Currency Wars Are Trade Wars

Paul Krugman is all for currency wars, but not trade wars:

First of all, what people think they know about past currency wars isn’t actually true. Everyone uses some combination phrase like “protectionism and competitive devaluation” to describe the supposed vicious circle of the 1930s, but as Barry Eichengreen has pointed out many times, these really don’t go together. If country A and country B engage in a tit-for-tat of tariffs, the end result is restricted trade; if they each try to push their currency down, the end result is at worst to leave everyone back where they started.

 

And in reality the stuff that’s now being called “currency wars” is almost surely a net plus for the world economy. In the 1930s this was because countries threw off their golden fetters — they left the gold standard and this freed them to pursue expansionary monetary policies. Today that’s not the issue; but what Japan, the US, and the UK are doing is in fact trying to pursue expansionary monetary policy, with currency depreciation as a byproduct.

There is a serious intellectual error here, typical of much of the recent discussion of this issue. A currency war is by definition a low-level form of a trade war because currencies are internationally traded commodities. The intent (and there is much circumstantial evidence to suggest that Japan at least is acting with mercantilist intent, but that is another story for another day) is not relevant — currency depreciation is currency depreciation and still has the same effects on creditors and trade partners, whatever the claimed intent.

Krugman cites Barry Eichengreen as evidence that competitive devaluation does not necessarily mean a trade war, but Eichengreen does not address the issue of a trade war directly, much less denying the possibility of one.  Indeed, while broadly supportive of competitive devaluation Eichengreen notes that the process was “disorderly and disruptive”.

And the risks of disorder and disruption are still very real today.

As Mark Thoma noted in 2010:

While the positive effects a currency war produced in the 1930s are unlikely to reappear, there is a chance of large negative effects such as a simultaneous trade war or the breakdown of the international monetary system, so let’s hope a currency war can be avoided.

The mechanism here is very simple. Some countries — those with a lower domestic rate of inflation, like Japan — have a natural advantage in a currency war against countries with a higher domestic rate of inflation like Brazil and China. If one side runs out of leverage to debase their currency because of heightened domestic inflation, their next recourse is to resort to direction trade measures like quotas and tariffs.

And actually, the United States and China in particular have been engaging in a low-level trade and currency war for a long time.

As I noted last year:

China and Russia and Brazil have all recently expressed deep unease at America’s can-kicking and money-printing mentality. This is partly because American money printing has exported inflation to the world, as a result of the dollar’s role as the global reserve currency, and partly because these states already own a lot of American debt, and do not want to be paid off in hugely-debased money.

Since I made that statement, there has been a great lot of debasement without any great spiral of damaging trade measures. But with the world locked into ever greater monetary and trade interdependency, and with fiery trade rhetoric continuing to spew forth from the BRIC nations, who by-and-large seem to continue to believe that American money-printing is damaging their interests   — who in the past two years have put together a new global reserve currency framework — it would be deeply complacent to believe that the risks of a severe trade war have gone away.

(Unfortunately, Krugman and Eichengreen both seem to discount the reality that Okun’s law has broken down, and that monetary expansion today is supporting crony industries, and exacerbating income inequality, but those are another story for another day)

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Germany, Spain Set To Pull The Plug On Green Energy

Over ten years ago, when Europe was a bright and shining example of experimental monetarist "brilliance", and when the money was flowing, the continent decided to do the ethical thing and actively promote the pursuit and development of renewable energy through countless government subsidies. As a result, Germany and Spain became the undisputed leaders in the race for a green future, and both created similar laws to encourage the development of renewable energy. There were two problems: i) green energy, while noble in theory, is about the worst idea possible when it comes to profitability and capital self-sustainability and constantly needs governmental subsidies, and ii) it was the end consumers who would pay for the government's generosity, in the form of a surcharge on electric bills. In Germany, for example, as the industry grew (in size, and thus in losses) demand for the subsidy increased, driving the surcharge higher. In January, the surcharge, which amounts to about 14% of electricity prices, nearly doubled to 5.28 euro cents per kilowatt hour.

And, as the WSJ so deftly explains, "that means ordinary consumers shoulder the lion's share of the costs for what the German government calls its "energy revolution." And here is where a third problem comes into play, because while German and Spanish consumers were happy to pay a surcharge in the golden days of a Dr. Jekyll Europe when everything was great, soon Europe become a doomed Mr. Hyde-ian Frankenstein monster, with imploding economies, 60%+ youth unemployment and resurgent neo-nazi powers. In short: the German and Spanish consumers have had it with funding an infinite money drain (even bigger than Greece), when cash flow is scarce and getting worse, and have just said "Basta" and "Nein", respectively.

Which means it is now a political issue in Spain, where the scandal ridden Rajoy has never been more unpopular, and certainly in Germany where Merkel faces an election in September and can't allow the public opinion to shift against her. As a result "with Spain in the grips of recession, the government wants to lower consumers' light bills. In Germany, Chancellor Angela Merkel faces an election in September and hopes to win points with voters by putting a stop to rising electricity bills."

Specifically, "Ms. Merkel's government on Thursday proposed putting a cap on the green-energy surcharge until the end of 2014 and then restricting any rise in the surcharge after that to no more than 2.5% a year. The government also plans to tighten exemptions, which would force more companies to pay, and achieve a cut in green subsidies of €1.8 billion ($2.42 billion). The plan is a quick fix pending comprehensive reform after the election, government officials said."

Spain is not far behind:

The Spanish parliament took a similar step on Thursday, passing a law that aims to curb rising household electricity costs by cutting aid to the renewable-energy industry.

Renewable-energy producers "are going to receive less revenue, but these measures are better for consumers" said Energy Minister José Manuel Soria.

Among the changes in the Spanish system, the new law indexes certain subsidies and compensation to an inflation estimate that strips out the effects of energy, food commodities, and tax changes.

Naturally the response from the subsidized industries has been swift and damning:

Renewable-energy companies said that the government was backing away from previous promises that it would ensure them a reasonable return on their investments.

"Spain's government is trying to smash the renewable-energy sector through legislative modifications," said José Miguel Villarig, chairman of the country´s Association of Renewable-Energy Producers.

Actually all the Spanish government is thing to do is stay in power, and in order to do so, it must stop demanding that its people pay for the development of financial black hole industries.

The immediate result of these steps will be a widespread collapse in the alternative energy space in Europe, which is barely sustainable on an "as is" basis (see Solyndra) with ongoing government funding, and will melt as fast as a snowball in the Iceland thermal when the money is even modestly cut off.

Because like all truly money losing government ventures, one can't mothball a project that by definition has to lose money in hope one day it will be a new money-winning paradigm, especially since the imminent deleveraging wave which will hit the world once Chinese inflation wakes from its slumber, will mean conventional energy costs will once again have no choice but to drop (see: "On This Day In History.... Gas Prices Have Never Been Higher").

Yet all this means is that the government will merely have to find other, more creative ways to lose money now that the alternative energy fad is virtually dead. Luckily, spending money with absolutely nothing to show for it is one thing that every government in the current insolvent global regime, has a peculiar knack for. It also means that thousands of former government workers with no real marketable skills are about to hit the streets demanding more handouts from the nanny state, and lead to yet another wave of European civil unrest just as the 'other people's money' is about to run out.

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Scientific American: Banks Are Too Complex to Succeed, Except for Central Banks

Too Big to Succeed ...On December 20, 1994 Mexico's newly installed president Ernesto Zedillo devalued the currency, the peso, by 15%. As a candidate he had said he would "defend the peso like a dog." That day the peso went from 3.47, where it had been for a year, to 3.95 and the trading floors of Wall Street were filled with the sounds of barking dogs ... As the crisis continued to unfold it became clear that few, including myself, had understood what could go wrong. What had seemed a relatively straightforward asset was too complex to be managed in such an ad hoc manner. This is far more common on Wall Street than most realize. Just last year JP Morgan revealed a $6 billion loss from a convoluted investment in credit derivatives. The post mortem revealed that few, including the actual trader, understood the assets or the trade. It was even found that an error in a spreadsheet was partly responsible. – Scientific American

Dominant Social Theme: Big private-sector banks need to be busted up.

Free-Market Analysis: Okay, dear reader, here is a conundrum you can help us solve. First, some background.

Chris Amade is the author of a recent article that appeared in Scientific American entitled "Too Big to Succeed," excerpted above. Mr. Amade has a Ph.D. in physics and designed credit models for Salomon Brothers in its heyday.

Scientific American is a great place to publish an article because it is considered to be a pre-eminent magazine of science, a publication the editors of which pride themselves on common-sensical erudition.

So here's our question: How in the world can Mr. Amade write an article complaining that big banks are too complex and ought to be broken up without mentioning central banking?

Somehow, we are to believe that private-sector banking swims in an ether provided by central banks – but this atmosphere is normal and natural while private-sector banking is troubled and abnormal.
We're not making this up. Here's more from the article.

Banks have become massive, bloated with new complex financial products unleashed by deregulation. The assets at US commercial banks have increased five times to $13 trillion, with the bulk clustered at a few major institutions. JP Morgan, the largest, has $2.5 trillion in assets.
Much has been written about banks being "too big to fail." The equally important question is are they "too big to succeed?" Can anyone honestly risk manage $2 trillion in complex investments?

Okay, good points. But if managing US$2 trillion is complicated, how complicated is it to manage US$20 trillion or US$200 trillion? Around the world, central bankers are surely managing this much in aggregate.

The biggest and best scientific journal in the US and a big brain who used to write algorithms for Salomon Brothers have teamed up to bring us the considered opinion that no facility in the world can effectively run a US$2 trillion book. So, just to repeat ourselves, how come no one ever mentions that central banks – running ten or one hundred times that amount – are not up to the task, either?
It is really incredible that even the "best and brightest" can't see that the complexities of the modern money system are entirely out of hand and that it will not end well. Scientific American and Mr. Amade could have done everyone a favor by writing an article explaining that the modern monopoly, fiat-money system as administered by the good, gray men of central banking is not just destined to fail but will likely explode spectacularly.

Of course, we are being a bit facetious here, to be sure. We KNOW why central banks don't come in for the criticism they deserve. The power elite that runs these banks and derives its incomprehensible fortune from them doesn't gladly tolerate the criticism.

Those in the money business who are building up their careers are frightened to mention even the reality of Money Power, much less its problems.

And so we get logical inconsistencies like this one. Top brains writing in the most prestigious science magazines available about how big private-sector banks should be simplified.

But the REAL complexity – and the real disaster – does not lie with private sector banks but with the nightmare of central banking that now has spread about the world like a terrible mesh imprisoning us all.

The corrosive effect of Money Power is that its mere presence dissuades analysis. It perverts the larger conversation and thus renders smaller ones incomprehensible. This is part of the sadness of the Modern Age. The very best minds and institutions are reduced to presenting us with sophistic observations that clearly do not reveal the truth.

Conclusion: They do this because they are afraid. The reserve dollar is not the currency of the world today. Fear is the currency.

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Is This The Beginning Of A Horrifying Stock Market Crash In Europe?

Are we witnessing the start of a historic financial meltdown in Europe?  In recent days, two massive corruption scandals have greatly shaken confidence in European financial markets.  The first involves Spanish Prime Minister Mariano Rajoy.  It is being alleged that he has been receiving illegal cash payments, and the calls for his resignation grow louder with each passing day.  The second is a derivatives scandal at the third largest bank in Italy.  Allegedly, there were some very large unreported derivatives deals that were supposed to help hide losses at the bank, but instead they actually made the losses much larger.  The investigation that is looking into this derivatives scandal is starting to spread to other banks, and nobody is quite sure how far down the rabbit hole this thing goes.  But what everyone does agree on is that this derivatives scandal has shaken up Italian politics, and the outcome of the upcoming election is now very uncertain.  Former Prime Minister Silvio Berlusconi is rapidly rising in the polls, and the European establishment is less than thrilled about that.  Meanwhile, stock indexes all over Europe fell rapidly on Monday, and even the Dow was down 129 points.  So will all this blow over in a few days, or is this the beginning of a full-blown stock market crash in Europe?

That is a very good question.  Perhaps there would not be so much concern if the overall European economy was doing well, but the truth is that the underlying economic fundamentals in Europe have continued to get even worse.  The unemployment rate in the eurozone is at an all-time high, and the unemployment rates in both Greece and Spain are now over 26 percent.  Much of southern Europe is already in the midst of a full-blown economic depression, so it really has been remarkable that the financial markets in Europe have been able to hold up as well as they have so far.

But now all of that may be changing.  Just check out what happened on Monday according to Bloomberg…

National benchmark indexes declined in all of the 18 western European markets, except Greece and Denmark. Italy’s FTSE MIB Index (FTSEMIB) sank 4.5 percent, the most in six months. Spain’s IBEX 35 slid 3.8 percent for a sixth day of declines, the longest losing streak in 10 months. France’s CAC 40 plunged 3 percent for the biggest drop since April. The U.K.’s FTSE 100 dropped 1.6 percent and Germany’s DAX lost 2.5 percent.

Unfortunately, what happened on Monday was just the continuation of a trend that started last week.  The following is from Zero Hedge…

The last four days have seen the biggest plunge in over six months with the IBEX (Spain -5.7%) and Italy’s MIB -6.7%. At the same time, Europe’s seemingly invincible OMT-promise-protected sovereign bond market has started to underwhelm. Italian bond spreads are 32bps wider and Spain 28bps wider – the biggest increase in risk in two months.

European banks have been hit particularly hard during this recent downturn.
Just check out some of the huge declines that European banking stocks experienced on Monday…
UniCredit SpA: -8.3 percent
Commerzbank AG: -5.9 percent
Santander: -5.7 percent
Intesa Sanpaolo SpA: -5.4 percent
Credit Agricole SA: -5.4 percent
Société Générale SA: -4.8 percent
Banco Bilbao Vizcaya Argentaria SA: -4.7 percent

Those are huge moves for just a single day of trading.  If we have a couple of more days like that, everyone is going to be talking about a “stock market crash” in Europe.

Unfortunately, it does not appear that any solutions to the scandals that are shaking up southern Europe right now will be forthcoming any time soon.

In Spain, it is increasingly looking like the Prime Minister may actually have to resign.  A recent CNN article explained what the scandal is all about…

Rajoy denied on Saturday allegations that he and other leaders of his conservative People’s Party had received secret cash payments from a fund operated by the party’s former treasurer. Rajoy said he would publish details of his personal wealth and income tax states on the prime minister’s website.

Of course politicians all over the world are accused of doing evil things all the time, but in this instance it appears that there may be some solid evidence that Rajoy may not be able to deny.  The following comes from a Bloomberg report…

Newspaper El Pais last week published allegations of illegal cash payments, featuring extracts from handwritten ledgers by the former People’s Party Treasurer Luis Barcenas showing payments to officials including Rajoy.

At this point, opinion polls are showing that even most of his own supporters do not believe him…

Polls show that 60pc of his own supporters do not believe the official explanation. A national petition drive calling for his resignation has already collected almost 800,000 signatures. Socialist oppo­sition leader Alfredo Pérez Rubalcaba yesterday joined the chorus calling for Mr Rajoy’s head, saying the country had ­become “ungovernable”.

So definitely expect things in Spain to get worse before they get better.
Meanwhile, the derivatives scandal in Italy continues to get more “interesting”.  Italy’s third largest bank is on the brink of collapse due to huge problems with derivatives contracts, and that bank just happens to be closely linked with the Italian politician that is currently leading in the polls…

The Italian scandal is related to Italy’s third-biggest bank, Monte dei Paschi di Siena, which has received two government bailouts and may yet have to be nationalized as its losses mount.
The bank is closely associated to Italy’s Democratic Party, whose leader, Pier Luigi Bersani, is leading in the polls, though slipping from his highs as former prime minister Silvio Berlusconi makes a late surge before the Feb. 25th general election. “The Monte [banking] scandals now look like overwhelming the Italian election campaign and put [Mr.] Bersani and the Democratic Party’s victory at risk,” James Walston, political commentator at the American University of Rome,  said in his Monday blog.

The Monte scandal centres on allegedly unreported derivatives deals that were apparently designed to hide losses and instead made the losses deeper. The bank, now under new management, has admitted that the derivatives losses might total more than €700-million.

So who benefits from all of this?  Well, it turns out that as a result of this scandal former Prime Minister Silvio Berlusconi is rapidly gaining more support.  The following is from a recent Telegraph article…

In Italy, ex-premier Silvio Berlusconi has upset the political landscape just three weeks before elections, surging back into contention with vows to rip up “German-imposed” austerity policies and cancel a hated property tax.

His Right-wing alliance has risen to 28pc in the polls, relishing a widening scandal at Banca Monte dei Paschi that has embroiled the Italian left.

But even if none of these scandals had happened, it was inevitable that the gigantic debt bubble in Europe would end up bursting at some point.
In fact, the entire globe is on the verge of a debt implosion.  This was something that Bill Gross of Pimco discussed in his February newsletter…

“So our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic – it is running out of energy and time. When does money run out of time? The countdown begins when investable assets pose too much risk for too little return; when lenders desert credit markets for other alternatives such as cash or real assets.”

No debt bubble can expand indefinitely.  At some point it can no longer hold itself together.
Europe is rapidly approaching that point, and so is the United States.
So how much time do we have left?

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Goldman Sachs hedging its bets: Is more economic pain on the way?

Investment bankers – can’t live with ‘em, and can’t live without ‘em.

At least that's how it seems in these tough economic times. We tend to hang on their every word, as if they truly know how big money intends to manipulate financial markets in the foreseeable future. But we also tend to blame these financial powerhouses for creating the worst recession since the Great Depression.

Goldman Sachs, Morgan Stanley and JP Morgan are the evil villains in this plodding screenplay, but, as the world suffers, these guys keep running to the bank with enormous bonuses with rarely any visible intention of correcting prior wrongdoings. They refuse to accept any fault for continually maneuvering the system to their monetary advantage. They do it because they can. They are the center of the global capital formation industry, where money and greed drive the engines of commerce.

As much as we may despise the reality of the present situation, we also respect these financial titans whenever they opine on the potential of future events, especially when they project valuations for stocks, commodities and currencies. When they speak, we listen intently. Up until now, Goldman, the leader of the pack, has been very upbeat on its forecasts for the stock market in 2013, suggesting a stellar second half of the year after the fiscal shenanigans in Washington have run their course.

Analysts at the firm have steadfastly predicted a 1,575 value for the S&P 500 index by the end of 2013. The index presently sits just above 1,500. But, this week Goldman published a graph, which a Washington Post headline described as scary. The chart depicts federal consumption and investment spending over the past 50 years. There are two major dips during the period, followed by a dire prediction over the next three years.

Alec Phillips, a Goldman Sachs economist, wrote, “We lowered our outlook for federal spending, to take into account the increased likelihood that cuts under sequestration take effect. With that built into their baseline, the cuts to federal consumption and investment look deep in the coming years. Sequestration, spending caps, and reduced war spending will together reduce real federal consumption and gross investment by 11 percent over the next two years.”

An 11 percent drop is material by anyone’s standards. The two previous drops followed the end of the Vietnam War in the late 1960s and the end of the Cold War in the early '90s. As these cuts were taking place, the economy was rebounding on both occasions, enough to sustain any significant withdrawal of stimulus from the government sector. Now that the Afghanistan and Iraq wars have almost concluded, sequestration budget cuts will decrease military spending automatically while our economy is still struggling to recover.

Previous federal spending cuts have been back-loaded during the latter half of the following budget decade in order to allow time for the economy to gain steam. The analyst at Goldman is only recognizing that the current situation is decidedly different than the last two dips. The chart also does not take into account the expiration of payroll tax cuts and the rise in tax rates for the wealthy, changes that some predict will add additional drags on economic growth.

Are we putting too much faith in the forecasting ability of Goldman analysts? They do reverse positions from time to time. While maintaining their 2013 projection for the S&P 500 index at 1,575, they had originally stood by a 1,250 forecast for 2012. The index ended the year at 1,426, a 14% error. Goldman also recently shocked gold investors by predicting a $1,200 price per ounce for the precious metal by 2018. It currently sits at $1,667, and a survey of analysts see modest gains in store for the next two years. Goldman is an admitted outlier in these estimates, as well.

While grandiose predictions may eventually garner future bragging rights if you are correct, we do live in an era of globalization. We must be mindful of what officials are doing in other parts of the world and how their actions might impact us down the road. Austerity measures in Europe and other regions have not corrected the current economic conundrum – how do you generate real, sustainable GDP growth under current conditions?

More central bankers are beginning to accept the U.S. approach of weakening the national currency to stimulate exports and domestic growth in the process. Mario Draghi, the European equivalent of Ben Bernanke, noted this reasoning in his comments today. The Euro plunged as a result. The Bank of Japan has recently pursued a path of qualitative easing in concert with the new Abe administration. The Yen has weakened 18 percent versus the greenback in just the past three months. Currency wars appear to be forming on the horizon. Someone, however, has to be the importer of last resort.

Favorable economic data, although modest, suggest that a gradual recovery is still in progress. The deficit shrank in December, and trade data is improving. But the CBO recently noted, “According to CBO’s projections, if all of that fiscal tightening occurs, real (inflation-adjusted) gross domestic product (GDP) will drop by 0.5 percent in 2013, reflecting a decline in the first half of the year and renewed growth at a modest pace later in the year.”

Another disconcerting statistic is that nearly $1 trillion flowed out of equities during the month of January. Do billionaires and hedge fund managers know something that the rest of us do not? President Obama knows that he is not out of the economic woods yet, the reason for his moving to slow down the impacts of sequestered budget cuts. Hopefully, Republicans are reading from the same playbook and will move in a similar fashion. Otherwise, we may all be in store for more economic pain in the near term. Lean Forward!

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Do Wall Street Insiders Expect Something Really BIG To Happen Very Soon?

Why are corporate insiders dumping huge numbers of shares in their own companies right now? Why are some very large investors suddenly making gigantic bets that the stock market will crash at some point in the next 60 days? Do Wall Street insiders expect something really BIG to happen very soon? Do they know something that we do not know? What you are about to read below is startling. Every time that the market has fallen in recent years, insiders have been able to get out ahead of time. David Coleman of the Vickers Weekly Insider report recently noted that Wall Street insiders have shown "a remarkable ability of late to identify both market peaks and troughs". That is why it is so alarming that corporate insiders are selling nine times as many shares as they are buying right now. In addition, some extraordinarily large bets have just been made that will only pay off if the financial markets in the U.S. crash by the end of April. So what does all of this mean? Well, it could mean absolutely nothing or it could mean that there are people out there that actually have insider knowledge that a market crash is coming. Evaluate the evidence below and decide for yourself...

For some reason, corporate insiders have chosen this moment to unload huge amounts of stock. According to a CNN article, corporate insiders are now selling nine times more of their own shares than they are buying...

Corporate insiders have one word for investors: sell.
Insiders were nine times more likely to sell shares of their companies than buy new ones last week, according to the Vickers Weekly Insider report by Argus Research.

What makes this so alarming is that corporate insiders have been exceedingly good at "timing the market" in recent years. The following comes from a recent CNBC article entitled "Sucker Alert? Insider Selling Surges After Dow 14,000"...

"In almost perfect coordination with an equity market that was rushing toward new all-time highs, insider sentiment has weakened sharply — falling to its lowest level since late March 2012," wrote David Coleman of the Vickers Weekly Insider report, one of the longest researchers of executive buying and selling on Wall Street. "Insiders are waving the cautionary flag in an increasingly aggressive manner."
There have been more than nine insider sales for every one buy over the past week among NYSE stocks, according to Vickers. The last time executives sold their company's stock this aggressively was in early 2012, just before the S&P 500 went on to correct by 10 percent to its low for the year.
"Insiders know more than the vast majority of market participants," said Enis Taner, global macro editor for RiskReversal.com. "And they're usually right over a long period of time."

There are other indications that the stock market may be headed for a significant tumble in the months ahead. For example, as a Zero Hedge article recently pointed out, the last time that the financial markets in the U.S. were as "euphoric" as they are now was right before the financial crisis of 2008.

And as I mentioned above, some people out there have recently made some absolutely jaw-dropping bets against stocks which will only pay off if there is a financial crash at some point in the next few months.

According to Business Insider, the recent purchase of 100,000 put options by a mystery investor has a lot of people on Wall Street talking...

According to Barron's columnist Steven Sears, someone made a big bet against the financials ETF yesterday (ticker symbol XLF), and it has everybody buzzing.
The trader bought 100,000 put options on the ETF (a put option increases in value when the price of the underlying asset, in this case, the ETF, goes down).
To put that number in perspective, Sears writes, "Few investors ever trade more than 500 contracts, so a 100,000 order tends to stop traffic and prompt all sorts of speculation about what's motivating the trade." According to Sears, the trade "has sparked conversations across the market."

Reportedly, those put options expire in April.

And as Art Cashin of UBS has noted, there was also another extremely large bet that was placed recently that is banking on a financial crash within the next two months...

A Very Big Bet In A Somewhat Unlikely Instrument – My friend, Jim Brown, the ever-alert consummate professional over at Option Investor pointed us to a rather unusual trade. Here's what he wrote in last night's edition of his valuable newsletter:
In past years I have reported on trades that were so large it appeared someone had inside knowledge of a pending event. Sometimes those were massive put positions on the S&P. A new trade just appeared that suggests there will be a market event in the near future. Last week somebody put on a call spread on the VIX using the April 20 and 25 puts. They bought 150,000 contracts for a net of $75 per contract. That is an $11,250,000 bet that the VIX will move over 20 over the next 60 days. You would have to be VERY confident in your outlook to risk $11 million on a directional position with the VIX at five year lows and the markets trying to break out to new highs.

So does all of this guarantee that the stock market is going to move a certain way?
Of course not.

But when you step back and look at the bigger picture, it does appear that Wall Street insiders are preparing for something.

Meanwhile, the government continues to assure us that happy days are here again for the U.S. economy and that we don't have anything to worry about.

The Congressional Budget Office has just released a report that contains their outlook for the next decade. The report is entitled "The Budget and Economic Outlook: Fiscal Years 2013 to 2023", and if you want a good laugh you should read it.
Here are some of the things that the CBO believes will happen...

-The CBO believes that government revenues will more than double by 2023.
-The CBO believes that government revenue as a percentage of GDP will rise from 15.8 percent today to 19.1 percent in 2023.
-The CBO believes that the unemployment rate will continually fall over the next decade.
-The CBO believes that the federal budget deficit will fall to just 2.4% of GDP in fiscal year 2015.
-The CBO believes that the federal budget deficit will only be $430 billion in 2015.
-The CBO believes that we will not have a single recession over the next decade.
-The CBO believes that inflation will stay at about 2 percent for the next decade.
-The CBO believes that U.S. GDP will grow by a total of 67 percent by 2023.

Wow, all of that sounds great until you go back and take a look at how CBO projections have fared in the past.

In fact, Bruce Krasting has gone back and looked at the numbers from the Congressional Budget Office’s Budget and Economic Outlook 2003. I think that you will find the differences between the CBO projections and what really happened to be very humorous...

Estimated 10-year budget surplus = $5.6T.
Reality = $6.6T deficit. A 200+% miss.

Estimate for 2012 Debt Held by Public = $1.2T (5% of GDP).
Reality = Debt Held by Public = $11.6T. A 1000% miss.

Estimated fiscal 2012 GDP = $17.4T.
Reality = $15.8T. A $1.6T (10%) miss.

So should we trust what the CBO is telling us now?

Of course not.

Instead, perhaps we should listen to some of the men that successfully warned us about the last financial crisis...

-"Dr. Doom" Marc Faber recently stated that he "loves the high odds of a ‘big-time’ market crash".

-Economist Nouriel Roubini says that we should "prepare for a perfect storm".

-Pimco's Bill Gross says that we are heading for a "credit supernova".

-Nomura's Bob Janjuah believes that the financial markets will experience one more huge spike before collapsing by up to 50%...

I continue to believe that the S&P500 can trade up towards the 1575/1550 area, where we have, so far, a grand double top. I would not be surprised to see the S&P trade marginally through the 2007 all-time nominal high (the real high was of course seen over a decade ago – so much for equities as a long-term vehicle for wealth creation!). A weekly close at a new all-time high would I think lead to the final parabolic spike up which creates the kind of positioning extreme and leverage extreme needed to create the conditions for a 25% to 50% collapse in equities over the rest of 2013 and 2014, driven by real economy reality hitting home, and by policymaker failure/loss of faith in "their system".

The truth is that no matter how much money printing the Federal Reserve does, it is only a matter of time before the financial markets catch up with economic reality.

The U.S. economy has been in decline for a very long time, and things just continue to get even worse. Here are just a few numbers...

-The percentage of the civilian labor force that is employed has fallen every single year since 2006.
-According to John Williams of shadowstats.com, truly accurate numbers would show that U.S. GDP growth has actually been continuously negative all the way back to 2005.

-U.S. families that have a head of household that is under the age of 30 have a poverty rate of 37 percent.

-One recent survey found that nearly half of all Americans are living on the edge of financial ruin.
-According to the U.S. Census Bureau, there are more than 146 million Americans that are considered to be either "poor" or "low income" at this point.

For many more statistics that demonstrate that the U.S. economy has continued to decline in recent years, please see this article: "37 Statistics Which Show How Four Years Of Obama Have Wrecked The U.S. Economy".

So where is all of this headed?

Well, after the next major financial crisis in America things are going to get very tough.
We can get a hint for how things are going to be by taking a look at what is going on over in Europe right now.

Can you imagine people trampling each other for food? That is what is happening in Greece. Just check out this excerpt from a Reuters article...

Hundreds of people jostled for free vegetables handed out by farmers in a symbolic protest earlier on Wednesday, trampling one man and prompting an outcry over the growing desperation created by economic crisis.
Images of people struggling to seize bags of tomatoes and leeks thrown from a truck dominated television, triggering a bout of soul-searching over the new depths of poverty in the debt-laden country.

The suffering that the Greeks are experiencing right now will come to this country soon enough.
So enjoy this false bubble of debt-fueled prosperity while you can. It is going to end way too soon, and after that there will be a whole lot of pain.

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Another Critically Important EU Summit! Fate of World to be Determined

EU leaders set for crucial budget summit ... European Union leaders are due to begin a two-day summit in Brussels to try to strike a deal on the next seven years of EU spending. High EU expenditure at a time of cutbacks and austerity across the continent is the main issue dividing the 27 member states. They failed to reach a compromise at a similar summit last November. The BBC's Europe editor Gavin Hewitt says the summit will almost certainly demand cuts in EU administration. However, whatever is agreed still has to go to the European Parliament and MEPs are big backers of EU spending, he adds. – BBC

Dominant Social Theme: What would we do without these critically important summits? Surely the world would be a far worse place.

Free-Market Analysis: So the EU leaders are getting together once more to determine the fate of the world in what the BBC calls a "crucial budget summit."

What occurs to us when we observe this constant procession of summits is that this is a kind of intentional manipulation. First, the power elite that is intent on consolidating world government sets up artificial crises. Then it creates a political process to solve them.

In the case of the EU, the crisis has gone on for years.

It was SUPPOSED to go on for years so that newspapers could write headlines about it. It is a promotion for the utility of government.

Every day, people pick up newspapers and magazines and read about this summit or that summit and how "leaders" are gathering to mull the fate of the world and to try to stop disaster from striking.
This was perhaps most effective in the past century during the prelude to World War II. With war about to break out, people were desperate for the latest word from "leaders." They were hoping things would be resolved. They weren't.

Imagine how they would have felt if they knew what we know today (and some of them did, of course), that world events were being manipulated by Money Power and that the War was likely pre-determined in order to create facilities for world government.

And that is, of course, exactly what happened.

Today we see the same narrative at work with the EU. But from what we can tell, these endless EU summits are increasingly irritating to people because the stakes are not the same.

It is one thing to have endless summits to avoid war. It is another to have a series of summits about banking defaults and budgets overhangs. Here's more from the BBC:

The EU Commission - the EU's executive body - had originally wanted a budget ceiling of 1.025tn euros (£885bn; $1.4tn) for 2014-2020, a 5% increase. In November that was trimmed back to 973bn euros and later revised down to 943bn euros.

However, with other EU spending commitments included, that would still give an overall budget of 1.011tn euros.

The UK, Germany and other northern European nations want to lower EU spending to mirror the cuts being made by national governments across the continent.

Downing Street said on Wednesday that Prime Minister David Cameron was intent on seeking an agreement to lower EU spending.

"The UK's position is unchanged since the November European Council - spending needs to be reduced further than the proposals on the table," a spokesman said.

You see how dry this is? It is one reason the EU meme is failing. The idea is always to promote government but the EU promotion has gone awry.

The article itself attempts to provide a sense of gravity via its narrative, pointing out that "EU budget negotiations are difficult" and that already there had been "short but intense meetings" between top EU leaders.

We even learn that a European Parliament spokesman warned that "more severe cuts would leave the commission unable to do its job as the EU integrates more deeply in response to the financial crisis."
And then there is this: "Analysts say failure to reach an agreement on its seven-year budget would mean the EU falling back on more expensive annual budgets."

Hmm ... When Hitler met with top British officials the headlines spoke of "Peace In Our Time."
Today's headlines read, "EU falling back on more expensive annual budgets."

This is simply not going to get the job done. Nor is the "war on terror" – which is one reason the elites have apparently expanded it. But as we have pointed out in the past, nuclear weapons have made war a difficult tool to use as a means of obtaining world government.

Prior to nuclear weapons, war could be generalized and pursued with full-on brutality. But total war is not an option anymore. And that seems to be the reason that Money Power has created faux wars instead.

Not only is EU consolidation not a great, galvanizing issue. It also, as we pointed out above, is proving increasingly tiresome. The lack of ability to promote a generalized war – a World War – is proving most troublesome to the elites, in our humble view. Combine this with the exposure of elite plans courtesy of the Internet Reformation and you end up with formidable obstacles.

The 21st century is not the 20th. Increasingly, people are not impressed with the EU and certainly not with the euro. The power elite propounds various forms of urgency to impress upon people the need for a centralizing force of government – and yet such a promotion is not so effective as it might have been previously.

Conclusion: These endless meetings are intended to impress upon people the importance of leaders and their deliberations. But we have a feeling that people are tuning out instead.

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Obama’s bankster bromance

The White House is holding a meeting today with a number of business leaders to discuss the President’s economic agenda, including immigration. This is encouraging, as it will be important to get leaders on board with reforming immigration rules.

What’s less encouraging is that the President continues to treat Goldman Sach’s CEO Lloyd Blankfein like he’s royalty.

Even if you put aside the bailout “taker” receiving billions of tax dollars indirectly via AIG during the industry bailout, the relationship is strange. Goldman may not have been the worst offender (or at least, the most costly) of the Wall Street banks responsible for trashing the US economy, but they were certainly in the thick of the problem. Relying on the expertise of any CEO from Wall Street is bizarre.

Even though Obama did plenty of campaign fundraisers on Wall Street, including with Blainkfein, the President should have more consideration for the Americans who carried the heavy load and paid for the sins of Wall Street. This is what happens when Democrats allow the unions to be cut to pieces. The only counter-balance to GOP money is banker money, and lots of it.

More recently, Lloyd Blankfein has been one of the usual voices calling for gutting the social system that most Americans need, like and want. For the Taker-Class like Blankfein, receiving trillions for his industry and billions for his company makes perfect sense and is fair. Your Social Security and Medicare? Sorry granny, you’re just being greedy and you will have to accept cuts.

Lloyd Blankfein wants his money and he’s first in line. Tough luck that there’s little left after he’s grabbed what he wants. Supporting the Blankfein’s of the world somehow is always the first priority of far too many politicians in Washington.

Get it? Blankfein is your better. In another era, he’s the type that would insist on you removing your cap while in his presence and calling him “sir.” (NOTE FROM JOHN: He’s Mary’s ex-fiancé, Richard, on Downton Abbey.) In the UK, he probably would have received a Knighthood by the Queen like Fred “The Shred” Goodwin. The poor guy was born in the wrong century, but he still gets his point across.

Even more recently Blankfein decided to hand out bonuses in the US early – unusually early – so that Goldman workers, himself included, could avoid any tax increases in the US. Yes, the tax dollars that saved their collective asses was so long ago and that memory has escaped them.

Blankfein tried doing the same thing in the UK, by pushing out payouts to avoid higher tax rates – but thankfully, Goldman was called out and forced to retreat. When government wants to do something, and stand up to this kind of corporate greed, it can. But it has to want to.

This brings us to today’s meeting at the White House. Of course it makes sense to round up support for immigration and other issues that will impact business, but why Lloyd Blankfein? I just don’t get it. Even more strange is that like the rest of Wall Street, this is a company that is cutting jobs. It’s not as profitable as it used to be, now that there are a few regulations (that protect taxpayers). The trend in banking is obvious.

Somehow though, year after year, Lloyd Blankfein keeps getting the special treatment and the special invites and the special respect from President Obama. Whether it’s bailout money, or being an expert on job creation (despite being a destroyer of jobs), Blankfein keeps getting the invitations.

Most Americans have had enough of the “Taker Class,” including Blankfein. But Washington just can’t get enough

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"Brace For A Stock Market Accident", GLG Chief Investment Officer Warns

Brace For A Stock Market Accident

Profits and leverage are locked in a deadly embrace

There is a time-honoured tradition in statistics: whipping the data until they confess. Bullish and bearish equity analysts are equally guilty of this practice.

It would seem that statistical conclusions are merely an ex-post justification of a long-held prior belief about equity markets being cheap or overpriced. Clearly, consensus, notably among sellside analysts, is bullish. I present the bullish view before discussing a bearish counterpoint.

Who can blame the equity bullish consensus? Earnings yields – a proxy for real equity yields – stand at comfortably high levels. For example, the forward earnings yield on the S&P 500 is 8.3 per cent.

Contrast real equity yields with real bond yields: with the US Consumer Price Index at 1.7 per cent and the nominal Federal Reserve funds rate at 15 basis points, real bond yields are at -1.55 per cent.

The difference between equity and bond yields – also known as the equity risk premium – is therefore close to 10 per cent. This is way above the 4-5 per cent premium required by investors to own equity, and therefore indicative of an ultra-cheap equity market.

There are two reasons why this consensus is misguided. First, because it uses dubious metrics. It is wiser to use a long-dated real bond yield because equity is a long-dated asset.

And forward earnings yields are misleading for well-documented reasons: analysts’ earnings consensus forecasts are known to be wildly optimistic; in a bid for juicier equity and call option compensations, managers encourage their accountants to inflate earnings numbers; and earnings are partially squandered by managements as they seek to prioritise growth over profitability.

So it is probably a good idea to use dividend-based – as opposed to earnings-based – equity valuation models. Unlike earnings, dividends do not lie.

Second, because consensus disregards leverage. Profits and leverage are linked (in a deadly embrace, it turns out). If deleveraging is yet to happen, then earnings growth can only be headed south.

So what if you trust dividends more than forward earnings? In a simple dividend discount model, the real equity yield is the sum of dividend yield and real dividend growth. The S&P dividend yield is 2.15 per cent. The real dividend growth has been historically 1.25 per cent.

The real 30-year yield is 0.4 per cent. Using these numbers, the equity risk premium is now 3 per cent, less than the premium level deemed acceptable. But we are not done yet, as we have not factored leverage into our equation.

Enter Michal Kalecki, a neo-Marxist economist who specialised in the study of business cycles and effective demand. Mr Kalecki showed that profits were the sum of investments and the change in leverage.

In the current environment, the implications of this equation are clear: in G7 economies, total debt is at a record 410 per cent of GDP. And this is excluding the net present value of social entitlements and healthcare expenditures, which is larger than the total debt.

Because leverage stands at unsustainably high levels in advanced economies, it should fall substantially over the long term, affecting profits negatively.

It can be assumed conservatively that the total-debt-to-GDP ratio needs to fall by 100 per cent before the debt position becomes sustainable in advanced economies. This would bring the US back to 1995, when the profit-to-GDP ratio was 45 per cent lower.

We can value the S&P under the following scenario: dividends fall by 45 per cent over a zero-growth period of 10 years. Then they resume their real growth of 1.25 per cent per year. Again, assuming a real yield of 0.4 per cent and a required risk premium of 4.5 per cent, fair market value is only one-third of current market levels.

Leverage is hence the fly in the ointment, begging the obvious question: when does the deleveraging take place? Answering this question is tantamount to timing the next major bear market. It is, of course, futile to predict a date, but as economist Herbert Stein used to say, if something cannot go on for ever, it will stop.

It is increasingly obvious that governments will take no active step towards deleveraging unless they are under the gun. But there are institutions and mechanisms that will trigger deleveraging, namely: Basel III, the bond market, default and, rarely, courageous politicians.

Inflation can also help delever, except in economies where social entitlements are inflation-indexed.

In the short term, it is clear that central banks need to entertain the illusion of viable stock market valuations by pulling rabbits from a hat. But as high-powered money reaches ever higher levels, the probability of accidents looms large.

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Should We Take the Department of Justice’s Suit Against Standard & Poor’s Seriously?

I know cynicism-hardened Naked Capitalism readers will expect the answer to the question in the headline to be “no”. But based on a summary of the filing at Bloomberg (and having conferred with lawyers on this beat), the answer looks more like “possibly yes”.

The reason to be skeptical of lawsuits against ratings agencies is that despite the monstrous damage done by crap ratings, suits against ratings agencies by aggrieved investors have gone all of nowhere. It isn’t a matter of evidence; there is overwhelming evidence that the agencies did a crappy job on structured credit ratings and that lots of investors really, truly relied on them. The issue is coming up with a legal theory.

So far, the ratings agencies have proven to be pretty much impervious to litigation. They’ve been able to rely on two lines of defense. The first, as absurd as it may seem, is First Amendment, to say that their ratings are simply journalistic opinions. There has only been some limited qualification of that position. For instance, judge Shira Scheindlin denied a rating agency motion to dismiss, on the ground that the ratings were of relevance to such a small group of investors so as not to qualify for First Amendment protection. But this ruling was narrow . The court distinguished private placement ratings from public ratings, with private ratings having less First Amendment protection. Mortgage backed securities ratings were public and so this line of argument would not apply to them. CDOs were typically 144A offerings. CDOs were almost always listed on the Irish Stock Exchange, so it would be hard to argue that the ratings were not public.

In addition, the unfavorable rulings were on asset backed commercial paper, where the issuer had much more interaction with the rating agencies. The courts courts took the view that the agencies did more than just provide an opinion – they had been involved in structuring the deals and were therefore entitled to less First Amendment protection. It’s harder to make that case for typical CDOs, since the rating approach for them typically model driven and formulaic.

The other line of defense is that the legislation authorizing the rating agencies as nationally recognized statistical ratings organizations give them significant protections if they stay within the relatively limited restrictions of those rules. In the past, the Federal government has tried overcoming these considerable obstacles by using other legal theories. For instance, the Department of Justice launched an antitrust suit against Moody’s in the 1990s.

So the reason the Department of Justice civil suit might be the real deal is that it is using a new legal theory and is focusing on a comparatively small number of specific transactions. As Bloomberg states:

The U.S. Justice Department filed a complaint yesterday in federal court in Los Angeles, accusing McGraw-Hill and S&P of mail fraud, wire fraud and financial institutions fraud. Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the U.S. seeks civil penalties of as much as $1.1 million for each violation. McGraw-Hill’s shares tumbled the most in 25 years yesterday when it said it expected the lawsuit, the first federal case against a ratings company for grades related to the credit crisis.
S&P issued credit ratings on more than $2.8 trillion of residential mortgage-backed securities and about $1.2 trillion of collateralized-debt obligations from September 2004 through October 2007, according to the complaint. S&P downplayed the risks on portions of the securities to gain more business from the investment banks that issued them, the U.S. said.

“It’s a new use of this statute,” Claire Hill, a law professor at the University of Minnesota who has written about the ratings firms, said in a phone interview from Minneapolis. “This is not a line to my knowledge that has been taken before.”

Despite the sweeping language, the case focuses on approximately 40 CDOs issued during the toxic phase of the bubble. The New York Times reports that S&P earned about $13 million rating these deals. The New York Times explains why the use of FIRREA puts a comparatively small number of transactions in the crosshairs:

The government is taking a novel approach by accusing S.& P. of defrauding a federally insured institution and therefore injuring the taxpayer.

Among others, the compliant includes the demise of Wescorp, a federally insured credit union in Los Angeles that went bankrupt after investing in mortgage securities rated by S.& P. Wescorp is included as one example of the contended fraud, and as a way to bring the case in California. The suit was filed in Federal District Court for the Central District of California.

The linchpins are that first, that the DoJ is using FIRREA. Second, the government is accusing Standard and Poor’s of conflict of interest (favoring banks and increased market share) and disregarding risks and failing to adhere to their stated approach to ratings. The key phrase: S&P falsely represented to investors that its ratings were objective, independent and uninfluenced by any conflicts of interest.

The Times reports that the suit was filed because settlement negotiations fell apart:

Settlement talks between S.& P. and the Justice Department broke down in the last two weeks after prosecutors sought a penalty in excess of $1 billion and insisted that the company admit wrongdoing, several people with knowledge of the talks said. That amount would wipe out the profits of McGraw-Hill for an entire year. S.& P. had proposed a settlement of around $100 million, the people said.

S.& P. also sought a deal that would allow it to neither admit nor deny guilt; the government pressed for an admission of guilt to at least one count of fraud, said the people. S.& P. told prosecutors it could not admit guilt without exposing itself to liability in a multitude of civil cases.

As indicated, the reason this suit might fly is that the causes of action rely on different statues than previously invoked, and the focus is on S&P’s misrepresentation of its own process: that it presented it as objective and unbiased, when it had significant conflicts of interests and its employees believed it was concerned only about profit, and that it may also have failed to adhere to its own procedures.
While getting a ratings agency scalp is small potatoes compared to getting the executives at one of the many financial institutions that helped bring about the crisis, I’ll take my victories where I can get them. Winning a case against a public company that is really keen not to lose (tons of private litigation would follow) would break a long losing streak in the DoJ and SEC on the finance front. Although the agencies have been craven, they apparently really were demoralized after losing their misguided suit against Bear Stearns hedge fund managers, and they’ve been gun shy. That does not mean they would not have lost in a fight against the Treasury if they had wanted to go after any targets, but let’s not kid ourselves: these fights never occurred. Breuer in a significant role was also a big part of the problem, but people who know something about the DoJ say the agency’s learned timidity was an even bigger impediment. They really lost their mojo after the Bear Stearns fiasco. You could have imagined a less cowardly DoJ filing suits against safe and obvious targets like WaMu.

Let’s hope that the DoJ’s prosecutorial efforts live up to the caliber of their filing. Too often the Feds have proven to be great draftsmen but lousy prosecutors. We’ll see if they can up their game.

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Shocking Numbers That Show The Media Is Lying To You About Unemployment In America

Did you know that the percentage of the U.S. labor force that is employed has continually been falling since 2006 according to the Bureau of Labor Statistics?  Did you know that the increase in the number of Americans "not in the labor force" during Barack Obama's first four years in the White House was more than three times greater than the increase in the number of Americans "not in the labor force" during the entire decade of the 1980s?  The mainstream media would have us believe that 157,000 jobs were added to the U.S. economy in January.  Based on that news, the Dow broke the 14,000 barrier for the first time since October 2007.  But if you actually look at the "non-seasonally adjusted" numbers, the number of Americans with a job actually decreased by 1,446,000 between December and January.  But nowhere in the mainstream media did you hear that the U.S. economy lost more than 1.4 million jobs between December and January.  It is amazing the things that you can find out when you actually take the time to look at the hard numbers instead of just listening to the media spin.  Back in 2007, more than 146 million Americans were employed.  Today, only 141.6 million Americans are employed even though our population has grown steadily since then.  When the government and the media tell you that we are in a "recovery" and that unemployment is lower than it was a couple of years ago, I encourage you to dig deeper.  The truth is that even the government's own numbers tell us that the percentage of the U.S. labor force that is employed continues to fall and that the U.S. economy is heading into a recession.  The Obama administration and the media have been lying to you about unemployment and about the true condition of our economy.  After you see the numbers that I have compiled in this article, I think that you will agree with me.

First of all, let's take a look at the percentage of the civilian labor force that has been employed over the past several years.  These numbers come directly from the Bureau of Labor Statistics.  As you can see, this is a number that has been steadily falling since 2006...

2006: 63.1
2007: 63.0
2008: 62.2
2009: 59.3
2010: 58.5
2011: 58.4

In January, only 57.9 percent of the civilian labor force was employed.

Do the numbers above represent a positive trend or a negative trend?

Even a 2nd grader could answer that question.

So how in the world can the Obama administration and the mainstream media claim that the employment picture is getting better and that we are in a "recovery"?

But most Americans believe what they are told.  It is almost as if we are in some kind of a "matrix" where reality is defined by the corporate-controlled propaganda that is relentlessly pumped into our brains.
The only way that the government has been able to show a declining unemployment rate is by dumping massive numbers of Americans into the "not in the labor force" category.

Just check out how the number of Americans "not in the labor force" has absolutely skyrocketed in recent years...

2006: 77,387,000
2007: 78,743,000
2008: 79,501,000
2009: 81,659,000
2010: 83,941,000
2011: 86,001,000

In January, there were supposedly 89,868,000 Americans that were at least 16 years of age that were not in the labor force.

That number has risen by more than 8 million since Barack Obama first entered the White House, and that is highly unusual, because the number of Americans "not in the labor force" only increased by 2,518,000 during the entire decade of the 1980s.

You sure can get the numbers to look more "favorable" if you pretend that millions upon millions of American workers simply "don't want a job" any longer.  The truth is that if the labor force participation rate was at the same level it was at when Barack Obama was first elected, the official unemployment rate would be well above 10 percent.

But that wouldn't do at all, would it?  7.9 percent sounds so much nicer.

And of course even if you do have a job that does not mean that you are doing okay.

If you can believe it, in America today 41 percent of all workers make $20,000 a year or less.

To me, that is a mind blowing statistic.  It would be incredibly challenging for anyone to live on $20,000 a year, much less try to support a family.

If you live in Washington D.C. or New York City and you have a "good job" working for the establishment, you may not realize it, but there are tens of millions of American families that are really hurting out there.  According to the U.S. Census Bureau, more than 146 million Americans are either "poor" or "low income" at this point, and most of those people actually do have jobs.

For much more on the "working poor" in the United States, please see my previous article entitled "35 Statistics About The Working Poor In America That Will Blow Your Mind".

If something is not done, the middle class will continue to disappear and poverty in America will continue to explode.

In a previous article, I noted that during Obama's first term, the number of Americans on food stamps increased by an average of about 11,000 per day.

How bad do things have to get before people realize that we are living through a nightmare?

Sadly, most Americans still have faith in the system.

Most Americans are still convinced that our politicians will somehow find a way to turn things around.
Most Americans will gather around their television sets this weekend and watch the Super Bowl and laugh at all the funny commercials without even thinking about how America is literally falling apart all around them.

But there is one group of Americans that is acutely aware of how bad things have really gotten.  Small businesses have traditionally been the primary engine of job growth in this country, but right now small business owners all over the nation are facing a tremendous crisis.

Millions of small businesses are on the verge of extinction, and yet our politicians just continue to pile on more taxes, more rules and more regulations.

A recent Gallup poll found that 61 percent of all small business owners in America are "worried about the potential cost of healthcare", and that an astounding 30 percent of all small business owners in America are not hiring and fear that they will go out of business within the next 12 months.

In a previous article entitled "We Are Witnessing The Death Of Small Business In America", I detailed how small businesses in America are being systematically wiped out.  Small businesses are dying all around us, and the number of new small businesses continues to decline.

According to economist Tim Kane, the following is how the decline in the number of startup jobs per one thousand Americans breaks down by presidential administration...

Bush Sr.: 11.3
Clinton: 11.2
Bush Jr.: 10.8
Obama: 7.8

Is that a good trend or a bad trend?

All of this is so simple that even the family pet should be able to figure it out, and yet most Americans seem oblivious to all of this.  They just keep gobbling up the mainstream media propaganda and they just continue to go out and wildly spend money.

It is almost as if we didn't learn any lessons from 2008.

Even while household spending in Europe has moderated, household spending in the United States continues to soar.  Just check out the chart in this article.

And guess what?  The infamous "no money down mortgages" are back.  If we wait long enough, perhaps "interest only mortgages" will make a comeback as well.

Unfortunately, I am afraid that time is running out.  we have been living in the biggest debt bubble in the history of the world, and it is only a matter of time until it bursts.

2008 was just a "hiccup" compared to what is coming.  Our politicians and the Federal Reserve were able to keep the house of cards from completely crashing down back then, but they are not going to be able to avert the economic horror show that is rapidly approaching.

I hope that you are getting prepared.  Back in 2008, millions of Americans suddenly lost their jobs, and because many of them did not have any savings, many of them suddenly lost their homes.  One of the most important things that you can do to prepare for the coming crisis is to build up an emergency fund.  If things suddenly go bad, you don't want to lose your house and everything that you have always worked for.

In addition, anything that you can do to become more self-sufficient and more independent of the system is a good thing, because the system is failing.  The years ahead are going to be much more chaotic than what we are experiencing right now, and when the next crisis strikes you will be very thankful for the time and the energy that you put into preparing.

So what are all of you seeing in your own areas?

Are businesses shutting down?

Are people having a hard time finding good jobs?

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Senators Demand that Banks Be Punished – but Not the Fed

Senators Call Out Attorney General For Treating Banks Like They Are "Too Big To Jail" Like many Americans, Senators Charles Grassley (Iowa) and Sherrod Brown (Ohio) think federal investigators have given banks a mere slap on the wrists for their part in the economic collapse and other misdeeds. So in a letter to U.S. Attorney General Eric Holder, the pair wonder if banks are being viewed by the DOJ as "too big to jail." In the letter, the senators say that even though banks have already paid out billions in civil and regulatory penalties, these settlements are nothing compared to the scope of the damage done, the money banks made before the economy went kaplooey, and the taxpayer investment in the TARP bail-outs. "Unfortunately, many of the settlements between large financial institutions and the federal government involve penalties that are disproportionately low, both in relation to the profits which resulted from those wrongful actions as well as in relation to the costs imposed upon consumers, investors, and the market," reads the letter. – Consumerist

Dominant Social Theme: Bring these banksters to justice.

Free-Market Analysis: But not the good, gray men of central banking.

We are not surprised. The power elites are deathly frightened, in our view, that their control over central banks is in jeopardy. They will sacrifice the entire financial infrastructure to make sure central banks are not attacked.

They are trying to do this any way they can.

They are trying to set up neo-Pecora hearings to focus on Wall Street and the securities industry in general. There will be similar attacks in Europe and Britain. Maybe in China and Japan too, who knows? Search the 'Net for "Neo-Pecora" and "Daily Bell" for more.

Back in the 1930s, Franklin Delano Roosevelt brought in the cigar-chomping Ferdinand Pecora to regulate Wall Street and make it safe for the consumer.

Eighty years later, consumers are right back where they started – or ended.

In the 1930s, after the Great Crash of 1929, savings were wrecked, retirements ruined and people decided they didn't trust the stock market.

The Pecora hearings were seemingly an elite psy-op intended to further establish the legitimacy of regulation generally and the idea that specific regulations could substitute for "market failure."
Of course, the failure of the markets was evidently and obviously because of their artificially induced centralization. In fact, it was only after a precipitating event – and at least seven decades after the Civil War – that the power elites could assert their control over the blossoming securities industry.
The US securities industry, specifically, was never meant to be – or not in its current size and shape. It is like an elephant standing in the intersection of major capital flows. The entirety of US industrial securitization has been shaped to travel past the behemoth which needs merely to extend its trunk to feed.

Every law and regulation passed merely contributes to further centralization and additional control. A very few people at the top of the pyramid can see the entire picture and pull the levers as necessary. The levers actually are pulled at the behest of the Federal Reserve, which is the main vehicle of control for the power elite itself.

What ought to be clear to people who want to understand more fully what is taking place is that the top elites are perfectly willing to sacrifice the mechanical device that distributes the Fed super money. What they are NOT willing to do is sacrifice the source of that money – the Fed itself.
The system has been built to fail and thus further centralize money power in the hands of the few. In order to confuse an increasingly maddened public, the powers-that-be created the dominant social theme of government regulatory competence.

The idea was that central banks and governments – being responsible parties – would rule over the private sector, which was inherently disorganized and not to be trusted as it was prone to "market failure."

This is the meme that has been operative for the past century or so. But it is failing now because it has been seen (over and over with increasing emphasis) that regulation doesn't work. Thus the powers-that-be are reduced to the argument that regulations on the books were not adequately enforced and that more and different regulation is called for.

In other words, a tougher and better cop on the beat is necessary – and he or she must be equipped with more powerful weapons as necessary. Sound familiar? Here's some more from the article above:

Grassley and Brown voice their concerns that prosecutors' treatment of the bank has left the impression with Americans that "Wall Street banks enjoy a favored status, in statute and in enforcement policy." [They] then proceed to ask AG Holder the following:

1. Has the Justice Department designated certain institutions whose failure could jeopardize the stability of the financial markets and are thus, "too big to jail"? If so, please name them.
2. Has the Justice Dept. ever failed to bring a prosecution against an institution due to concern that their failure could jeopardize financial markets?
3. Are there entities the Justice Dept. has entered into settlements with, in which the amount of the settlement reflected a concern that markets could be impacted by such a settlement? If so, for which entities?

The letter also asks Holder to identify all outside experts consulted by the DOJ with regard to any prosecutorial decisions involving a financial institution with more than $1 billion in assets.
... "Our markets will only function efficiently if participants believe that all laws will be enforced consistently, and that violators will be punished to the full extent of the law," write the senators. "There should not be one set of rules that apply to Wall Street and another set for the rest of us."

This last paragraph is most notable because of the number of assumptions involved. First of all, it assumes that laws CAN be enforced consistently. Second, it demands that violators be punished to the "full extent" of the law – which seems to be an attempt to seize control of the process from the judiciary. Finally, it argues that there should not be two different "sets of rules."

We have long argued that the meme of Western "justice" will be the last elite meme to fall in this era of the Internet Reformation. But it WILL fall, and it is actually happening, in our view. We see signs.
Kim Dotcom, under attack for copyright violations, has found a sympathetic public hearing; most recently gun confiscation has aroused such a furor in the US that elites who want to see citizens disarmed in that great country have backed away.

Yes, this is an Internet related phenomenon, in our view. Of course, it is one that will occur on a macro scale and will not, ultimately, be available for scrutiny on an individual basis.

Laws, people will decide, cannot be enforced consistently because they are inherently unjust.

Demanding that violators be punished to the full extent of the law is also likely useless because it is merely enforcing the meme that modern Western law is enforceable to begin with. It is not. At this point, given the number of laws and often their ludicrousness, the "law" is entirely discretionary and is used as a weapon to silence certain individuals and groups.

The Senators' letter also gets the "rules" wrong. There are not "different rules for rich and poor." There are different rules for those who support the government (and the controlling elites by extension) and those who do not.

Many people in the West are involved with various kinds of crimes today. A law, at this point, is whatever "officials" say it is. Because there are so many laws, enforcement has the luxury of enforcing what it wishes to enforce.

As a result, law enforcement in the West tends to focus on harassment style enforcement – arrests for drunk driving or drug use – and also on various kinds of crime, including white-collar crime that poses a challenge to the state itself.

This is surely why little government crime is prosecuted. This is, in fact, why Congress itself can break laws with impunity and excuse itself from laws aimed at the general populace. Only certain kinds of white-collar crime are prosecuted. "Criminals" often escape punishment.

The current zeal to catch and jail Wall Streeters performs three functions, however. It shows the general populace that a certain "criminal" element is being prosecuted. It removes central banking from the line of fire. Finally, it WEAKENS the market itself – and financial transactions – by bringing yet more of them under the watchful eye of government control. As the elites control government, this last point is especially beneficial.

Conclusion: If it seems too good to be true that the US Congress is insisting that the "public" receive deserved justice, that's because it probably is.

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