Thursday, June 2, 2011


David Stockman is back on Bloomberg.  If you don't have time for all 6:45 of the interview, fast forward to 3:55 or so.  In the last couple of minutes Mr. Stockman simply lays it on the line and states the obvious, that both parties and the administration are committed to a total default in the US debt.

As I examine the market today, it looks as though it is coming to the realization that the US economy is slowing rather than growing.  All we've heard from the Fed is that stimulus was necessary to save us, yet we are seeing that it has had no real lasting effect other than to defer the inevitable clearing (correction) of over-inflated prices in all asset classes.  All we have heard from the administration of the President is that government spending was necessary to buoy the economy to save us, yet despite a bulging workforce of overpaid bureaucrats, and an increase in government holdings of private industries (GM, AIG, C) we have nothing positive to show for it.

Our housing market is in the tank, and unless you live in a few sheltered areas in the southern states you know that real estate markets are not getting better.

Our job market is poor and as we've seen with new data releases we find that we aren't seeing a sustainable recovery.

Our banking system is still a disaster with lots and lots of worthless assets sitting on their balance sheets not marked to market.

I haven't made a reference to it lately, but Iran is really in the midst of some very interesting events.  Their President is challenging the "spiritual" leadership and Parliament of the country and it seems as though he is now locked in a power struggle with the real leaders in the country.  We knew this guy was a nut, but now he's fired all of the oil ministry officials and has taken over the role as top oil minister himself.  Now, that in itself isn't that crazy, but Iran is set to take leadership of OPEC this year as the leadership rotates every year.  Add to that his insanity and his overt nutty desire to destroy Israel and you have a perfect cocktail of instability.  If you don't think that this could impact oil prices in the world, you are in for a rude awakening.

Stagflationary pressures are in full effect here as we are seeing a slowdown in economic growth and we are seeing commodity prices and input prices rise.  

While China bulls continue to believe that there is no end in sight for the Red Dragon, we are seeing disturbing snipets ranging from the video post made earlier this week on China's ghost towns, and also new reports that China is purposefully shutting in production of its manufacturing by cutting off electricity to producers.  The electricity disruptions are being caused by a lack of available fuel supplies like coal or natural gas.  By creating these interruptions, they will absolutely slow their economy.  Now some may suggest that this is a way to limit out of control inflation, and that may be great for them, but it is important to note that we are NOT decoupled from the emerging economies and a slow down there will result in a slowdown here.

Did we mention the credit problems and growth problems in Europe?  Nahhh, there are no problems there.  As we've discussed, it doesn't matter how bad things get there, the IMF, ECB, and EU will do anything and everything to delay what is going to happen.  While Greece is getting serious, we'll see a couple of more attempts to crush the Greeks with more "helpful" restructurings until finally, it all comes apart at the seams.  As I type this we get new word that another "fix" has been made and  suppose that we'll believe it will stick this time.  Next up is Portugal, Spain, and Italy.

And finally, let's not forget about the Japan disaster.  We are still facing a situation where they are dealing with melting down reactor cores, radiation releases, and an inability to control the situation.  The impact of that debacle is going to have far-reaching effects in the short and long run.  As the Japanese government attempts to find a way to put together a recovery of sorts, we'll see a drastic collapse in growth in their country, but we'll also see the knock on impact of the coming sales of US Treasuries to fund the rebuilding process. 

Take that last comment further and let's explore how this goes down.  Right now, we have the US government that is selling an enormous amount of treasuries at extraordinarily low rates, and clearly our goverment is spending well above what we are making in the form of tax receipts (huge deficit spending).  In order to finance these huge additional borrowings, the Fed has taken it upon itself to purchase these new treasuries in the open market.  As the Fed has continued these dangerous purchases, market participants (buyers like other central banks and investment managers) have stopped making purchases because they can see that the Fed's interference causes rates to be too low and also makes our financial health riskier.  In fact, we know that some investors are short US Treasuries (Pimco).  I just mentioned it, but we also know that China has reduced their purchases of US bonds as the fiscal health of our country has deterioriated.

With potential buyers out of the market and the specter of Japan becoming a net seller of our bonds, we could be in for a significant problem, just like the one that David Stockman outlines in his video.

Now before we get too worked up and you perceive that I've gone full bear here (close) we need to see the full landscape of potential possibilities in the short run.  The drop in the market recently has been noted to have been based on the poor employment picture that still remains stuck.  We also have this threat of a government default as politicians waste time and feign that there will be any measurable change in the status quo and that they actually have enough conviction to not increase the debt limit. 

These "shocks" actually help to raise the USD and to rattle all of the players, this is what the Fed needs to have an excuse to extend heroic measures and "save" us all.  I can see a scenario where we remain in a choppy, scary market for the next couple of months and then witness another version of last year's market rally in the September through December period when it becomes critical for another salvo of QE or stimulus.

We continue to see this scary game played out and as we see the Fed do more and more, we see less and less real and long lasting improvement in the economy.  As I've said before, these actions are not about helping the average person survive and thrive, it is about maintaining power and position at the highest levels.  The Fed is not working for the people, the US, or anyone, the Fed works for the benefit of itself and the banks that make it up.