks that people that receive federal assistance are lazy and simply just sucking off the taxpayer .....well you know what I mean. The other side seems to want assistance for everyone assuming that the government is there to provide each man, woman, and child all of the things they deserve and should have as their God given right. This group often goes to extremes and feels strongly that the poorest of the poor should have everything provided. Personally, I think I'm somewhere in the middle, but I find myself leaning more to one or the other based on how many encounters I have with folks down on their luck.

IMPROVEMENT IS GREAT, IS THIS MEANINGFUL?
Before I go any further about that, let me just share the November 2011 data that was just released that shows a continuation (I know, it is small) of the decline of people on the food stamp roles. We now have two straight months of declines from the peak seen in September of 2011. This is an important development because this is the first time since January 2007 that we have seen two back to back months of declines in the participation numbers. This is no small feat, and could be an indication that the US economy, and more importantly the least financially healthy, are making a comeback.

DOES TWO MONTHS SIGNAL THE ALL CLEAR?

Unfortunately, the monthly decrease has not erased the disturbing trends we saw over the course of the year. The 46,133,787 people in the program is a 4.4% increase over year-end levels in 2010 and this represents a 5.8% increase year-over-year from November 2010. Clearly these figures are lagging, so it is very important for us to see these trends continue. The decline in this statistic is a great measure that will suggest that people are getting back to work and standing on their own. We need this improvement badly for the financial health of the country and the psychological health of the nation.

GOATMUG

HOW FACEBOOK EARNS MONEY

noreply@blogger.com (Goatmug) — Tue, 31 Jan 2012 14:34:00 +0000

Just wanted to provide a follow up story on The Facebook Economy piece I wrote yesterday.
If you wondered how Facebook makes money, here is a couple minute piece by Bloomberg on how the social media company generates revenues.

GOATMUG

THE FACEBOOK ECONOMY

noreply@blogger.com (Goatmug) — Mon, 30 Jan 2012 21:14:00 +0000

I had an interesting discussion with a friend the other day when he asked me if I spent anytime on Facebook. I answered that I didn't "do" Facebook since I was too busy. (There are a host of other reasons of course, but that's another topic).

I asked him why he Facebooked and he suggested that he did it to keep in touch with people and to network a bit. I told him that I had read an article recently that had stated that research is beginning to show that Facebook makes people depressed. To my surprise, he totally agreed.

FACEBOOK LEADS TO DEPRESSION

"The researchers who conducted the analysis noted that “for a significant number of users, the negative effects of Facebook outweigh the benefits of staying in touch with friends and family."

"Things like rejected friend requests caused 32 percent of the people who participated in the study to feel guilty -- and 12 percent of the people said that Facebook just made them generally anxious."

When I read these items about Facebook, there is certainly part of me that is relieved that I don't participate!

As we closed our conversation I also considered something else that might add to poster's stress, that Facebook lives are not real. Let me give you an example.

FACEBOOK DISTORTION

During the holiday season, my wife received a wonderful Christmas card from a person we know. The lovely card pictured a charming couple holding their 1 year-old baby. The family hugged and seemed happy to be together to celebrate a beautiful Christmas season. While everything in the photo and card seemed perfect, the truth is that this couple is separated and living in separate homes. The father never sees the child and has begun a relationship with another woman. The appearance of the father in the picture is quite odd, since it isn't an accurate depiction of reality at all. But there you have it, the woman and the man set up a time to create this photo-op and staged a classic Christmas tradition for all of their "friends and family".

In some ways, I suspect that just like this holiday card, Facebook is represented by this distortion of reality as well. Sure, you can un-friend your spouse, but my guess is that members of Facebook (in general) don't highlight that they just had a fight with their husband, got fired for being a terrible employee, or have a kid that is abusing drugs in school. In other words, Facebook probably is a depository of the version of life that we wish we had where all the good things get posted and none of the bad things get attention.

FACEBOOKED

As I continue to think on this topic, I realized that our economy and the investing markets are very much like a Facebook post. We are told all the good things like employment is getting better, rail shipping is at highs, consumer spending is rebounding, companies are starting to hire, but all of that seems hollow as we really measure it against reality. Think about it, our DJIA is nearing levels we haven't seen since May of 2008 so the logic must be that if the market is really improving, then all of the credit issues and insolvency problems we've faced are well in the rear-view mirror.

Unfortunately, we too know there is an another, real reality in our economy. In this version, we know that job seekers cannot find a great job, that employees work long hours because they feel threatened that they may be replaced if they don't work more, we know that money is very tight, and our government continues to take more and spend without constraint while promising more benefits. In addition to that list, Europe is even worse!

TRADING PERSPECTIVE

Simply look at the last 26 trading days and you'd be hard pressed to discern that there was any problem in the global economy by looking at the stock market. Its upward march has been a thing of beauty! Yet, underlying the wonderful performance, we know that there is a lingering, even gnawing sense that there are other issues that must be tackled for real price action to propel markets higher. Even with my beginning of the year call for higher markets through April, I do believe that markets do need to pause here and even pull back. Take a look at almost any chart and they are ramming headlong right into previous highs. Without some sort of new and positive news, there is no chance that they ramp higher. If you've been in great dividend payers that have made lots of ground, sell them and reload later! No one ever did poorly by locking in profits. If you find yourself questioning this notion, at least set stops in case the reversal really gets going.

The best case scenario for bulls is that we consolidate here and then push higher on great news, however I actually believe we'll pull back 3% to 5% and then hold for another push higher with a few more words from our benevolent leader in the Federal Reserve.

FACEBOOK IPO

Perhaps we started talking about Facebook as a result of the news leak that Facebook is preparing to unleash its IPO on the world in the coming months. While I have no doubt that the IPO of Facebook will bring billions of dollars of wealth upon Mark Zuckerberg and many others that somehow joined the firm over the years of its infancy, I have to question if the general investing public will be so lucky. Certainly, recent tech IPOs leave us with feelings of the dot.com era rather than a sense that these firms are long for the investing world. Friends on Slope suggest that Facebook is different, that the very name Facebook is part of our daily lexicon and therefore it will be a winner like Google. Perhaps. We will certainly see, but isn't it interesting that Facebook's timing could be almost perfect as the estimated IPO date may be in mid-May, right where I have indicated that I see the top in the market for the year.

Before I go, I wanted to check back in on GRPN since I have publicly stated that I think this is the worst of all the new and hot IPOs that hit the market last year. The business is one that is easy to replicate and unfortunately for many of the clients the results have been very negative. Have a glance at GRPN's chart. If we were trying to spin this for a Facebook post, what would we say?

GOATMUG

ITALIAN ROAST? (FORGET ABOUT THE USA)

noreply@blogger.com (Goatmug) — Wed, 25 Jan 2012 15:05:00 +0000

Are we headed back into a declining Euro environment as a result of rising Italian bond yields? To be clear this would mean that we might see a falling US equity market as well.

SETTING THE STAGE FOR MORE FED ACTION? --- NOT YET, BUT CLOSE
We have the FOMC meeting today and don't believe we'll see anything too earth shattering, except I do believe that we will begin to hear more and more from the Fed that they are concerned about lack-luster growth and that they may need to step in and assist the economy? You might say, "Why would they need to interject themselves now?" Unfortunately, the Fed has increased the scope of their mandate and now they are the keepers of growth and provider of liquidity for the entire world. This is not going to be an ECB or Euro problem, it is a Fed problem and no matter how good the US economy or earnings stateside look, you can bet that Uncle Benny will be focused on halting the spread of credit issues here.

The Italian bond yield is just one indicator that all is not well. Clearly we still have the Greek issue too. But further, we are seeing many signs of a complete credit seizure type event in Europe that is building. Large firms are having trouble performing in this environment because credit spigots are being turned off (for themselves or for their clients). Could it be that we are witnessing the Lehman moment for many industries in the Eurozone? The Fed will have to act won't it? It will need to stave off any chance of that coming to our shores, right?

LOOK FOR A TIP OF THE HAND IN THE PRESS CONFERENCE
As a result, of the worsening credit conditions overseas you should look for key words in the written statement and the press conference related to "providing liquidity facilities", Repos, Dollar Swaps, and inter-bank lending facilities.

The credit and debt issues of sovereign nations is bleeding into the business of regular businesses as Siemens reported declining margins and profits.
SIEMENS REPORTS DECLINES

The trouble is affecting smaller businesses as well as we see in this recent article in bendbulletin.com.
The gist of the story is that larger banking institutions have just stopped lending to smaller firms and therefore new niche lenders have moved in to fill the void.
TIGHTENING CREDIT

Unfortunately, the new lenders aren't making things better for Swiss Eurozone refiner PetroPlus who filed for bankruptcy earlier this week. The firm was getting crushed by a poor economic environment as oil prices rose and the crack spread went against them. Lenders refused to step in and provide liquidity creating a situation which couldn't be managed.
PETROPLUS FILES

The situation in Europe is not getting better for companies, bond trading in sovereigns is not improving, and the Greece situation is coming close to a head where bond holders are about to take it on the chin and take real haircuts. Can the Fed come to the rescue again? We will see shortly.

Becareful trading today as FOMC events can be hazardous to your account's health if your are long or short.

GOATMUG

THE 3 PILLARS OF THE FED MANDATE

noreply@blogger.com (Goatmug) — Fri, 20 Jan 2012 21:36:00 +0000

I almost fell out of my chair today at lunch as I scanned Bloomberg's news stories. There in not-so-black -and-white stood the statement that completely summarized all of the issues that America has with Wall Street and its crazy view of the world. There, plainly for all to see, one statement characterizes why the last two years of my blogging has been therapy in a way. This sentence captures the essence of why Main Street will never get Wall Street, and why Wall Street won't be happy until the entire nation's financial system is completely destroyed.

WE NEED MORE POWER!
In an interview this morning with Bloomberg Surveillance, Tom Keene spoke with Ira Jersey of Credit Suisse Group. In the discussion, Ira gives us his view that more quantitative easing is needed and more liquidity should be spent to stimulate the economy. Mr. Jersey starts with;

"The policy-making Federal Open Market Committee meets Jan. 24-25. The central bank is forecast to keep its target for the federal funds rate at zero to 0.25 percent. The target has been at that level since December 2008 and the Fed has pledge to keep it there until mid-2013.

The central bank has purchased $2.3 trillion of mortgage and government bonds in two rounds of so-called QE. In September, it announced plans to sell $400 billion of short-term debt and use the proceeds to buy an equal amount of longer- maturity securities, in a program as nicknamed Operation Twist after a similar action in 1961 designed to contain borrowing costs for companies and consumers."

“We do think the Fed is going to do another round of asset purchases later in the quarter, probably aiming for April,” Jersey, director of U.S. rates strategy at Credit Suisse"

ALL IS FIXED, LEAVE IT ALONE?
Ok, so we are told daily on CNBC that jobs are getting better, housing is improving, banking is returning to normal and banks are healthier, inflation is under control, foreclosures are abating, and the consumer is out there spending and adding to his revolving debt. How could we possibly need more QE?

Well, if you are a Main Streeter, perhaps all of those positive things would lead you to conclude that while the economy is not fully recovered, it is on its way and the government and Fed should wait and see how things are going and maintain the status quo for a while. You'd probably think that allowing market forces to take over might be a good thing. While you might feel that way, bankers don't exactly see it the way you do.

"Jersey said a third stimulus effort may be more focused toward the housing market and buying mortgage-backed securities.

A Bloomberg news survey conducted in November found 16 of the 21 primary dealers of U.S. government securities said Fed Chairman Ben Bernanke and his fellow policy makers would start another purchasing program during the first half of 2012. The dealers’ estimated that the Fed may buy about $545 billion in home-loan debt.

“We need to get confidence up, in particular business confidence up,” Jersey said. “That would help stimulate jobs, which helps stimulate the residential housing market, and that’s what gets you out of the doldrums.”

HOUSING, HOUSING, HOUSING IS NOT OK
So, we need to get the business confidence up and that will fix housing and everything else. Why the heck didn't I think of that? Have you noticed that everything comes back to these housing values? If I didn't know any better, I'd almost suspect that banker's balance sheets could somehow still be impaired after all this time. Mr. Jersey believe that the Fed will act to drive mortgage rates even lower and somehow this will get economic activity really fired up.

WHERE IS HE GOING WITH ALL OF THIS AND HOW DOES IT RELATE TO THE FED?

Mr. Jersey casually drops this bomb on us, which is frankly just awe-inspiring.

“We are growing, we just don’t feel prosperous. It is a part of the job of the Fed to assure prosperity, one of the ways to do that is to kick- start housing.”

WHAT?? THE 3RD LEG OF THE FED STOOL
Did Ira Jersey just say what I thought he said? Of course he did. Didn't you know that there was a 3rd mandate of the Fed?

First, we want to maximize employment, second, we want to maintain price stability and NOW, Credit Suisse has added that we need to expect the Fed to make us feel prosperous!! It is so nice to know after all of my years in the markets that I had completely left one of the Fed's mandates out!

Clearly this interview reveals the divide between Wall Street bankers and normal people. We want the Fed to just stop, and the bankers just want the Fed to make them happy. Unfortunately we also know that the only thing that makes bankers happy is a predatory economic attack on our wealth and our savings (sort of like the government too eh?). Somehow I think regular people don't have a chance in this fight.

Finally, if you want to read some old speeches about the Fed mandate, how about this gem from another Fed Governor who helped do "research" that helped collapse a Euro nation a couple of years ago. - MONETARY POLICY & THE DUAL MANDATE - Fred Mishkin

GOATMUG

YOU CAN NEVER HAVE ENOUGH OF A GOOD THING

noreply@blogger.com (Goatmug) — Tue, 17 Jan 2012 22:17:00 +0000

More QE? Now? I thought the economic situation in the US was getting better? I thought employment was improving? What could possibly lead the Fed and it's newly elected doves to conclude that the US economy needs another dose of the economic elixir that heals all woes?

Apparently, there is something out there that these guys see as a significant risk to cause them to want to double down and flood the economy with more liquidity. It doesn't matter if it doesn't help the real economy, asset values may go higher, so thus we probably need more of it huh? Or, is it even more simple, is it just the non-partisan Fed working the election cycle?

Enjoy the video where Steve Liesman from CNBC examines the possibility of more action by the Fed to save us from even the possibility of a slow down. He also mentions something I highlighted last year that the composition of the Fed has changed again and those terrible fiscal and monetary hawks have been replaced by doves that are all for pushing the envelope of monetary safety.

The stunner here for me is that message expressed in the video that even if GDP comes in a 3% or more, there is a real possibility for Fed intervention. Perhaps this talk is simply setting the ground work with a plausible threat for action by the Fed as we know they like to believe that the mere mention of their action will cause market participants to act in new and risky ways.

If we consider that a breakdown of the Greek situation is coming and very rapidly, these may be not-so-subtle efforts to pre-warn the market that they will be acting to keep the world from ending.....again.

GOATMUG

CHART-FOO-YOUNG

noreply@blogger.com (Goatmug) — Mon, 16 Jan 2012 04:15:00 +0000

A COLLECTION FOR YOUR ENJOYMENT
Here are a few more charts I examined this weekend. Not really a rhyme or reason for the collection, but I had them so I thought I'd share them.

Don't read too much or too little into the charts and their significance here in the post. I love some of them as seen through the lens of the thought that May 2012 will be the high for the year, others I hate now and will probably hate more later.

In my mind, PFE looks the most topped out while EWY and EWC look like they could go much higher if we don't have some Euro-crisis in the next week or so.

VLO - VALERO

BX - BLACKSTONE

CAT - CATAPILLAR

EWC - CANADA ETF

EWM - MALAYSIA ETF

EWY - SOUTH KOREA

FCX - FREEPORT MCMORAN

MMM - 3M COMPANY

PFE - PFIZER

SHLD - SEARS

Have a great day off from trading and honor Martin Luther King on this wonderful day.

GOATMUG

RESISTANCE IS FUTILE (MAYBE) - CHART FIESTA

noreply@blogger.com (Goatmug) — Sat, 14 Jan 2012 06:12:00 +0000

It's Friday, why not look at some charts and have a chart fiesta (party for you gringos). Many charts are showing signs of hitting resistance and most in the market segment areas also have been going higher on lower and lower volume. Housing is the only exception, which has rocketed higher on higher volume (XHB).

I am not going to give any additional commentary, cause I've laid out the case in the 2012 Outlook for most of these items. It's as big as the Great Wall of China, but I think it will help you if you take the time to read it. The charts below will help you compare the commentary to what I believe I see in these charts!

OH YES, AND ONE NOTE AND PROMOTION FOR WHY YOU NEED TO USE GOOGLE CHROME AS YOUR BROWSER!!!
If you use Google Chrome as your browser and you click on the charts to get a full page view, all you need to do is page down or even possibly roll the mouse down if you have a roller ball and it will allow you to move to the next chart! WOW! Easy and awesome. It took me a long time to convert to Chrome, but I almost use it exclusively now and this is an example of why!

MARKET SEGMENTS

XRT - RETAIL

XHB - HOUSING

XLP - CONSUMER STAPLES

XLV - HEALTHCARE

XLU - UTILITIES

IYT - TRANSPORTS

LQD - CORPORATE BONDS

HYG - HIGH YIELD BONDS

PPA - DFS/AEROSPACE

SECTOR / COMMODITY CHARTS

WNR (REFINER)

JJC - COPPER

JJG - GRAINS

POT - POTASH (FERTILIZER)

SGG - SUGAR

UGA - GASOLINE

There you have it, lots of charts and lots of topping and a little opportunity mixed in there too.
Have a great weekend. Send me an email or leave a comment if you have thoughts or questions about any of them.

GOATMUG

THE RAVAGING EFFECTS THIS MARKET HAS ON PARTICIPANTS

noreply@blogger.com (Goatmug) — Fri, 13 Jan 2012 16:13:00 +0000

Can someone tell me what happened in the life of ex-Pimco Managing Director Paul McCulley? As a respected player in the upper tier of all global finance, Mr. McCulley was actually one of my favorite guys.

Now though, Mr. McCulley seems to have taken one of those trips like the Beatles did to India for transcendental meditation. Apparently he has connected with his inner spiritual man???

These markets do have the ability to mess with people, it just looks like Paul may have been impacted more than most.

GOATMUG

EL-ERIAN PUTS THINGS IN FOCUS

noreply@blogger.com (Goatmug) — Mon, 09 Jan 2012 20:26:00 +0000

The Pimco-Fest continues as I found today's Bloomberg interview with Pimco's CEO and CIO, Mohamed El-Erian. The CEO restates much of what Bill Gross highlighted in his article, but heck, it's a video, so you don't have to read!!!!

How awesome!

There are a few takeaways that I enjoyed and since El-Erian is such a sharp guy, his perspective is neat, and also he always uses language so well.

HIGHLIGHTS
People's mindset doesn't change to match the risk environment we are in.

Fed is out of tools, so now it is employing communication to try to push investors to take more risk.

The Fed alone cannot help and fix everything, other agencies globally are asleep at the well.

QE III cannot produce what we want. The Fed wants to do things, but can't produce the outcomes.

Is the US decoupled? There is a massive headwind called Europe. We can't avoid Europe.

Investors need to stay defensive, Focus on fundamentals and pay attention to technicals.

Uncertainty and unpredictability should never lead to paralysis.

US stocks are the cleanest dirty shirts, we will see if they can continue to produce revenue while controlling costs.

There is nothing new in this interview, but the clarity and conciseness that he brings is refreshing.

GOATMUG

2 HEADED MONSTERS - BILL GROSS' BINARY WORLD

noreply@blogger.com (Goatmug) — Sun, 08 Jan 2012 06:39:00 +0000

I read the 2012 outlook from Bill Gross this week and wanted to make it available and make some clarifications about his thoughts and also highlight how powerful it is that this controller of literally hundreds of billions of dollars has gone so negative on the outlook for the global economy.

Below is the link;
TOWARDS THE PARANORMAL

In this post, Bill Gross revisits the term "New Normal" that Mohamed El-Erian had made common place when referring to a low growth, stagnant global economy.

"The New Normal as PIMCO and other economists would describe it was a world of muted western growth, high unemployment and relatively orderly delevering. Now we appear to be morphing into a world with much fatter tails, bordering on bimodal. It’s as if the Earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century. Welcome to 2012."

Where Gross is really focusing on is this idea of a distribution curve where there are two really bad outcomes at each side of the distribution of events. Unlike the unforeseen black swan eventst, Gross is suggesting that the probability of the worst outcomes is increasing and therefore he references the "fat tails". (In a normal distribution the tails are small).

THE PARANORMAL
Gross describes where we are as we enter 2012;

"The financial markets are slowly imploding – delevering – because there’s too much paper and too little trust. Goodbye “Old Normal,” standby to redefine “New Normal,” and welcome to 2012’s “paranormal.

Perhaps the first observation to be made is that most developed economies have not, in fact, delevered since 2008. Certain portions of them – yes: U.S. and Euroland households; southern peripheral Euroland countries. But credit as a whole remains resilient or at least static because of a multitude of quantitative easings (QEs) in the U.S., U.K., and Japan. Now it seems a gigantic tidal wave of QE is being generated in Euroland, thinly disguised as an LTRO (three-year long term refinancing operation) which in effect can and will be used by banks to support sovereign bond issuance. Amazingly, Italian banks are now issuing state guaranteed paper to obtain funds from the European Central Bank (ECB) and then reinvesting the proceeds into Italian bonds, which is QE by any definition and near Ponzi by another."

Not exactly mincing words is he? Gross continues to state that in reality, global credit markets are actually EXPANDING mildly rather than what should be happening through normal events we've been through. Extra normal intervention of central banks and politicians is having the effect to push credit expansion rather than contraction. Gross explains that INFLATION is one side of the distribution; one of the "fat tails".

THE FED SURE LOVES ITS INFLATION DOESN'T IT?
On the other side of the curve we have the following;

"At the other tail, however, is the potential for “implosion” and actual delevering. To the extent that most sovereign debt is now viewed as “credit” in addition to “interest rate” risk, then its integration into private markets cannot be assured. If only Italian banks buy Italian bonds, then Italian yields are artificially supported – even at 7%. If so, then private bond markets and non-peripheral banks in particular may refuse to play ball the way ball has been played since 1971– purchasing government debt, repoing the paper at their respective central banks and using the proceeds to aid and assist private economic expansion. Instead, fearing default from their sovereign holdings, any overnight or term financing begins to accumulate in the safe haven vaults of the ECB, Bank of England (BOE) and Federal Reserve. Sovereign credit risk reintroduces “liquidity trap” and “pushing on a string” fears that seemed to have been long buried and forgotten since the Great Depression in the 1930s."

DELEVERAGING IS A NICE WAY TO SAY DEFLATION
Here, Gross suggests that the other side of inflation is the repudiation of ponzi debt and the notion that central banks efforts to stave off credit implosion through debt purchases could result in absolutely nothing meaningfully good, and ultimately tax-payers eating a lot of defaulted debt.

Well, central bank efforts have worked previously, why not now? I've discussed this reason many times, the Fed has worked itself into a box of zero interest rates now, and that amounts to them trapping themselves with little room to work. If rates are 25bps how much farther can they go? If the Fed dropped rates to zero and the ten year US Treasury fell to 1% through additional bond-buying activities (QE) does that buy them incrementally anything? Does more liquidity available do anything at all when the world is swimming in USD?

NO, zero bound money makes yield investors freeze and these buyers state that all they would really desire to do is keep their money safe given that when they deploy it and invest, they are really taking significant risk adjusted risk for very little return. Why is that? When was the last time your broker told you that money markets could lose money? When was the last time you thought about your brokerage firm freezing your money in accounts like an MF Global situation? Situations like these make investors that rationally examine risk state that they will forego investing in anything to ensure the safety of their money. Essentially, the desires of the central banks to stimulate asset demand ultimately can have a chilling effect on investing that is exactly opposite to what they intend.

So what does Bill Gross say the Fed will do about this growing conundrum? He says that they will actually signal in their January meeting that they intend to hold interest rates low even longer, perhaps as long as 3 years!

INVESTING OUTLOOK
What does Mr. Gross say investors should do in response to the 2 potential outcome disaster scenarios?

Bond Investors -
1) Extend out maturities and bond duration. With a signal from the Fed it won't raise rates for even longer, essentially you are protected from rising rates and the losses on bonds this imposes.
2) Invest in US Treasuries, not Europe. Go 6 to 9 years out, not less because you get paid nothing.
3) If you are buying long dated US Treasuries, they better be TIPS
4) Corporate bond holdings should be in the higher grades of debt, not lower. Again, he suggests some financials here and I think he is off his rocker.
5) Munis could be a good opportunity --- PERSONALLY I THINK HE IS NUTS, but then again, Pimco has to invest in long maturity bonds, but I wouldn't touch them.
6) No EU bonds.

Stock Investors -
1) High yielding dividend payers is what he says to go after. Look for companies with stable cash flows like utilities and big healthcare (pharma).
2) Commodities - Gross is basically flipping a coin here saying it could go either way.

Currency -
He gives us no real insight, simply saying that in deleveraging the USD is awesome and in inflation, it sucks.

SUMMING UP - DID HE REALLY SAY THAT?
Finally, Gross puts it all in perspective with this last parting shot;

"For 2012, in the face of a delevering zero-bound interest rate world, investors must lower return expectations. 2–5% for stocks, bonds and commodities are expected long term returns for global financial markets that have been pushed to the zero bound, a world where substantial real price appreciation is getting close to mathematically improbable."

What? Investors had better begin to expect 2% to 5% returns from all asset classes? Is he serious? I presume he is dead serious and this is the real issue. I still have discussions with friends that expect 10% returns or 12% returns and I ask them where you plan to get that? The reality is that yes, you can get those returns, but the amount of risk you take in the investing environment today is off the charts.

THEY BOUGHT US TIME, NOT MORE ROPE
I will say it again, daily moves up and down 3% indicate that the market is having a death-rattle event, not that it is healthy and invigorated. I am suggesting that the very underpinnings of the market itself is heaving and struggling and these are the last gasps and fits of life in this dying beast. It seems as though Bill Gross agrees. Gross doesn't say it, but I think he is calling BS on all work of the Fed and realizing that they have gained us absolutely no material and meaningful improvement for lots and lots of bailouts and manipulation. We are at the end of our rope and essentially the Fed has only bought us time over the last three years, not more rope.

NOTHING IS BETTER, THE BIG ONE IS COMING
In a way, I feel like the comments of Bill Gross echo the sentiments of a video interview Kyle Bass did a couple of months ago, where Bass lamented that we are in a "Binary Outcome" situation with the Euroland. Bass described the Euro situation as a scenario that results in either the implosion and collapse of the financial system or they are saved. While Bill Gross extends a bit more of the "curve" in between nasty outcomes, the thrust of the statement is the same, nothing is better, and the big one is coming.

GOATMUG

CONFIDENCE LOST, 13 PREDICTIONS FOR 2012

noreply@blogger.com (Goatmug) — Tue, 03 Jan 2012 17:09:00 +0000

The 2012 year is off and running and before it gets away from me, I wanted to publish the outlook for the new year and get it done before the middle of January like last year. I will do a review of the 2011 Predictions later, which I might suggest you read here - 12 FOR 2011, where I might say I was right more than wrong and really on point in several key macro level directional calls. (Back patting over now).

Let's jump into it.

VOLATILITY, VOLATILITY, VOLATILITY
2011 was one of the nuttiest year for the broader markets that I can remember. The SPX traded in huge ranges and ended up only 2% for the year. There were many, many swings up and down of at least 5% and this kind of action makes any sane investor sea sick. As I mentioned many times in the 146 posts I did last year, 3% moves up and 3% moves down in consecutive days is not a sign of a healthy market, it is a sign that the market is absolutely sick.

CONFIDENCE COLLAPSE WILL BE COMPLETE
2012 will be a year where this type of manic action will continue, so I suspect that there will be great periods of euphoria and gut wrenching falls during the year. Unlike last year where I predicted that the US markets would be positive and increase 6%, I suspect that we'll see an unnerving drop from the closing levels of the SPX to 1144 or a loss of 9%. (everything in me wants to say a loss of only 5%, but this blog isn't for chickens). Does this mean that there are no gains to be had this year? NO WAY!!! In fact, I believe that we'll see a repeat of 2011 with the theme of Sell in May and Go Away being rewarded heavily in commodity and energy names. This further highlights that if the front half of the year has the potential of being pretty decent, it must mean that the later half of 2012 is going to be nasty for me to get to my -9% prediction. It is with this in mind that we must note that all Euro deception and troubles will be revealed after May, and this is how I reconcile the two ideas.

The odd thing about the market losses for 2012 will be that the performance will be disconnected from the improving US economy. What I am saying is that we will actually look back in January 2013 and say "wow, the economy isn't really that bad compared with last year, but what we'll actually see is that Europe is just that bad, and the fall of the Euro will spell a falling market for equity players.

WE JUST CAN'T AVOID IT, WE'RE STILL CURRENCY TRADERS
Even if you don't think you are a currency trader you are. In relative terms, the USD is so much better than the feeble Euro and we'll see a continuation of the recognition of this issue, therefore the USD will be higher despite a concerted effort in the first 5 months of the year to reverse this trend.

US MARKETS - IMPROVING CONDITIONS BUT WAIT....
1) JOBS - The jobs picture will continue to improve with the jobless rate dipping to the low 8% levels. This rebound in the joblessness level has more to do with employers simply hiring under qualified workers to fill specialized roles as this issue has been persistent for the last year or so. Employers biggest challenge has been to find skilled workers to fill open positions. In 2012, employers will just suck it up and attempt to train those new hires in the open spots.

Note that there is an extremely troubling problem in our labor environment where unemployment for the uneducated is amazingly high while the unemployment rate for college grads is extremely low. Despite the stories you hear, if you have a college degree and are willing to move, you should be able to find a job. This bifurcation of the jobs market feeds the class warfare sentiment and who can argue with it when looking at the issue through this lens? The trouble is that the uneducated have to WANT to actually work to get educated! Our nation has become one where many of our citizens don't even make an effort to grasp one of the best attributes that our country offers; the hope and reality of achieving the American dream and having the ability to work hard, risk, and achieve greatness. Unfortunately our least prepared and least equipped have traded hope and opportunity for the instant gratification of subsistence living and are pacified with social programs that placate many needs and are a facade of comfort. Why give maximum effort when the short run gains received from working hard are less than or only marginally better than doing nothing?

2) HOUSING - (CONVENTIONAL WISDOM DIES HARD AND ATTITUDES CHANGE)
I anticipate that the US housing markets will remain flat even in these depressed levels. Unfortunately we really have no idea what sales numbers can be trusted from NAR because they have fudged reported sales for so long. Despite this slight of hand and the conflict of interest, I think that we'll see a flat line amount of growth in sales as there is a significant paradigm shift occurring in the minds of the US home buyer. In the past owning a home was part of the American dream. Now, given the collapse of real estate markets and the lack of availability of credit (the demand that home buyers actually have 20% to put down) potential buyers are simply now believing that home ownership is quite as cool as they were led to believe. The myth that home ownership is a great investment is being debunked and this sham is finally getting some publicity. As this knowledge is now getting widespread acknowledgement, there will be a steady-state level of home ownership and little variation or boost to buy homes. Add to the mix the notion that Congress is still looking at a move to get rid of the mortgage interest tax deduction and you'd see a continued decline in home ownership.

3) USD
As I mentioned above, we are all currency traders whether or not we know it.

While it is tough to believe that the USD has merit, it certainly has "relative merit" and therefore I see an even more impressive move higher in the USD currency basket. The continued revelation that the Euro is done in its current form plus the continued efforts of politicians and financial leaders to keep the "ponzi" intact will only serve to boost the USD to higher levels. I think a level of 84 is very easy to achieve on the DXY. (See the 5 year chart below). If USD goes higher, stocks go lower. (chart by www.marketwatch.com )

4) INTEREST RATES
Did I tell you that predicting interest rates is a fools errand? Ask Bill Gross, the king of bonds, if guessing where US Treasuries will go is easy! I am going to say that the last two directional calls of Mr. Gross have made him look like a complete dolt! Of all of my predictions last year, this is the one that I missed as I expected rates of 3.5% or more! Ha! Who is the idiot now? I guess I anticipated a decent year in the markets and assumed that we'd achieve that decentness by way of actual growth and a clearing of some tough issues. Unfortunately, I could not have known that we'd achieve the average returns on the Dow by doing what central banks always do, which is create really low interest rate environments that ultimately blow the real economy sky high and collapse financial markets! (Oddly, I think Bill Gross miscalculated the level of insanity that the Fed would go to to keep the scheme in place, even though he is one that is really close to these nut jobs).

So, where do we go from here? Lower. How about a bold call of 1.65% to 1.75% on the 10 Year. Despite a stronger dollar, we'll actually see yields lower as the flight to quality and away from the Euroland disaster will push 10 years to Japanese type levels. (chart by www.marketwatch.com )

COMMODITIES
Now we get to the fun stuff. I nailed the macro level calls on commodities this year which makes me feel very nice and warm inside for about 3 seconds. Unfortunately, that is about as wonderful as it gets as I am reminded that you have to trade the strategy to make money on it! Yes, I did trade these, and yes, I did make money, but I didn't make as much as I could have because I stayed longer in the trades than I had outlined in the 2011 outlook. Essentially, the call on all of these was to stay in till May and get out. If you did that and actually exited on May 1st, and never traded again (or dare say even went short) you rocked.

I will spare you the gloating about how I nailed the calls on oil and gas to almost perfect calls on the high and low, etc. I will however say that this year is even scarier than last in that we have a quickly escalating Iranian problem and the countries involved are removing all wiggle room for themselves. It looks like the US and Europe are on a collision course with the real nut job and no one wants to back down, in fact, it could actually be in their best interests to pick a fight! Without further ambling about things I will obviously write much more on.

I think intra-year, oil and gas ARE the big winners this year, even though they will fall after mid year, other than that, the big winners at the end of the year will be the ag-type commodities like sugar, corn, and wheat. The play here is that central banks must fight for their lives by providing stimulus in the face of the deflationary forces of the Eurozone collapse, while they won't be successful in saving that which cannot be saved, they will resume the process that helped tear down many of the Middle East regimes by way of out of control food inflation. Buy your freeze-dried stuff now, cause it is going to cost more by the end of the year!

5) OIL AND GAS -
This year the theme to buy now and sell in May is again right on. There is mounting evidence that the US economy is resilient and not collapsing, there is the Fed giving oil and gas an inflationary wind at its back, and finally, Iranian President Mahmoud Ahmadinejad is pushing all of his chips onto the table to buy enough time to go live with several nuclear warheads. If he can weaponize just one device, he suddenly has tremendous leverage over his neighbors and the USA in the region. With the brinkmanship at record levels, oil and gas will not sit idly by, they will lurch higher with $110 within easy reach by mid February.

The seasonal play also works well for the plays I made last year and in fact, I am already involved with several of them. I think WNR and VLO will be winners in the first half of the year and a play in UGA also looks solid. Targets for these plays are $18, $27, and $54. I think all of them could easily exceed these levels, but I will stick with the "exit by May 1 strategy" this year even if it means missing out on other gains.

Oh yeah, the big oil names and service companies are awesome too, especially if they pay a dividend. Portfolio Managers are still in the game of security selection where one would pass on bonds and buy dividend paying equity stocks instead because corporate bond yields are so low. This benefits almost all large firms and energy firms that are dividend players seem to be a solid approach to capture upside and income.

6) AG STUFF -
Yes, I said it again, corn, wheat, soybeans, sugar and anything that can be consumed will move much higher. A safe play is to time the exit in May as well, but I think that agricultural commodities will be the one uncorrelated asset this year that just kills it. The more intervention we see domestically by Uncle Ben and his round table of doves we will see more food disruption in the form of out of control prices fed into the system. Tunisia, Egypt, Libya, and Syria will all just be the tip of the iceberg as world citizens rise up to confront their leadership's ability to control prices of food as a result of the never-ending liquidity spigot originating in the USA. Names to watch here are CORN, JJG, SGG.

7) GOLD AND SILVER -
I am telling you what, I nailed this one too last year. While I undershot the move upside in gold and silver, the pricing action did just as expected and clearly the move isn't done. The crazy euphoria is now gone from the trades and that is awesome because I feel like both gold and silver can now be entered rather safely for longer term trades. It seems like central bank intervention has eased some fears related to the "buy gold, cause the Euro is going to collapse", but it will return and with a vengeance.

I hesitate to give price levels and targets here, but what the heck it's not like you are paying for this.
I think we will see a revisit to the $1,900 level in gold and probably beyond that given the circumstances that need to be in play for the shiny metal to return to its highs. (charts by www.kitco.com )

Silver, will probably NOT revisit its $50 highs, but will settle in at $44

I think either of those would be nice if you pulled the trigger and then made a hasty exit.

As I noted last year, I actually DID sell 1/2 of my silver position as it was blasting near its highs. I had experienced enough misery by giving away gains in my refiners and gas trades that I locked in profits on much of my silver holdings. I am looking to purchase a new replacement slug any day.

8) COPPER
Copper too was one of the trades that made me look really good in my predictions from last year. I suggested that copper was going to be a big loser, and it was almost from the start. There is a chance that copper goes higher this year for several reasons despite the fall of the Eurozone. First, there is some hope of a recovery in the emerging markets. Any improvement there will be a benefit to copper. Second, copper got shelled last year and as a result, is a relative better play. Despite the chances for a rebound, I won't be buying JJC anytime soon, however a play in FCX might be good for the same May 1 sell time frame since a move higher will absolutely benefit FCX as a miner of gold and copper. I think this is the best way to play this angle, AND you get a dividend too. $44.00 is probably a very conservative target (only a 10% move from today's levels, with $55 as a realistic area to expect).

FINANCIALS -
I just have to say it, I hate them. They are hard to understand and chock full of liabilities and counter-party risks that are not truly known. This statement unfortunately goes for banks, insurance companies, and brokerage firms (are there any left?). There might be gains out there, buy if we can get them from other areas should we really try here?

9) BANKS - I missed it on banks last year. I expected that things would improve and they would perform much better, they didn't. Oddly enough, I think that bank performance could rebound in 2012 IF yields begin to rise. The margin compression they are suffering as a result of Operation Twist and other FED intervention has been costly and we should see some abatement in this as the program nears its end in 2013. I think BAC is still a big fat loser and suggest running away from it as some type of Country-Wide or Mortgage Fraud stuff is going to have an impact on them.

It isn't lost on me that Kyle Bass invested a slug of $200MM into Mortgage Guaranty Insurance Corp which is probably more a statement of his feeling that housing is at least bottoming domestically, but it also might be a signal to watch that stock (yes, it is already up 50%, I know and since he bought at $2.50 a share he is also doing quite well).

In this short to medium term for the year, the chart also suggests that GS could rally almost $15. If we see a $110 or $112 handle on GS and you are crazy enough to be long it, I suggest an exit.

FIXED INCOME -
The question is, does fixed income exist anymore? The answer clearly is no. Treasuries are a scam in that the US government through a scheme of the Treasury and the Fed are distorting the prices for bonds to achieve their own goals of suppressing borrowing costs. The private sector is buying US Government debt as a result of absolute fear, and so are other sovereign nations. There is no real market here, just a concoction of lies and more lies to cover the first lies up.

The average investor who is a retiree cannot live on the interest produced by any fixed income investment and so they are force to yield search and carry more risk than they normally would or simply abandon this asset class and reach for dividend paying equities. Unfortunately that strategy will back fire, we just don't know when. The Fed strikes again.

10) GOVERNMENT DEBT -
I've already highlighted this topic in the INTEREST RATE section. Bonds will go higher and yields lower as we near year-end. The safety trade to flee to US Treasuries will be firmly intact next Christmas. Downgrades of sovereign debt abroad will make the US yields even cheaper despite the fact that US spending is totally out of control.

TLT looks like it could spend some more time falling to at least the $113.50 area, but if my call for a move up in equities and then down again is correct, we could see an attack at $123 on the long side by year end. (That's not much you say??? They are treasuries I say, should they really trade in a 10% range?)

11) MUNI BONDS -
Meredith Whitney seems like the biggest loser when it comes to Muni Bonds in 2011. Meredith learned a hard lesson that a great call one time doesn't mean that you will make every call right. Further, the better lesson is that once you make an awesome call, DON'T PUSH YOUR LUCK and predict the apocalypse! Everything that Meredith Whitney said is true, the only problem is that she, like Bill Gross, misunderstood the commitment of the players in the system to keep the system afloat. Also, Ms. Whitney didn't state a realistic time frame for the collapse to hit. If the Euro crisis has shown us anything, it is that they implosions are slow and are delayed and delayed until they can't be delayed, and then suddenly the market and its willing participants simply wake up one day and reject the credit of entities and borrowers that just one day prior were perfectly fine. Perhaps if Goldman Sachs had made a prediction like that, things would have fallen apart faster, but it didn't.

If you take a moment to look at Muni yields you are first struck with how crazy one has to be to buy munis. First, it is very difficult to get financials for these municipalities that are timely. Second, it is impossible to get a decent yield, and finally if you attempt to stay shorter in your maturities you will get paid absolutely nothing for the risk you can't evaluate.

Perhaps the best way to approach Muni Bonds is to short them. Take a look at MUB which looks like it should at least revisit $107 or even $102.

12) CORPORATE BONDS -
I am going to copy word for word what I wrote last year in this space and I'll only change a word or two. Wait for commodity and market ramp. That move higher will continue to push corporate bond prices lower and finally put them in a pricing area where they again become interesting. Please note that I usually target buying corporate bonds that are less than 7 years in maturity. I do not subscribe to the hyper-inflation theories and therefore I do believe that a chance to buy solid company bonds yielding a 5%, 6%, or 7% rate will be great. What did I change? #1 - You may only get an opportunity to get into corporate bonds in February or March (last year that was the low). #2 - I reduced the target yields on bonds by a percent or two. Right now I would do just about anything for a 5% 4 year bond, you just can't find it, (without buying some stupid financial company bond) so when you do, you better buy it with the money that is allocated to a more conservative type investment.

As you look at LQD it seems ripe for a correction to $107 or even $104. The crazy shorters out there may look to take advantage of a drop in this etf, but the fear trade will drive buyers right back in to fixed income assets by year end.

EMERGING MARKETS
Other than Bill Gross and Meredith Whitney the other big loser of the year was the emerging market trade. All of these markets were smashed as the shiny veneer was rubbed off the glorious BRIC trade. The trouble these countries ran into was one of a slow-down in growth, a wind down of credit bubbles, and finally importation of inflation served to them directly from their friends at the Fed. I've commented often about the currency race to the bottom as they attempted to counter each move of the Fed to stay competitive. The only problem with fighting the Fed in this fashion results in run away inflation and citizens tend to get really pissed off about paying 10% higher prices for veggies and meat each month!

13) COUNTRIES TO WATCH -
Based on the three causes of the beating that the emerging market players took last year I am hard-pressed to see if there is any abatement in any of those issues. The answer is no. Based on this, I think it is quite easy to simply pass on China as an option for further long-sided investment.

I am still a huge fan of Indonesia (IDX) simply because it is a really nice chart to trade. I would not be caught adding a position here on IDX unless I saw a pop through $31 (I waited all last year for that) and I'd certainly be watching closely at the $25 level. In a year when China's FXI lose almost 20%, Singapore's EWS lost 21%, and Russia (RSX) lost 29%, IDX was flat when you calculate and add in the dividend. (Chart below is IDX)

I'm a fan of EWS despite the brutal beating and I like EWM too, but once again sell early. Finally, readers will recall that I've had this stalker-like love affair with India where I'd wait and wait and wait for EPI to do something positive.....and it never did. I must believe that India will one day be a powerhouse, but it wasn't last year. I like the bounce EPI had over the last week and if there was a time to do it, it was then. A bounce here could take it to $18 or even $20, I'm just a bit gun shy after seeing a 40% loss of a blood-letting over last year.

Let me wrap things up here. There are the ideas for 2012 and the outlook for the major macro-level areas of the economy. I could say much more about the defensive approach that fund managers are using going into healthcare, consumer staples, defense, and utilities, but I've already said that many times last year, and it was a highly successful venture for any that took action.

SHORTS
I was fortunate enough to call a few big shorts this year too. There were a couple that I was very, very, very early on and just killed it being short on like NFLX, MCP, and RIMM (don't believe me, do a search on the blog for those symbols!). I did tend to sell those too early as is often the case, I think I am so conditioned to believe that some invisible hand will appear and save crappy companies that I am willing to exit trades that I know could be much bigger winners. That is one of my goals for this trading year, to keep my foot on the throat of dying losers and cash in on them in a much more significant way. I'll be looking for those entries in earnest in April. I can't let this section go without mentioning GRPN. Groupon will be one firm that is out of business in the next 5 years and therefore it is clearly an equity to focus on if it can ever gain any traction and get a bounce.

DISCLAIMER - THE EVENT THAT MESSES UP ALL PREDICTIONS (A swan that makes black swans shake in their boots)
Finally, let me throw in one last disclaimer because it is important. All of these predictions in some way assume that the US, Israel, Europe, and Iran (along with the Persian country's allies, Russia and China) don't get involved in a real and escalated shootin' match. If that happens all bets are off. I don't think this is a situation where the markets rally like they did in 1991after Saddam invaded Kuwait and we invaded Iraq in the first Gulf War. If there was a quick overthrow internally of the Iranian leadership and hostilities ceased then I think that a bull market rally could follow, but I don't predict that kind of easy internal outcome and frankly I am terrified that an EMP attack on the USA is really something that is possible. If that were the result from a conflict our markets would cease to trade and the world as we knew it would be over in the blink of an eye. An EMP assault on our country would make New Orleans after Katrina look like a picnic and a fun day at the park.

Please read the follow up post that I'll put up over the next couple of days which will include bonus predictions on the elections, healthcare, and foreign policy. Honestly, I think all of those topics may drive the markets more than we appreciate, but this post is about stating where I think things will go and specific reasons why. The broader drivers like these topics should be covered in another post, so look for it soon!

GOATMUG

NEW YEAR - SETTING THE TONE - GET PHYSICAL AND PROTECT YOURSELF

noreply@blogger.com (Goatmug) — Mon, 02 Jan 2012 23:14:00 +0000

Thanks for all of your patience as I have made it through the busiest time of year for my business. I am beginning the 2012 Outlook and will also do a post on the 2011 Review in the coming days and weeks. Before we get to that, I want you to take a moment and read or listen to the interview between Jim Puplava and Ann Barnhardt.

Ann Barnhardt was a commodity futures broker that was quite successful that suddenly quit her business in November as MF Global collapsed. The fall of that company and the theft of client funds to her was the final straw that indicated that our financial system was a complete sham and would result in losses of her customer's money. With the release of an open letter, she wrapped up the firm and quit the business.

Jim's firm runs the amazing website www.financialsense.com and I highly recommend their work. As I've mentioned often, Jim's son, Chris Puplava is one of my favorite bloggers and I read him every Friday without fail.

Please use the following link to read the transcript of the interview between Jim and Ann; other than some of the Kyle Bass interviews I've posted, this has to be the best of 2011.
AWESOMENESS - BEST INTERVIEW OF 2011

To hear the interview, you can go to the site and select the player you desire or download it in mp3 format.
HEAR THE INTERVIEW

If you don't want to click away, I have cut and pasted the text of the interview here, please note this is the property of www.financialsense.com and not the work or product of Goatmug.

Transcript for Ann Barnhardt Interview

Jim Puplava: Joining me as my special guest on the program today is Ann Barnhardt, formerly of Barnhardt Capital Management. And Ann, you were a commodity broker for eight years and then you formed your own independent brokerage for six years. A couple of weeks ago you made the painful decision to shut your doors because you felt your clients’ money and positions were no longer safe. What led you to draw those conclusions?

Ann Barnhardt: Well, obviously, it was the MF global collapse and more specifically the fall out after the MF Global collapse and the reaction by the CFTC, the SEC and most especially by the Chicago Mercantile Exchange [the “Merc”]. The actions, specifically by the Merc after the MF Global collapse were unprecedented, unfathomable and completely and totally intolerable. The Merc itself basically did the equivalent of sticking a nine millimeter in their mouth and pulling the trigger by not stepping forward, backstopping the MF Global client accounts and at the very least, the Merc should have allowed the MF Global customers to liquidate their accounts and then transfer to other firms. What the Merc did was the worst possible thing—they froze those people out of their accounts and didn’t allow them to liquidate while the markets continued to trade. And I cannot over-emphasize the importance of that, the risk that those people were exposed to in the cattle business (and my forte is cattle. I am actually a cash cattle person. My brokerage business was geared almost exclusively towards livestock and grade. I have a lot of contacts in the cattle industry who didn’t necessarily do their futures business with me but were contacts of mine who did do business through brokers that cleared through MF) who lost tens of thousands of dollars on hedge positions that they wanted to get out of but could not get out of in the week and a half after the MF Global collapse.
This has never happened before. This was a complete breach of fiduciary duty by the Chicago Mercantile Exchange itself to the point that it literally has destroyed the entire paradigm. I got to the point where I could no longer tell my clients that their free cash customer funds, not even exposed to the market place—just their cash sitting in their account, non-margined—was not safe. I couldn’t tell them that their money was safe. At that point it was morally incumbent upon me to get my client out of this completely dysfunctional, basically destroyed marketplace. Get them off of those railroad tracks and get them away from the risk. Now, I didn’t clear through MF, but with the European collapse and knowing what we know about how these financial entities are leveraged in European paper and the cascading nature of all of this I had to act before the proverbial poop hit the fan because if you sit around and you wait until after the poop hits the fan it is too late. You wouldn’t get anybody out. To me, it wasn’t really a painful decision. It was a complete no brainer.

Jim Puplava: In the past, when firms went under customer funds were intact and the exchanges would step in, as you mentioned earlier, to backstop everything to keep customers 100% liquid. And normally, a quick transfer from the bankrupt firm, the bankrupt firm would be immediately replaced. Why do you think they did not allow that to happen this time?

Ann Barnhardt: You tell me. I will use the word again, it is suicidal. What they did was suicidal. So you are absolutely right. Up until last month on Friday, October 31^st, the customer segregation of funds rule was utterly sacrosanct. Even when Refco imploded and imploded quite dramatically in 2005, no customer funds were gone. It was on the prop trading side of the company but the customer funds were there, were accounted for, and it is the onus of the Mercantile Exchange to audit these FCMs [Futures Commission Merchant]. MF Global was under the auspices and under the supervision, of the auditing supervision, of the CME. And I believe that MF was audited not just annually, but quarterly. Also, there is the question of how in the world can the Merc miss the margin being posted. The Merc is supposed to be moving equity and doing margin wire transfers twice a day every day. How could those customer funds be “missing”. They aren’t missing. They were stolen. They were stolen by Jon Corzine and his cadre of associates at MF Global. So yes, again, to your listeners who may not fully appreciate the gravity of this, this has never, ever happened before. Nothing even close to this has ever even happened before and it is the function of the Mercantile Exchange itself—the reason why the exchanges exist is that they stand in the middle of every transaction and they act as the de facto counterparty to every single transaction so that, for example, my clients never had to worry about the credit worthiness of the other individual, whoever it might be, who is on the other side of any trade that they did.
Now, for every buyer there is a seller and it is a one-for-one, zero-sum game; but to ensure the credit worthiness and the integrity of the market, the function of the Mercantile Exchange itself is to stand in the middle of every transaction and be the guarantor. So a year ago when Terry Duffy held a press conference [watch it here] and said never in the history of the Mercantile Exchange has a customer ever, ever lost funds resulting from the collapse of a firm, he was telling the truth a year ago. Everything changed on Halloween of this year though. And that's why I had to shut the doors of my brokerage because I could not in good conscience continue forward knowing that the Mercantile Exchange was no longer going to fulfill their fiduciary duty.

Jim Puplava: In the futures market, which is highly leveraged, if you open up a futures contract you are usually leveraged 10-to-1, so they require an exceptional firm base on which to function. And the major integrity of the whole system is the segregation of customer funds. That was breached by MF Global. And let’s not sugar coat this, Ann, basically management stole all of the non-margin cash, invested it in highly speculative securities and what has astonished me has been the reaction of the exchange and regulators—where is the investigation into Jon Corzine?

Ann Barnhardt: Well that is the point of this. We are now living in a lawless, Marxist, Communist, usurped, what used to be a representative republic but is no more. This is no longer a nation of laws. This has now transformed into a nation of men. It doesn’t matter what crime you commit. In the case of Jon Corzine, this man has stolen in excess of a billion dollars. I think by the time it is all panned out it is going to be closer to $3 billion of customer funds that he stole. Why did he do it? Is he stupid? Well, of course he’s not stupid. This is a former head of Goldman Sachs. This man doesn’t have a low IQ per se. Why in the world would a man wake up in the morning one day and say you know what, I think I am going to steal all the customer seg funds in this FCM that I’m running, which is the biggest FCM in the country. Yeah, that sounds like a good plan. No. Why would a man like that even engage in a nefarious plot like this? Because he knew going into it he could get away with it. And the reason he could get away with it is he is in tight with the Obama regime. He is one of Obama’s highest fundraisers. Earlier this year Jon Corzine had a fundraiser dinner at his New York City apartment for Barack Obama where it was charged at $35,000 a plate. Okay? He bundled high six figures for Obama in one evening! He is a crony of the regime. This is Marxist Communism. There is no rule of law. And these people, these poor MF customers are just sitting out here helpless to do anything because there is no law enforcement because this is no longer a nation of laws. The rule of law no longer exists. There is no longer justice in this nation. And no nation, no culture, no society can survive if there isn’t a foundation of justice. That is why we are teetering on the precipice of collapse and I foresee civil war coming within the next several years.

Jim Puplava: You know, we had Gerald Celente on this program and he had an account with Lynn-Waldok, which was eventually taken over by MF Global, and he's been trading futures in gold. He had a plan when he built up enough he would eventually take delivery. Well, they stopped him out of his trade, sequestered his margin (or his cash) and forced him out of a trade and closed his account.
[Click here to listen to Gerald Celente's MF Global experience]
So what you are talking about—because the exchange did not backstop and then froze customer accounts—is they forced, would you say, millions if not hundreds of millions of dollars of losses on these customers?

Ann Barnhardt: Absolutely. If we are talking several billion in customer seg funds then the losses that were incurred could easily by the customers in that week, week and a half that they were frozen out could easily, easily get into the hundreds of millions it might even breach into the low billions. No question about that. And yeah, and even with options. You know, I talked to cattleman who have put options on as hedges to put a floor underneath the price of the cattle in case—so imagine this, you buy a put option four months ago, you pay the premium. You post that money. Then this happens, you are frozen out of your account. Your account gets transferred to another firm, without your consent. By the way, none of the customers were allowed any input into this. Their accounts were just sent to RJ O’Brien and other firms like that without their consent. And then once the positions were transferred, even if it was a risk limited position like a long put option, then the new clearing firm called them the next morning after the trade settled and said there was no equity in your account because all that money got stolen. So you are going to have to pay the premium for this put option again. So it's doubling the cost essentially for a lot of these people out here who are dealing in what is supposed to be the very risk limited paradigm of long options. The entire situation could not have been handled any worse. In fact, I would take it a step further. It was handled so poorly I can’t imagine that these people are that stupid at the Merc and at the CFTC and so forth. I can’t believe that the bankruptcy trustee is that stupid. This almost seems like it was so bad that it had to have been nefarious.

Jim Puplava: You know, Ann. You believe that MF Global is just the tip of the iceberg. That there is massive industry exposure to European sovereign debt. In fact, the day you and I are doing this interview the Fed just engineered a major swap with central banks. It was a central bank love fest on Wednesday of group money printing. That tells me that central banks acting in unison the way they did shows they are afraid that there's something big out there that is about to happen and that they are trying to maybe plug a hole in the dyke.

Ann Barnhardt: Well, if anybody out there understands fourth grade arithmetic you know from metaphysical certitude that Europe is done. Europe is mathematically impossible. It cannot be saved. You want to make a start. You even want to make a start at trying to bail out Europe we are talking $25 trillion just to start. And it would then—if you were going to bail out the entirety of Europe—you would now be talking about hundreds of trillions of dollars. Okay, people, there isn’t that much wealth or money on the surface of the earth. The total gross domestic product of the entire planet earth is I think just under $70 trillion. And we are talking about in excess of $100 trillion to bail out Europe? This is now mathematically impossible. These people have so leveraged themselves and so leveraged these governments in these countries giving their brain dead citizenry free hand outs and entitlements that it is now mathematically impossible to save the paradigm. It's not a matter of if the global financial system is going to collapse. Oh, it's going to collapse. You better trust and understand that. It's just a matter of when. And these piddling little maneuvers that these people are making that the Fed is doing. Oh, we are going to give Europe some money. Okay. What I saw this morning, what the Fed is getting ready to do in terms of Europe, is keep Europe going for another seven days. Well, fantastic. Thanks for that. That is literally the brain dead mindset of these politicians. All they are doing is looking to kick the can down the road. At first it was kick the can down another 10, 12 years. Then it is kick the can down the road for another year. And then it was well, let’s kick the can down the road for another few months. Now we're literally to the point where all we can do is kick the can down the road for a matter of a few days. It's not going to make it. I will be very surprised if we make it until Christmas.

Jim Puplava: You know, one would have thought Ann, after the 30 to 40:1 leverage leading up to the financial crisis of 2008, pre-Lehman, that financial firms would have learned. And especially a guy like Jon Corzine that saw Goldman have exposure to AIG with $13 billion in credit default swaps which we bailed him out 100 cents on the dollar. Apparently, this lesson was not learned at MF Global because the leverage, what was the figure? I think it was 100:1—it was just astounding.

Ann Barnhardt: The only lesson that these criminal degenerates learned from the 2008 situation was that they could do anything they want and that pimp daddy government would bail them out. You have to understand, people like Jon Corzine, these are evil, evil people. He went into MF Global looking to rape that company personally for his own good. And that's what the motivation of a lot of these people are. You have to get your heads around this. You have to get your heads around the fact that there are truly evil people in the world who do not give a crap about anyone or anything except themselves, their own personal wealth and their own personal power. And they would sell their grandmother to the Nazis for a nickel without hesitation if they thought they could get away with it. It's the same with people like Jon Corzine, and then we have talked about the fact that Jon Corzine is tied into the Obama regime. And we now know that the government is absolutely stuffed to the gills almost exclusively with this same type of moral degenerate culture. These people that are in the government—not just the Congress and Executive Branch but also in the bureaucracy—they are in it for themselves. They are in it for the money. And two weeks ago when we had the 60 minutes exposé on the insider trading, those of us who have been in the business have known intuitively that that was going on for a very, very long time. We knew that there was front running going on by politicians. A great example of this is someone like Harry Reid. When he entered Congress, Harry Reid had a low six-figure net worth. He now has an eight-figure net worth. And he's never done anything except be a United States Senator. The salary I think of which is something like $170,000 a year. How does that happen? How does a man with $170,000 a year salaried position go from having a six-figure net worth to an eight-figure net worth? That doesn’t make any sense unless he is doing nefarious, illegal, insider trading type deals.
It is obvious what's been going on. You have to start acknowledging these people for what they are, and that is moral degenerates who are basically sociopaths and psychopaths. Meaning they don’t feel any sympathy or empathy for other human beings. The only thing they care about is themselves. They will do anything. They will steal. They will lie. They will cheat. They will lie to your face. They will look in the camera with this tremendous earnestness and lie with fork tongues through their teeth in order to advance their wealth and power. And if we, as a people, don’t get real about this, if we keep having these Pollyanna visions that these people are all on our side and they are really looking out for us. And they are doing the best they can. We will be cork screwed into the ground and this nation will be reduced to a smoldering rubble. You've got to wake up.

Jim Puplava: I would like to go back to MF Global for a second. There is something even worse as you look into the details—it's been hinted and that there could be possible clawbacks. I’m wondering if you might explain that possibility and what a clawback means for, let’s say you had an account at MF Global and, I don’t know, you didn’t feel comfortable with the commodities market—the volatility. So you pulled the money out. There is a possibility they can go after you.

Ann Barnhardt: Oh, absolutely. Clawback is a fairly common tactic in bankruptcies. And what it is is looking at the bankrupt entity and looking at the money that went out of that entity in the time period immediately preceding the collapse. And I don’t know what time frame they would look at MF. I don’t know if it would be 30 days or 60 days or 90 days—I have no idea. But the trustee has in the last two weeks said that yes, clawback is on the table. So what that means is, let’s say for example, you are a savvy individual and you are a good steward of your money. And you are doing business with a firm that clears through MF Global. You are looking at MF Global’s publicly available bond yields. And you see in the six weeks before the collapse that their bond yields spiked parabolically [see chart here]. They went from 6% to 18%. That is a sure, sure sign of massive trouble. And so being an intelligent, informed, aware person who is a good steward of their wealth, what do you do? You say I’m getting out of this company. I am getting my money out of MF Global because something bad is about to happen looking at these bond yields. You can also do the same thing looking at the stock price. You could do the same thing looking at downgrades by the ratings agencies. There's all kinds of ways that you can come to these conclusions.
The other thing is if you're a hedger. If you are a bonafide hedger—if you had positions on and the market moves in favor of your hedge position on the futures side, you don’t leave that equity sitting in your account. What your broker like me does is they wire that money home because you are using that money probably to either offset a cash transaction or to pay down a revolving line of credit. You're not getting any interest on your money sitting at MF Global so you might as well get that equity out of there, send it home and pay down your line of credit so you are not paying interest on that money. So there would organically have been lots and lots of money flowing out of that company in the period immediately before the collapse. Either due to natural hedges, organic in and out functions or due to intelligent people looking at the bond yields and saying uh oh we better get out of here. The bankruptcy trustee can legally claw that money back. Say okay, I am going to go and I am going to dive into your pocket now. And I am going to claw back your money which you, in your responsibility and in your good stewardship pulled out of a company that you knew to be in trouble. Oh yeah, so these MF customers will essentially be raped three times—they will have their cash stolen out of their accounts, they were then locked out of their position so they couldn’t trade and were fully exposed to market risk, paralyzed, unable to do anything for excess of a week. And then, number three rape, is having the bankruptcy trustee come back and literally seize money out of your own personal checking accounts and business accounts and so forth. And clawing it back to feed this bankrupt entity. And you know what the cherry on top of the sundae of all this is? And this is what blows my mind—the bankruptcy trustee, right now, as this is being recorded on the 30^th of November. The bankruptcy trustee is still allowing MF Global to trade proprietarily for itself, for the company proper.
It is unbelievable. The rule of law is dead in this country.

Jim Puplava: You know, adding to this just prior to that was the restructuring of Greek debt, where the derivatives association announced that it was a voluntary restructuring so therefore the bankers didn’t have to pay out on credit default swaps. So what you have here, Ann, I believe is a system where the government is protecting the too-big-to-fail at the expense of the customers. And with it, the rule of law is thrown out to protect Wall Street, what does that say about the integrity of the system? It is no wonder people are losing faith.

Ann Barnhardt: There is no integrity in the system. And let’s make it simple—it is not just about the government protecting the “too big to fail banks". It is about criminal oligarchs as individuals protecting each other. They don’t give a crap about the customers of JP Morgan or you know, Citi or Goldman or anything. What they care about is each other. The Obama regime is protecting Jon Corzine proper, the individual. Because he is one of them. He is one of these criminal oligarchs. And for your listeners who may not remember, Jon Corzine is a former congressman. But immediately preceding MF Global he was the Governor of New Jersey and he just cork screwed Jersey into the ground. It is Chris Christy who beat Jon Corzine to become the governor of New Jersey. So yes, this Republican, Chris Christy, was elected in New Jersey—uber liberal, blue state New Jersey—because Corzine financially destroyed this state. And again, this guy Corzine is former head of Goldman. He is not stupid. You have to stop thinking that these people are just misguided or that there is some sort of a difference of opinion on economic theory. These people are nefariously trying to destroy everything in this country. It's called the Cloward-Piven strategy. Go in and destroy and collapse the entire economy, everything and then rebuild a new Marxist, Socialist, fascist state out of the burning rubble of this destruction. This is intentional. This is nefarious. This is not a function of incompetence. It's a function of malice of forethought and conscientious theft and destruction.

Jim Puplava: What would you advice? I am a long term believer in the bull market in commodities, but how do you play commodities when the futures market is no longer secure? And what does this do to the proper functioning of the markets? In other words, now that you've closed your firm because you don’t believe in the integrity of the system and we just listed a series of reasons why—not honoring contracts, appropriating funds, not allowing trades to go off. Not one investigation, in fact, this goes even further than that. We had Bill Black on the program recently, who helped make prosecutions in the S&L scandal. And at that time, 2,000 individuals went to jail. There has not been one criminal charge brought by the justice department since the 2008 crisis. So given that this is where we are, what do you advise and what will you do personally?
[Listen to Bill Black's tell-all interview on why no one has gone to jail]
Ann Barnhardt: Well get the hell out. Get out of all paper and it's not just the commodities markets. This is going to cascade through everything. It is going to get into the equities. It is going to get into 401ks and IRAs, it is going to get into pension plans and so on and so forth. Total systemic collapse. Get out! I don’t know how I can be anymore plain about this. I say this over and over and over again and then I get scads of emails saying, well I can’t get out of my 401k. Yes, you can. Yes, you can. Take the penalty and get the hell out of there. What would you rather do? Would you rather pay the 10% penalty or would you rather have it all go up in smoke? Because that's what we're staring down the barrel of. Number two, we seem to have this backwards. In terms of what I do, cattle and grain specifically, the futures markets are the derivatives. The futures markets are derived from the actual cash commodity market. Now, I am blessed because my area of expertise is actually in the physical cash market, actual cattle on the hoof. So I have a consulting firm and I'll continue to teach cattlemen how to trade actual physical cattle. But, yeah, to all the people out there listening—you are going to have to get away from paper and get back into physical commodities, the real deal. Anything that is on paper anything that involves a promise or a commitment is no longer valid because as we said there isn’t a rule of law anymore. People can steal from you. Your money can be confiscated. And think how easy now it is to confiscate people’s wealth. Most of our wealth in this society exists as zeroes and ones on a computer server. It takes no effort whatsoever to steal zeros and ones on a computer server. So what I have been telling people is you need to get into physical commodities. And the rule of thumb is if you can stand in front of it with an assault rifle and physically protect it, then it's real—it's a real commodity. That includes food, that includes water, that includes long guns and ammunition. That includes fuel. That includes precious metals—gold and silver coinage. Most especially silver coinage because silver is the metal of barter and transaction and currency. Gold is the storage metal because it's so valuable per ounce. And also, silver is extremely undervalued relative to gold because that market has been synthetically suppressed for the last several years by again, these nefarious actors. So yeah, reallocate into physical commodities.

Jim Puplava: How do you know that somebody like just as we saw in 2008 or recently with MF Global—that is somebody like a Goldman, a JP Morgan that is writing credit default swaps on European debt—how do you know if you have an account with this group that they pledge your assets for collateral or they comingle them with the firm’s assets and then what do you do?

Ann Barnhardt: Oh, exactly. Corzine isn’t alone in this. The reason the MF Global situation happened the way it did is as we eluded to earlier because Corzine had that company just suicidally leveraged. He took those customer funds and then leveraged it into European, sovereign, junk paper at about 100:1 ratio. Massive. Massive leverage. That is why his collateral call was the first one to come and why it took him out because he was so heavily leveraged. Don’t kid yourself. These other entities are doing the same thing. It is just that they are not as heavily leveraged as Corzine was. So yes, the entire paradigm is no longer trust worthy. There is no meaningful government or industry wide regulation and I have been saying this for years. That regulation in the financial industry in the United States both government based and private regulation—private industry regulation—is a monstrous, monstrous joke. The top tier of those organizations are evil, nefarious people. The mid level are halfway stupid, halfway evil who again, are just there to collect their salary paycheck and will say and do anything that they are told and who really don’t understand the business that they are trying to regulate. And then the lower level, the grunts, the actual auditors who go out on site, a lot of those people are super incompetent, affirmative action hires. And yes, I said it and I am not ashamed of it. They are affirmative action hires. They have no business being there doing what they are doing. They are also hiring a lot of kids 15 minutes out of college who are literally reading off the script and couldn’t audit a company if their life depended on it.
So what they do is they send these incompetent people out into the field and into lower management. And then when the poop hits the fan, they blame them. It is absolutely evil and it is a complete joke. And Madoff was the first proof of that. There have been other ponzi schemes since Madoff happened that haven’t gotten as much notoriety, but there was a big one in the futures industry that all of the FCMs were invested in. And the regulatory body of the futures industry the NFA, they audited that Ponzi scheme, they totally missed it. They even admitted that they signed off on it because they really didn’t understand what they were doing. I mean, that is the level of incompetence and evil that we are talking about in terms of these regulatory bodies. The only way to fix this is to shut the whole damn thing down and start from scratch. I am personally looking in the next decade for the emergence of a new exchange within the United States [that is, a replacement of the Chicago Mercantile Exhange]. Word on the street is it might happen in Dallas and I would be fully in favor of that. Start over from scratch.

Jim Puplava: Alright. Well the message: get physical and protect yourself. We have been speaking with Ann Barnhardt, formerly of Barnhardt Capital Management. Ann, I want to thank you for coming on the program and sharing your thoughts.

Ann Barnhardt: Thank you for having me, it's been a pleasure.

Hmmm, an industry pro completely shuts down their business and all they can say is buy physical commodities and get some guns and ammo. Makes you think that she is a nut job or she really knows something. I am betting against the former and wagering heavily on the second option.

Please check back soon, I am getting started on the other items as life has finally slowed a bit.

GOATMUG

A BIG JUMPSUIT TO FILL - NORTH KOREA

noreply@blogger.com (Goatmug) — Tue, 20 Dec 2011 19:49:00 +0000

As you know, I am a firm believer that our current economic environment is driven by forces that are global. Due to the significance of world political events we must be aware of the issues facing each sphere of the world. I am struck by how stunningly fast geopolitical changes are happening everywhere. As a result of the pace of change, it is important to use excellent resources to understand the climate in these places.

With an armed military force of more than 1 million and of course at least 6 nuclear weapons, all of us should be watching North Korea. Please examine this short video about the death of North Korea's leader and the transition to power of his son, Kim Jong Uhn by Stratfor.

Kim Jong Il Update

Like the global elite everywhere, remaining in power is the only thing that matters. I don't think it will be long before Kim Jong Uhn needs to demonstrate his power and authority on a global stage.

GOATMUG

MORNING CUP OF JOY

noreply@blogger.com (Goatmug) — Tue, 20 Dec 2011 13:38:00 +0000

Christian Gattiker, head of research at Bank Julius Baer & Co., discusses the outlook for stocks and bonds amid the ongoing sovereign-debt crisis. He talks from Zurich with Owen Thomas and Linda Yueh.

Just thought I would share what the perspective is becoming as market participants are becoming more and more.....realistic. I will try to cut and paste a few items I've seen over the last week where I've noticed that big players are really putting a sour note out without any reservations. I've seen a few Tweets from Bill Gross and the other Pimco guys that have been well, downright caustic and negative. Could this be a time to go long? I doubt it. Sometimes, the crowd is correct even when all of them are negative.

GOATMUG

EMU GIVES EUROZONE CITIZENS A TERRIBLE PRESENT

noreply@blogger.com (Goatmug) — Fri, 16 Dec 2011 16:39:00 +0000

While mostly unrelated to economics I found this very entertaining video of the Jimmy Kimmel show that had me laughing about the contents hours later.

Please enjoy......

Oddly, after watching the video, I'm struck by how similar the "gifts" of Eurozone political leaders have been to their own citizens in this mockery of a sham called the bailout process. In fact Germany's and France's leadership seem to be doling out these "gifts" overtime and yet the citizens of the periphery countries seem to be eyeing the gift and then opening them only to fall apart in tears or lash out in anger. See, the bailouts provided by the IMF and ECB may be wrapped up and packaged nicely, but they really are nasty old hot dogs or half-eaten peanut butter and jelly sandwiches.

I'm waiting for the moment when Greece, Portugal, Spain, or some other nation takes the approach that the kid does at 4:27 in the video.

Have a Merry Christmas!

GOATMUG

KYLE BASS - DECEMBER NEWSLETTER

noreply@blogger.com (Goatmug) — Thu, 15 Dec 2011 16:32:00 +0000

As an add on to the previous post, I was able to find a copy of the December Hayman Capital investors letter.

Enjoy.

http://www.scribd.com/doc/75784106/Hayman-Capital-Letter-Dec-14

GOATMUG

CRACKS IN THE FOUNDATION

noreply@blogger.com (Goatmug) — Thu, 15 Dec 2011 14:32:00 +0000

Ok, we knew there were serious problems with Europe as this has been a topic of discussion for more than a year on this blog. I need to write a more detailed post on the impact that MF Global is having on the financial system, but this interview with my all-time favorite hedge fund 1%er, Kyle Bass is a great introduction to the subject.

As usual, Kyle delivers a message of death in a matter-of-fact style. He makes the following key points;

That the peripheral countries in Europe are already way past the point of no return and they are going to usher in the break up of the Euro system.
That the ECB and EMU leadership really have no plan.
Liquidity provided by the Fed recently in the form of dollar swaps is an indication that there is much more trouble in credit markets than you might think.
When looking at the dollar swap facilities you need to realize that they are trying to counter the seizing up of global credit markets.

Enjoy the 11 minute video. Look for a post this weekend about the MF Global fallout. I heard a really good interview on Bloomberg Radio about the impact this disgusting theft is having on ranchers and farmers and I will see if I can find it for your listening pleasure.

GOATMUG

RANDOM THOUGHTS

noreply@blogger.com (Goatmug) — Mon, 12 Dec 2011 18:19:00 +0000

There is so much going on right now I have very little time to manage and update the blog as this is a very busy time of year. Despite my absolute craziness, I find myself scanning items and thinking, "I have to write something about that!" Frankly, there is no time for long-winded notes about all of the complete non-sense that is happening in the world and in markets so I think I'll just post a list with a sentence or two of comment and then as we get deep into the holiday week, I will pull some details out.

WORLD POLITICS - IF YOU DON'T THINK THIS IS HAVING AN IMPACT YOU ARE NOT PAYING ATTENTION.

RUSSIA
Putin's party faces allegations of outright fraud and manipulation to hold power. Opposition party Prokhorov billionaire says he will challenge Putin in March elections. Let's cut to it right away, Putin is not a friendly guy and Prokhorov will find himself in jail soon enough. Even if Putin somehow lost elections a circle of leadership exists in Russia that dates back 30 to 40 years and they run the show.

Funny, that is what world citizens are learning daily. There was once a liberalization of thought that people actually had a voice in government and had self autonomy. Unfortunately, that is untrue in Russia, Egypt, the EU, and the USA. While it is an odd collection of nations grouped in my sentence it should be striking that we all exist in different stages of realization of our lack of individual control over our governments and our own self rule. Sadly, I think we are actually all more alike than we'd admit.

If the challenge to Putin becomes more serious, be prepared for an orchestrated uprising and terrorist attacks in the homeland, in Russian vassal states, and even overt attacks on NATO forces by Syria and Iran. These of course will be diversionary moves as Russians needs a bad guy, and I'm sure they will find one.

CHINA
The Chinese economy looks to be rolling over hard. What can a country do with 300,000,000 poor people that don't have jobs? Better find something to occupy them and focus their attention on stuff outside of their horrible conditions.

EUROPE
The financial collapse in Europe is now in the final stages. Each political move continues to be found impotent to deal with reality and mathematical fact that spending more than your take in over many years leads to collapse. As the final collapse draws near, I can only expect outright attacks in Syria and Iran.

PAKISTAN
Can this situation get worse for the US? We hear that the Pakistanis are making nice-nice with the Taliban. It won't be long till Obama engineers a caliphate in India's backyard.

ISRAEL / IRAN
Odd that tensions are rising isn't it? Israel is running out of time to deal with the nuclear problem in Iran. Lots of weird explosions and stuff are happening in the Persian country. The USA lost control of a sophisticated surveillance drone over Iran and we state that we lost control over neighboring Afghanistan.

Isn't it convenient how every country needs a diversion at the same time?

US TOTALITARIANISM
Don't forget the good old USA. We continue down a slippery slope in the name of fighting terrorism where our "leaders" erode any protections we have as US citizens from the abuse of power and creation of a totalitarian state. The USA government continues to act without any check as we have assassinated US citizens abroad, can now detain anyone without charges with no set time frame, and also have our government actively monitoring social media for dissent and even comments about our economic leadership (the Fed). Look at this interview with Larry Wilkerson regarding a new defense bill that is going to be passed soon.

AND BEFORE YOU FREAK OUT AND CALL ME SOME NUT JOB, remember, all it takes is one power hungry individual to change your life completely. Imagine One SWAT team that accidentally comes to your home rather than your renter neighbor's, a reckless police officer that arrests you or kills your wife in the assault. Our militarized police forces are now equipped to put down any peaceful protest or deal with any resistance and they typically respond with overpowering force and ask questions later. Unfortunately that usually isn't good for the average innocent citizen that is caught up in the incident..

US POLITICS
Newt, Obama, Romney, Perry? My goodness. Romney's Obama-esque strategy of saying nothing and not having any real positions had almost worked. He is being dragged into the fray by Rick Perry who fills the role of comedic relief in these debates.

Seriously, we have a sitting President that had no experience and is a complete ideologue with a Socialist or even Marxist bent and yet he somehow has a chance against an amoral smarty like Newt or a Liberal lefty in Romney. Newt was for all for Obamacare and Fannie and Freddie when he was on the payroll and essentially Romney was the universal healthcare champion too. Isn't there someone out of 307,000,000 citizens that can represent us better than any of these three? Chris Christie where are you?

TRADES

GOLD IS GETTING SLAUGHTERED
In dollar terms that is. Didn't I post last month that you needed to get long gold in Euro terms? That trade is still a good one, in fact it is probably still a good one in dollar terms as well, you'll just have to wait for the collapse of the USD.

$SPX SHORT TERM TARGET 1185

MS TARGET $9

GETTING READY TO LIKE OIL AGAIN
We've discussed this many times in the blog that there is a season trade on oil and I've liked the refiners during this time as well. While conventional wisdom exists that it is best to own oil during the summer months, I posted a story last year about the statistical wisdom of that and how it actually is a very good bet to sell your oil by the first week of May. I mention this because it is probably time to dust off that strategy, especially with Iran practicing their wartime drills on how to close the Straights of Hormuz.

DIVIDEND PLAYS / DEFENSIVE RECESSION STRATEGIES
I just wanted to revisit the plays we've discussed all this year of trying to get in front of money managers that need to be invested even though many are calling for a recession. The plays I outlined early in the year were XLV (healthcare), XLP (consumer staples), PPA (defense and aerospace), and XLU (utilities). Those plays still look decent, but you need to be mindful of defense and healthcare cuts that may come as a result of the Super Committee's failure to find meaningful resolutions to the debt and budget cuts. Of course those cuts are over 10 years, so they are absolutely immaterial, but that doesn't mean that the defense and healthcare etfs won't over-react to the downside for a month or two.

RECESSION OR NOT?
My favorite bloggers and money managers are completely mixed in their outlooks for the domestic economy. The best longer term trend watcher and money manager is Chris Puplava wrote "Bill Gross - Wrong on Bonds Again?" last week and we need to pay attention to his great article. Chris is brilliant but has been faked out as much as anyone during this year. While he has pretty conservative positions, he has made some bearish comments that have been reversed, and has made some bullish comments that he's had to pull back as well. His longer term indicators suggest that we are actually heading toward expansion and that the recession is not going to stay.

Am I sold on what Chris is selling? I don't think so, only because he isn't considering the impact of Europe's collapse in his article. I think things get much uglier before they get better and there is a better time to position for the long side coming up. His summary suggests that Bill Gross may get clobbered by rising US government debt rates as the economic outlook domestically improves. That might happen if you take the Euro crisis away, but we all know that Greeks won't suddenly be able to stop spending and we also know that the ECB won't suddenly find a solution to the unsolvable either.

That's it for now. As I have more I'll use the same format over the next couple of weeks till things settle down.

GOATMUG

GROUPON (GRPN)- A BAD TASTE IN YOUR MOUTH

noreply@blogger.com (Goatmug) — Tue, 22 Nov 2011 14:32:00 +0000

NEW IPO, SAME OLD SCAM
Groupon (GRPN) is a company that recently held its IPO (initial public offering) where it went public and attempted to squeeze in its fundraising in before the equity markets closed. Other firms like LinkedIn (LNKD) and Pandora (P) all paved the way for the final scam which is eerily similar to the 2000 Tech Bubble days.

I've felt that many of these firms were not quite worth their initial stock prices, but for me, Groupon is among the worst of the bunch.

Why would I doubt the merits of this company? I'll list a few below;

1) NOTHING ABOUT IT IS UNIQUE
The GRPN business model is easy to replicate. In fact, LivingSocial, is a player in the space that has been operating globally since 2009. Unfortunately for GRPN, if I had a list of several thousand email addresses, I too could easily go into this business.

2) GRPN HAS NOT BEEN PROFITABLE
The company took in $1.3 Billion in sales and lost almost $700 million. GRPN has about $250 million in cash on it's balance sheet. The argument is that GRPN needed to raise cash so it could scale up its business, I would suggest that it needed to stay put and make its business profitable before taking investor money.

3) CLIENTS AREN'T PROFITABLE
It seems that it isn't only Groupon that is unprofitable. Essentially Groupon is used by many retailers as a loss leader in an attempt to get people in the door. The pitch is simply once they get in the door and try your product, they'll become clients. In the case I included below we find that if the retailer or small business survives the encounter with Groupon, they probably won't be inclined to sign up again.

London Baker's Experience With Groupon Leaves Bad Taste In Mouth

The baker in the story was overwhelmed by the purchases of 75% off coupons for her products. In fact, the baker priced their product in such a way that she lost about $3 per dozen cupcakes she sold. In addition, she had to keep staff working overtime and ultimately lost $20,000 in the experiment with online coupons.

As we evaluate her experience, we must conclude that the baker made a few bad decisions. So let's not "sugar coat" this. She obviously didn't understand the demand that the coupon would have. She obviously didn't price the coupon correctly, and she didn't put a cap on the number that could be sold. All of these are absolutely correct, and frankly this is in line with what I see from many small retailers, they simply don't understand business and risk mitigation. This is why so many fail and so many sign up for long term leases at rates that kill their business before they even start.

With all of those items noted, we still need to recognized that the Groupon sales person also is at fault. Why didn't they put a cap on the sale for their client's first experience? Why didn't they encourage the client to price their sale appropriately?

Ultimately, Groupon will lose a potential repeat customer because the baker took a bath AND the story hit the national and world media they will probably also lose potential customers.

MARKETING IS GOOD, EXTREME VALUATIONS AREN'T
Look, as a business owner I have always distrusted "marketing" because it is fuzzy and often it isn't measurable. I do not hate the idea of email coupons, in fact, I have bought a few before (I absolutely hate the rules and conditions they place on them). In fact, I think that Groupon's business could be a powerful tool for a small business owners to make a quick name for themselves and build a business. The trouble I have with Groupon is simply that it isn't an "internet company" and doesn't deserve valuations that are sky high and neither do firms like Linked In that ARE internet businesses. Valuation is important and we've seen that crazy valuations often result in heartaches.

4) THE CHART IS SICK
While there is not much data here in about 20 days of trading, the chart looks like it will break through the lowest point it has had in its short trading history. In fact, as I am writing, it has fallen through $22.72 which I identified as support. I can't even identify any support below this level, so unless we get back up on the close, I think it is a stock you can short with impunity

GOATMUG

"HAVING GERMANY BY THE SHORT HAIRS"

noreply@blogger.com (Goatmug) — Wed, 16 Nov 2011 04:37:00 +0000

KYLE BASS ADDS HUMOR WHERE THERE IS NONE
As I was postulating that Euro leaders saw no other way out of their debt problem than to speed up the fiscal reorganization and consolidation of power at a supra-national level, Kyle Bass was giving another wonderful interview with the BBC. Since Kyle works in Dallas, he absolutely uses Texan slang and references even in the most stoic and formal settings. In the interview he breaks down the challenges that the Eurozone faces and outlines a result that is 100% the opposite of what I described would happen. He also logically lays out an argument as to why Germany would be stupid to continue bailing out the other Eurozone "partners".

While Kyle Bass is absolutely correct, I think he gives the leadership in Europe too much credit and assumes that they will be able to realize that they are throwing good money after bad and that it is just better to stop. Funny, the Euro political class hasn't realized this yet and according to my post earlier today and the article by Clive Cook, they rationally won't either.

LOGICAL LEADERS NEED NOT APPLY
Please check out the EURO NATION which highlights just how disfunctional the thinking is at the ECB level and just why Kyle's logical conclusions may be totally wrong. I think this is why it is so difficult to judge the outcomes of this situation, because these leaders are not managing the situation as a business owner would, they are driven by ideological motives that they feel are much greater than mere financial concerns.

The interview with Kyle is only a couple of minutes long and I highly recommend it. (Click the caption below the screenshot).

KYLE BASS INTERVIEW ON BBC

And just as I was publishing this, I noted this Tweet from none other than the Fed's mouthpiece Steve Liesman from CNBC. This message contained within 140 characters summarizes everything wrong with central bankers, Euroleaders, and fiscal union supporters.

Steve basically says, "PRINT, PRINT, PRINT, cause if you don't the Eurozone is going to blow up, so might as well try to print anyway." Thus, in a simple statement we see why Kyle Bass is so right, but will be wrong in predicting how Euro leaders will react to the situation.

GOATMUG

THE EURO NATION

noreply@blogger.com (Goatmug) — Wed, 16 Nov 2011 03:38:00 +0000

SAVING THE EU AT ALL COSTS
If you are like me you wonder what kind of leader knowingly commits his or her country to destruction. In the case of the Eurozone, (and the US), I find myself asking this question almost daily. I believe I found an answer to the question today when reading a Bloomberg piece called "Saving The Euro Will Be Easier Than The Alternative" by Clive Cook.

This piece highlights a few of the troubles with the idea of the EU as constructed and even describes the fatal error of the creators of the currency union by growing too fast and not concentrating on deep foundational changes in a core of homogeneous countries. But, as we know, the planners and politicians didn't so we don't need to focus on that right now. Cook's piece does make an interesting assertion that there are not many choices available now that the stew is in the pot and this is unsettling because we get a better glimpse into the minds of the EU leadership.

"What politicians have built, you might argue, politicians can unbuild. It isn’t nearly so easy. When you put a currency union together, parities are fixed. When you take one apart, they are freed: Why else dismantle the union but to let exchange rates move? That obvious asymmetry has large consequences. Who would hold a deposit in an Italian bank if Italy were expected to abandon the euro? The new lira, in which those deposits might soon be denominated, would depreciate at the instant of its creation. The mere prospect would trigger a systemwide bank run."

Going on we find that Clive Cook may simply have opened the playbook and this message gives us the ultimate direction of the Eurozone, if this week's tsunami of debt and financial fear can be held back in the short run.

"Nonetheless, we may suffer the profound misfortune of finding out -- unless Europe’s governments see that the only sane choice is to accept the logic of the currency union they created and the obligations that go with it. In the medium term, that means closer fiscal union. In the immediate term, it means one thing above all. The European Central Bank must be granted whatever powers it may need to underwrite public debts across the EU."

Did you catch that?

"the only sane choice is to accept the logic of the currency union they created and the obligations that go with it."

That is right, Cook describes how leaders in France, Germany, and elsewhere (even China and the US) see the world. The dish is beyond the point of return and the main course cannot be made into another entree. Instead of tossing it into the garbage, all efforts will be made to fix the broth. The leadership cannot adjust course, because failure in their eyes is just not tolerable. In a sense, they are now in the "too far along to fail" just like there is the US version of "too big to fail". Essentially, the currency union cannot be broken without a total fiery crash of all their economies and so the only course of action is to actually speed the process up!

Remember too, that the EU is not just an economic philosophy, it is really a political and ideological movement that attempts to coalesce Europe and make future wars impossible. These ideas are not quickly abandoned by leadership when economic times get tough.

TONE DEAF OR JUST COMMITTED?
Cook's article helps me clarify that these politicians are not just fiddling away while Europe is burning, they actually see no other choice than to solidify efforts to "save the system". In their rational thoughts, the undoing of the Euro is not only admitting that mistakes have been made, it is more like surrendering to an army that eats their prisoners. I detect a hint in Cook's writing that he actually supports the notion that the Eurozone must forge ahead, but as we know there are often many choices that can be made even when we think there is only one. My sense is that the EU leadership thinks there is only one pleasant choice available, and that is to save the union. Unfortunately, I don't believe that they agree with the notion that I hold that they can still save themselves if they simply stop now. There will be suffering and pain, but at least the process with be limited to some countries and they can get working on recovery. Unfortunately, countries like Greece, Spain, and Portugal will suffer immensely while the EU groups "saves" them, and then they will suffer even more if the fix doesn't work. Ultimately a botched job will bring down even more than the trouble spots and will potentially destroy the very large economies like France and Germany as well.

There is actually another choice here that we keep hearing. The ECB could simply begin monetizing their debt (start printing) and then purchase all of the Italian and Greek bonds in the open market. The move to do this would immediately crush any bond shorts and it would drive sovereign bond yields down. What stops the Eurozone leadership from doing this? Simply the Germans are fearful that the move would devalue their currency and usher in longer term hyperinflation.

PROMISES, PROMISES
There is another problem with printing and it simply is that Europeans all have a promise problem. What do I mean by that? Developed countries in Europe and the USA have gone wild promising benefits to aging workers that simply can't be met. In time, each of these countries is finding that the future obligations of supporting retirees is just too great. As troubled debtor countries like Greece make attempts to cut those promised benefits we see riots and strikes as a result. The EU countries have only scratched the surface of their spending problems and until the expense side is adjusted, there are no "fixes" that will solve the debt crisis. Ultimately, I believe the Germans will not get their wish and the EU will print as there is no fix for this problem other than wiping out a lot of debt (which won't happen). Let me be clear as well regarding Italy, despite what we are hearing, the country is not in collapse mode like Greece, in fact, it is the 3rd largest economy in the EU. Having said that, it is spending too much and is now facing interest expense costs that no developed country can endure for the long term. The attack on Italy must be dealt with with the overt action of the fiscal leadership to stop bond yields in their tracks.

NEXT STOP, FISCAL UNION
In my opinion, no matter what efforts are made by the ECB and EU leadership, they will fail. The failure of all bailouts and bond buying will result in the last ditch political move to wrest national sovereignty from the nation states and consolidate economic power where taxation and revenue decisions can be made for the entire region. Clearly this was the goal all along, we just haven't seen a big enough crisis to push the Europeans to abdicate their self rule.

SO WHERE DO WE GO FROM HERE?
I don't think there is a simple answer to this question. The reality is that if Europe would go all in and become a fiscal union, I think the short run would make the Euro much stronger and the USD weaker. US equities would go nuts and go much higher. You might actually see gold reverse on this news which would be quite odd, but I think it would take the fear premium off of gold significantly even though the act of "printing" should send things higher. Before this happens I am still convinced that we will remain in this trading range from 12,750 on the DJIA to 11,500 or from 1345 to 1185 on SPX. The movements in the indices in this range will be driven by rumors and retractions of statements. The "healthy" market with 2% and 3% moves in either direction will continue till we have some sort of resolution.

GOATMUG