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Destruction By Definition

Destruction By Definition

Major U.S. stock market indexes yo-yoed about all week.  On Monday, panic selling from last week turned to panic buying.  Decades of Fed intervention have conditioned stock market investors to step in front of semi-trucks to scoop up nickels.

The Dow Jones Industrial Average (DJIA) jumped 1,290 points.  This marked its biggest-ever single day gain in terms of points.  Can the economic destruction wrought by coronavirus containment really be overcome with what former New York Fed President, Benjamin Strong, once called stock market “coup de whiskey?”  We doubt it.

But we are fairly confident Fed stimulus will have the offensive consequence of widening the gap between sky high asset prices and weak economic fundamentals.  Fed Chairman Powell certainly understands this.  Nonetheless, on Tuesday, he went forward with the dirty deed.

After an early morning teleconference with various G7 poohbahs, Powell cut the federal funds rate by 50 basis points.  This took the Fed’s target range to between 1 and 1.25 percent.  As far as we can tell, Powell’s dirty deed achieved the exact opposite of its intent.

U.S. stock market indexes didn’t go up.  Rather, they went down.  In fact, they went down a lot.  The DJIA, for example, gave back 785 points.  Here’s why…

The Fed’s rate cut was an act of fear.  Investors smelled it out and circled like a pack of wild hyenas.  Powell may be able to expand the supply of money and credit.  But he can’t make up for the economic destruction of a global economy that’s grinding to a halt to stem the spread of coronavirus.  Cutting rates 50 basis points won’t cut it.

“This Sucker’s Going Down”

Bull markets, like myths and legends, die hard in America.  By Wednesday, the bulls were back at it…bidding up share prices like 17th century tulip bulbs.  The DJIA, baited by promises for fiscal stimulus, jumped 1,173 points – back above 27,000.

…click on the above link to read the rest of the article…

The Triumph of Madness

The Triumph of Madness

Viewing the past through the lens of history is unfair to the participants.  Missteps are too obvious.  Failures are too abundant.  Vanities are too absurd.  The benefit of hindsight often renders the participants mere imbeciles on parade.

Was George Armstrong Custer really just an arrogant Lieutenant Colonel who led his men to massacre at Little Bighorn?  Maybe.  Especially when Sitting Bull, Crazy Horse, and numbers estimated to be over ten times his cavalry appeared across the river.

Were George Donner and his brother Jacob naïve fools when they led their traveling party into the Sierra Nevada in late fall?  Perhaps.  Particularly when they resorted to munching on each other to survive the relentless blizzard.

Certainly, Custer and the Donner brothers were doing the best they could with the information available to them.  The decisions they made must have seemed reasoned and calculated at the time.  But what they couldn’t see – until it was too late to turn back – was that with each decision, they unwittingly took another step closer to their ultimate demise.

Still they were human just like we are human…no smarter, no dumber.  We’re not here to ridicule them; but rather, to learn from them.

A Good Man in a Bad Trade

Rudolf von Havenstein had been president of the Reichsbank – the German central bank – since 1908.  He knew the workings of central bank debt issuances better than anyone.  He was good at it.

Thus, when he was called upon by history to deliver a miracle for the Deutches Reich in the aftermath of WWI, he knew exactly what to do.  He’d deliver monetary stimulus.  In fact, he’d already been at it for several years.

On August 4, 1914, at the start of the war, the Goldmark – or gold-backed Reichmark – became the unbacked Papermark.  With gold out of the picture, the money supply could be expanded to meet the endless demands of war.

…click on the above link to read the rest of the article…

How Xi Jinping will Save the World from Coronavirus

How Xi Jinping will Save the World from Coronavirus

In 1349, when Black Death was ravaging Europe, many of the day’s best and brightest banded together in pursuit of a common cure.  They had little choice.  Black Death was rapidly spreading across the continent.  Nothing could stop it.

Boils were lanced with precision.  Blood was let with vigor.  But there was no escape from the plague’s instant death.  It was efficient.  It was relentless.  People would go to bed at night perfectly healthy; by morning, they’d wake up perfectly dead.

Then, at the exact moment of maximum death and despair, flagellants came to the rescue.  Processions marched to and fro, seeking relief through forcefully whipping themselves in public displays of self-mutilation.  According to the History Channel:

“Some upper-class men joined processions of flagellants that traveled from town to town and engaged in public displays of penance and punishment: They would beat themselves and one another with heavy leather straps studded with sharp pieces of metal while the townspeople looked on. 

“For 33 1/2 days, the flagellants repeated this ritual three times a day. Then they would move on to the next town and begin the process over again.”

This may seem strange, weird, and, quite frankly, a bit nuts.  But something miraculous happened.  The Black Death epidemic soon exhausted itself.  The flagellants saved Europe from the mid-14th century onslaught of Black Death.

Or did they?

Probably Nothing, Possibly Everything

To be clear, flagellants had no influence on the eventual relenting of Black Death.  Remember, correlation does not imply causation.  Post hoc ergo propter hoc – “after this, therefore because of this” – or simply the post hoc fallacy, recognizes that just because one event happened to follow another, doesn’t mean the initial event caused the later event to occur.

…click on the above link to read the rest of the article…

The Impulses of Lunar Fed Policy Under Repo Madness

The Impulses of Lunar Fed Policy Under Repo Madness

This week, while you were busy working, Jamie Dimon, CEO of JP Morgan Chase, took time out from rubbing elbows with fellow movers and shakers at the World Economic Forum in Davos, Switzerland, to share his trepidations:

“The only thing I have trepidation about is negative interest rates, QE, and the diversion between stock prices and bond prices and yield and stuff like that….  I think it’s very hard for central banks to forever make up for bad policy elsewhere, that puts them in a trap.  We’re a little bit in that trap today with rates so low around the world.”

Fair enough.  Though Dimon, in what we presume was an inadvertent omission, failed to share that his firm may have recently walked the Federal Reserve into an elaborate policy trap.  Now the Fed’s stuck.  JP Morgan’s thrown away the keys.  And Dimon’s reaped a significant windfall.

If you recall, between Monday night and Tuesday morning September 16/17 the overnight repurchase agreement (repo) rate hit 10 percent.  Short-term liquidity markets essentially broke.  The Fed had to intervene in the repo market, via overnight repo operations, to push the repo rate back below 2 percent.

Since then, overnight repo operations by the Fed have become a near daily occurrence.  What’s more, these daily operations have ballooned to the order of up to $120 billion and are being maintained indefinitely.

On Tuesday, for example, the Fed created $90.8 billion out of thin air.  Of this, $58.6 billion was added to the overnight repo.  The remaining $32.2 billion was added to the 14-day repo.  Then, on Thursday, the Fed created another $74.2 billion out of thin air.  Of this, $44.15 billion was added to the overnight repo, and the remaining $30 billion was added to the 14-day repo.

…click on the above link to read the rest of the article…

Every Bubble Eventually Finds its Pin

Every Bubble Eventually Finds its Pin

The transfer of wealth from workers and savers to governments and big banks continued this week with Swiss-like precision.  The process is both mechanical and subtle.  Here in the USA the automated elegance of this ongoing operation receives little attention.

NFL football.  EBT card acceptance at Del Taco.  Adam Schiff’s impeachment extravaganza.  You name it.  Bread and circuses like these – and many others – offer the American populace countless opportunities for chasing the wild goose.

All the while, and with little fanfare, debts pile up like deadwood in Sequoia National Forest.  These debts, both public and private, stand little chance of ever being honestly repaid.  According to the IMF, global debt –  both public and private – has reached an all-time high of $188 trillion.  That comes to about 230 percent of world output.

Certainly, some of the private debt will be defaulted on during the next credit crisis and depression.  But when it comes to the public debt, governments do everything they can to prevent an outright default.  Central banks crank up the printing press and attempt to inflate it away.

After Nixon temporarily suspended the Bretton Woods Agreement in 1971, the money supply could be expanded without technical limitations.  This includes issuing new debt to pay for government spending above and beyond tax receipts.  Hence, since 1971, government directed money supply inflation has been the standard operating procedure in the U.S. and much of the world.

Downright Disgraceful

Expanding the money supply has the effect of dissipating wealth from the currency.  The process allows governments, which are first in line to spend this newly created money, a back door into your bank account.  Without levying taxes, they get access to your wealth and future earnings and leave you with money of diminished value.

…click on the above link to read the rest of the article…

Suffering the Profanity of Plentiful Cheap Money

Suffering the Profanity of Plentiful Cheap Money

What if the savings in your bank account lost 55 percent of its value over the last 12 months?  Would you be somewhat peeved?  Would you transfer some of your savings to another currency?

That was the favored approach in Argentina – where the official inflation rate’s 55 percent.  But no more.  On September 2, President Mauricio Macri resorted to capital controls to preserve the central bank’s foreign exchange reserves and prop up the peso.  What gives?

Just fifteen months ago Macri secured the biggest bailout in the International Monetary Fund’s history.  Now Argentina’s delaying payment to its creditors and is rapidly approaching what will be its third sovereign default this century.  On top of that, Macri’s Peronist rival Alberto Fernández will likely take his job come election day in October.

Alas, for Macri and his countrymen, a painful lesson is being exacted.  You can’t solve a debt problem with more debt.  Eventually the currency buckles and you’re left with two poisons to pick from: inflation or default.  With Macri’s latest capital controls scheme he’s choosing to take swigs of both.

Make of Argentina’s woes what you will.  Central bankers in the United States are also guilty of programs of mass money debasement.  They may have a bigger economy to better mask their malice.  But despite what the MMT delusionals say the day of reckoning always arrives – and always at the worst possible time.

Indeed, the U.S. dollar hasn’t lost 55 percent of its value over the last 12 months.  However, according to the Bureau of Labor Statistics’ own inflation calculator, the dollar’s lost 55 percent of its value since 1988.  In other words, it takes $1 to purchase what $0.45 could buy during President Reagan’s last year in office.

 …click on the above link to read the rest of the article…

Getting to a Special State of Ugly

Getting to a Special State of Ugly

There are certain phrases – like “trust me” or “I got this” – that should immediately provoke one’s suspicion.  When your slippery contractor tells you, “trust me, your kitchen renovation will be done before Christmas,” you should be wary.  There’s no way it’ll be done until late spring.

Or when your incompetent client says, “I won’t be needing your services at this time, I got this.”  You should expect a panicked phone call at 5pm on Friday.  “This is way more than I can handle,” your client will say, “take care of it.”

On Monday, when the sky was falling, and there was much weeping and gnashing of teeth, the Chinese yuan weakened to above 7 per dollar for the first time in over a decade.  This prompted U.S. Treasury Secretary Steven Mnuchin to waft out a suspicious phrase of his own.  He called China a “currency manipulator.”

Mnuchin’s logic, as far as we can tell, is that China manipulated their currency because their central bank didn’t adequately intervene in foreign exchange markets to prop up the yuan.  Conversely, direct intervention into markets, to maintain a centrally planned price that’s acceptable to Mnuchin, is not currency manipulation.  Go figure!

On Tuesday, to restore confidence in the yuan, and refute accusations of being a malevolent currency manipulator, the People’s Bank of China (PBOC) announced a plan to price fix the yuan.  Specifically, the PBOC will sell 30 billion yuan ($4.2 billion) of offshore bills in Hong Kong on August 14.  This move is designed to drain liquidity offshore, thus strengthening the yuan against the dollar.

Why bother?

Cooperative Currency Debasement

The world, circa 2019, is a fabricated reality.  Debt, piled upon debt, piled upon debt, ad infinitum, has erected a financial order that’s at perilous odds with the underlying economy.  Central bankers attempt to manipulate fake money and fake foreign exchange rates to keep the debt pile from cascading down.

 …click on the above link to read the rest of the article…

Fake Money’s Face Value Deceit

Fake Money’s Face Value Deceit

Shane Anthony Mele stumbled off the straight and narrow path many years ago.  One bad decision here.  Another there.  And he was neck deep in the smelly stuff.

These missteps compounded over the years and also magnified his natural shortcomings.  Namely, that he’s a thief and – to be polite – a moron.  Recently the confluence of these two failings came together like a sewage spill to a river draining through the center of town.

Mele made a dishonest mistake.  He failed to recognize that he’s not the only dishonest soul operating in a dishonest world.  That is, he failed to comprehend the difference between face value and real value.

So it was, with dishonest intentions, that he burgled a rare coin collection with no clue what it was that he’d taken.  To his soft and greedy mind all he saw was a hoard of coins with a face value of One Dollar.  Thus, he redeemed them for cash.  Zero Hedge offers the details:

“After stealing a rare coin collection from an elderly and disabled retiree, Shane Anthony Mele, dumped what their owner said was at least $33,000 worth of collectible coins down a Coin Star machine at a Florida supermarket and collected their face value, receiving about $30 – enough for a couple of 12 packs.”

A Downright Disgrace

Mele, no doubt, is a thief and a moron.  He’s also a thief and a moron that got caught up in something he doesn’t understand.  He may be dishonest.  But the world he’s operating in is also dishonest.

Stealing someone else’s property and then reducing the spoils valued at $33,000 to a payout of about $30 is a remarkable achievement.  Mele’s Coin Star transaction delivered a loss of over 99.9 percent.  But he’s not alone…

 …click on the above link to read the rest of the article…

The Big Government Show Must Go On

The Big Government Show Must Go On

Another week.  Another week of distractions.  On Tuesday, for instance, was the great State of the Union Address.  To this, many opinions and observations have been offered.  Here, we’ll contribute several of our own…

President Trump is a showman of stout ego.  How he must have relished the run-up to Tuesday’s primetime address with impatient anticipation.  What a disappointment it must have been to look out from the podium of the House of Representatives at the 116th Congress and see the greatest assemblage of political crooks, lowlifes, and losers in living memory staring back at him.

But the show must go on…disappointments and all.  For life’s full of disappointments.  The many botched opportunities.  The countless hours wasted on bids for ridiculous jobs.  Super Bowl Sunday.  Duds, dissatisfactions, and disappointments come a dime a dozen.

Words are also the source of many disappointments.  Words that shouldn’t have been said.  Words that should have been said.

So, too, words, and the absence of words, can be distractions.  And within a sequence of words there are sometimes obvious omissions.

For example, nowhere within the 82 minute State of the Union Address was there a single word of the country’s burgeoning $1 trillion budget deficit.  Nowhere was there a word of the great $22 trillion national debt default that’s bearing down upon us like a savage hurricane along the Gulf Coast.  Nowhere was there mention of the $122 trillion in unfunded liabilities, which includes the sacred cows of social security and Medicare.

What Gives?

No One Cares

The real State of the Union – the one President Trump omitted from his address – is a state of impending doom brought on by 50 years of relentless debt accumulation.  Day after day, week after week, month after month, year after year, the federal government has spent more than it takes in.  Now the debt has piled up past the point of no return; there’s no longer an expedient way to reverse course.

 …click on the above link to read the rest of the article…

Full Faith and Credit in Counterfeit Money

Full Faith and Credit in Counterfeit Money

There are nooks and corners in every city where talk is cheap and scandal is honorable.  The Alley, in Downtown Los Angeles, is a magical place where shrewd entrepreneurs, shameless salesmen, and downright hucksters coexist in symbiotic disharmony.  Fakes, fugazis, and knock-offs galore, pack the roll-up storefronts with sparkle and shimmer.

Several weeks ago, the LAPD seized $700,000 worth of counterfeit cosmetics from 21 different Alley businesses.  Apparently, some of the bogus makeup products – which were packaged to look like trendy brands MAC, NARS, Kyle Cosmetics, and more – were found to contain human and animal excrement.

“The best price is not always the best deal!” remarked Police Captain Marc Reina via Twitter.  Did you hear that, General Electric shareholders?

Yet the Alley, for all its dubious bustle, offers a useful public service.  It provides an efficient calibration for the greater world at large; a world that’s less upright and truthful than an honest man could ever self-prepare for.  In 30-seconds or less, the Alley will impart several essential lessons:

The price you’re first quoted is the sucker’s price.  To negotiate effectively, you must appear to care far less about buying than the merchant cares about selling.  Don’t trust someone that says, “trust me.”  And, most importantly, don’t believe what you see and read…or what you hear.

Reality Bites

For everything worthwhile, there exists a counterfeit.  This modest insight extends well beyond the boundaries of flea markets and tent bazaars.  It extends outward to news, money, prescription drugs, wars, public schools, Congress, corn ethanol, medical insurance, public pensions – you name it.  There’s plenty of fraud, phony, and fake going on.

For example, in the year 2018, the most reputable news outlets have been reduced to mere purveyors of propaganda.  The stories they spread are stories of fiction.

…click on the above link to read the rest of the article…

The Oil Curse Comes to Washington

The Oil Curse Comes to Washington

Prices rise and prices fall.  So, too, they fall and rise.  This is how the supply and demand sweet spot is continually discovered – and rediscovered.

When supply exceeds demand for a good or service, prices fall.  Conversely, when demand exceeds supply, prices rise.  Producers use the information communicated by changing prices to make business decisions.  High demand and rising prices inform them to increase output.  Excess supply and falling prices inform them to taper back production.

This, in basic terms, is how markets work to efficiently bring products and services to market.  Five year plans, command and control pricing systems, and government price edicts cannot hold a candle to open market pricing.  But not all markets are created equal.  The market for gumballs or garbage bags, for instance, is much simpler than the market for solar panels or jet engines.

What we mean is some markets are subject to more government intervention than others; especially, if there’s a large money stream that can be extracted by government coercion.  Sometimes governments nationalize an entire market – for the good of the people, of course.

Strange and peculiar price movements can indicate there’s something else besides natural supply and demand mechanics going on.  On April 6, a barrel of West Texas Intermediate (WTI) grade crude oil cost about $62.  Ten months ago, that same barrel of WTI oil cost about $43.  About 24 months ago, it was only about $30 a barrel.

Yesterday, April 26, WTI oil was about $68 a barrel.  What’s going on?

Price Fixing Accidents

Indeed, the oil market is subject to mass government interventions the world over.  The push and pull of these hindrances to regular market determined price discovery can prompt wild price distortions.  We don’t pretend to understand the many variables at play that influence the price of oil.  Still, today, we scratch for clarity and edification, nonetheless.

…click on the above link to read the rest of the article…

Why You Should Embrace the Twilight of the Debt Bubble Age

Why You Should Embrace the Twilight of the Debt Bubble Age

People are hard to please these days.  Clients, customers, and cohorts – the whole lot.  They’re quick to point out your faults and flaws, even if they’re guilty of the same derelictions.

The recently retired always seem to have the biggest axe to grind.  Take Jack Lew, for instance.  He started off the New Year by sharpening his axe on the grinding wheel of the GOP tax bill.  On Tuesday, he told Bloomberg Radio that the new tax bill will explode the debt and leave people sick and starving.

“It’s a ticking time bomb in terms of the debt.

“The next shoe to drop is going to be an attack on the most vulnerable in our society.  How are we going to pay for the deficit caused by the tax cut?  We are going to see proposals to cut health insurance for poor people, to take basic food support away from poor people, to attack Medicare and Social Security.  One could not have made up a more cynical strategy.”

The tax bill, without question, is an impractical disaster.  However, that doesn’t mean it’s abnormal.  The Trump administration is merely doing what every other administration has done for the last 40 years or more.  They’re running a deficit as we march onward towards default.

We don’t like it.  We don’t agree with it.  But how we’re going to pay for it shouldn’t be a mystery to Lew.  We’re going to pay for it the same way we’ve paid for every other deficit: with more debt.

A Job Well Done

Of all people, Jack Lew should know this.  If you recall, Lew was the United States Secretary of Treasury during former President Obama’s second term in office.  Four consecutive years of deficits – totaling over $2 trillion – were notched on his watch.

…click on the above link to read the rest of the article…

To Hell In A Bucket

To Hell In A Bucket

“No one really cares about the U.S. federal debt,” remarked a colleague and Economic Prism reader earlier in the week.  “You keep writing about it as if anyone gives a lick.”

We could tell he was just warming up.  So, we settled back into our chair and made ourselves comfortable.

“The voters certainly don’t care about the federal debt,” he continued.  “They keep electing the same spendthrifts to office.

“And the politicians know the voters don’t care.  They also know that making more and more promises is the formula for getting reelected.

“Deep down, the aging masses know they need massive amounts of government debt to pay their social security, medicare, and disability checks.  On top of that, many of the so-called gainfully employed are really on corporate welfare; they hang their hats on government contracts to fund their paychecks.

“You know as well I do how this crazy debt based fiat money system works.  The debt must perpetually increase or the whole financial system breaks down.  The best we can hope for is that the ongoing currency debasement merely leads to a subtle erosion of living standards.  That’s the best-case scenario.

“But, again, no one except maybe a handful of your readers’ gives a rip about the federal debt.  Plus, if you’re gonna keep writing about it you need to use better terminology.

“The federal debt has grown at such a rapid rate that standard dollar units no longer capture what’s going on.  The debt numbers are so large it is difficult to distinguish between hundreds of billions and tens of trillions of dollars.

Going Broke at Mach 30

“For better perspective, you need to describe the debt growth in astronomical terms.  You see, astronomers use light years to adjust for large distances.  A light year, as its name suggests, is the distance light travels in one year.

…click on the above link to read the rest of the article…

Warnings from Mount Vesuvius

Warnings from Mount Vesuvius

“Injustice, swift, erect, and unconfin’d,
Sweeps the wide earth, and tramples o’er mankind” – Homer, The Iliad

When Mount Vesuvius Blew

Everything was just the way it was supposed to be in Pompeii on August 24, 79 A.D.  The gods had bestowed wealth and abundance upon the inhabitants of this Roman trading town.  Things were near perfect.

The lucky residents of Pompeii lived in large homes with elegant courtyard gardens and all the modern conveniences.  Rooms were heated by hot air flowing through cavity walls and spaces under the floors.  Running water was provided to the city from a great reservoir and conveyed through underground pipelines to houses and public buildings.

Fresh fish from the Bay of Naples were readily available in the Macellum (great food market) and countless cauponae (small restaurants).  Entertainment was on hand at the large amphitheatre.  Life was agreeable, affable, and idyllic for all – and it was only getting better.  Everyone just knew it.  They could feel it.  They believed it.

By 79 A.D. Pompeii had experienced nearly uninterrupted advancement from its founding almost 700 years earlier.  That this would ever change was unthinkable.  On the morning of August 24th, who but a doomsayer would suggest there wouldn’t be another 700 years of progress?

Yet, just then, when things couldn’t have seemed more certain, Mount Vesuvius blew.  Nineteen hours later, where there had been life and a thriving civilization, there was silence for the next 1,669 years.

Praying for Death

Viewing events through the lens of history and hindsight is unfair to its participants.  Their missteps are too obvious, their vanities are too abundant, and their inferiorities too absurd.  They appear to be mere imbeciles on parade.

Was George Armstrong Custer really just an arrogant Lieutenant Colonel who led his men to massacre at Little Bighorn?  Maybe.  Especially when Sitting Bull, Crazy Horse, and numbers over three times his cavalry appeared across the river.

…click on the above link to read the rest of the article…

The Coming Debt Reckoning

The Coming Debt Reckoning

American workers, as a whole, are facing a disagreeable disorder.  Their debt burdens are increasing.  Their incomes are stagnating.

There are many reasons why.  In truth, it would take several large volumes to chronicle all of them.  But when you get down to the ‘lick log’ of it all, the disorder stems from decades of technocratic intervention that have stripped away any semblance of a free functioning, self-correcting economy.

The financial system circa 2017, and the economy that supports it, has been stretched to the breaking point.  Shortsighted fiscal and monetary policies have propagated it.  The result is a failing financial order that has become near intolerable for all but the gravy supping political class and their cronies.

Take consumer spending.  This is the primary driver of the U.S. economy.  Yet it requires vast amounts of credit.  In fact, American consumers presently hold $1 trillion in revolving credit.  At the same time, they have nowhere near the income needed to finance these debts, let alone pay them off.

Remember, the flipside of credit is debt.  Obviously, the divergence of increasing debt and stagnating incomes is a condition that cannot go on forever.  But it can go on much longer than any sensible person would consider possible.

Debt Slaves

If you haven’t noticed, the financial services industry is extremely accomplished at compelling people to go whole hog into debt.  Moreover, the entire fiat based financial system, which depends on ever increasing issuances of debt, hinges on it.  Just a slight contraction of credit, like late 2008, and the whole debt repayment structure breaks down.

On an individual basis, there are only so many credit cards that can be maxed out before the shell game ends.  Wolf Richter, of Wolf Street, recently clarified the relationship between the economy and deep consumer debt:

 

…click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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