By John Galt
December 16, 2008
Prevailing wisdom on the morning of December 16, 2008 was that I would wake up, watch Bubblevision, drive to Vero Beach, FL, visit my accounts and today would be a non-eventful sort of financial market kind of day. The Federal Reserve was supposed to mark the Fed Funds Rate down to 0.50%, the Bureau of Labor Statistics would issue a report after consulting with Tinkerbelle for guidance, and CNBC would not have any kind of stroke other than Booyah Boy proclaiming he doesn’t need Viagra when he does his reports with Erin Burnett in the Stop Fondling, er, “Stop Trading” portion of the show.
(I’ve edited the Erin Burnett photo out for the board…this is a family board after all-JG)
(Gratuitous photo of a sexy CNBC anchor)
At 2:25 p.m. EST, my phone started ringing. At that point in time, I had to call my friends and ask if I had entered into an alternative universe or did in fact the Federal Reserve lower the Fed Funds rate to the 0.00% to 0.25% range. After being assured that I was not guest starring on a special episode of Star Trek where my car crossed into an alternative universe and my wife had grown a Ben Bernanke beard, I recovered enough of my senses to utter a stream of profane adjectives describing the idiocy we are now a part of.
Now that my confidence has been restored that the most basic of human avarice, greed and panic are back in charge, the facts need to be stated. The actions by our central banksters today indicates a final, desperate last chance to salvage a fiat currency system which has managed to take embedded inflationary growth and turn it into one final dying gasp of exasperation which will ultimately doom the West and lead to the new world order of trade and commerce.
Ignore the new Fed Funds rate target. Ignore the new discount rate declaration. Pay little if any attention to the data points (PPI and CPI primarily) released lately; I’ll address those later in the paper. Think about the current situation and the historical perspectives or comparisons which are valid to some degree but not one hundred percent pure accurate examples separately, but in total enough of each to cause a MFO (Mogambo Freak Out):
* We have the unsound, un-supported, and unconventional approach to currency management and expansion, just like early 1920 Weimar Germany.
* We have the unsustainable and unserviceable debt levels and commitments of that same Weimar Republic.
* The United States has now incorporated a modernized but broader approach to salvaging assets with the impossible promise to control commodity inflation just like Argentina attempted in the 1990’s.
* We are engaging in practices unseen since the Mexican currency collapse and claiming it is appropriate for our Central Bank because we know what we are doing.
* There is absolutely no application of traditional market valuation methods now that the average investor or group of investors are in competition with the Federal Government for similar assets. Why should anyone risk capital when they could have the price floor undercut by any number of government agencies or worse, the Federal Reserve?
I know to a lot of souls this will sound like more JGEHTBS (With kudos to the Mogambo, those are John Galt Extreme Hyperventilation’s of Total Bovine Scatology) and you may indeed wonder why I would get excited about a move designed to gently introduce the concept of shoving a banana up everyone’s rear and proclaiming that we are not a Banana Republic despite the new yellowish tint of our skins.
Folks, the actions we saw today and have seen for the last two years are nothing short of things that would make the Chiquita chick blush.
Don’t Cry for Me Argentina
The problems we area encountering are not just the misguided comparisons to the “lost decade” of the Japanese deflationary period, they are much worse. To find an apt comparison I think you would have to call our situation the great Honduran-Weimar-Post-Soviet Russian-Argentine Currency and Confidence Crisis of 2009. Because we are not only getting the best of all worlds in spades with this idiocy, we are following the leadership ideals of a guy that buttered his bread on how we were going to avoid getting here in the first place!
Ben baby, I love you, but you should have stayed in the classroom.
You see the issues now have transcended beyond the deflationary depression collapse fears that were pumped up by the misguided monetary manipulations exercised by the Treasury and Fed last spring to artificially make the dollar rise and crash the commodity bubble. The problems we now face are the consequence of these policies where confidence has been destroyed by decades of propaganda and theoretical Keynesian economic idealism which has never been successfully executed on a world stage much less within a large complex domestic economy based on service and financial sectors as opposed to commodity and industrial expansion. The theories that these economists and bankers have based their entire careers on work possibly sound in the era of a gold backed currency and 1953 Buicks, but in the modern world where transactions are executed in milliseconds and the faith of much of the population is based on honesty, confidence and accuracy, the fallacy of Keynes is about to be exposed by events which have accelerated past the learning curve required by the socialist theories he espoused.
Faith is a Four Letter Word
Mr. Madoff was able to manipulate and sucker so many people and organizations into investing into his Ponzi scheme that it should be quite obvious to anyone that a hedge fund which does not provide monthly statements just might have something to hide. Yet the “faith” of the investors in the scheme was tested and ultimately doomed to failure as the reality of his con was exposed to the sunlight of a bear market where poorly evaluated or fraudulent valuations are given a test run which they ultimately fail.
In a true bear market and recession, both of which are necessary evils as winners and losers are examined, dissected and extinguished without mercy, the valuation test of assets and investments determines the viability of the models. Those instruments who are backed by theory instead of fact based models usually are eviscerated by the swiftness and harshness of various corrections to the downside that ultimately allow stronger corporations to cherry pick the good assets and leave the bad ones to be devoured by the vultures.
The issues exposed by today’s Fed actions and the non-stop interference of the government into our capital markets demonstrate that the most important aspects of any free market are confidence and faith. The current system has turned both into a four letter word: Crap.
Three real examples of what I am talking about have been executed by our government in the last few years. The first and most obvious was the short sale band executed by the Pontificate of Ethics, the SEC. They figured out that the stock markets in the United States were crashing because those evil capitalists were profiting off crappily run financial companies and banks. Well, we can’t have a market they can’t manipulate so instead of trying to buy the stocks up because the SEC couldn’t and the Treasury did not have a TARP yet, they elected to manipulate the game by changing the rules. For a base line example, imagine you are playing Gin Rummy and the Fed screams “UNO” at you. You say so what but the Treasury says the Fed wins because that’s the game we’re playing now and it is not their fault you don’t have the right cards.
You can not protest as the other players are not just the referees, they are the house and the enforcer and you have to eat your losses and shut up. Does that not inspire you to risk your capital and play the game more? Uh, no. To add insult to industry, not only can you not trust the game on the short side now, but you have no clue when the house is going to buy stocks to bail other players out or sell the same stocks to burn you if you go long. This does not inspire confidence in fact it makes you want to leave the game and look for a safer, saner investment where you can not watch your dollars go up in smoke like a bad Cheech and Chong movie.
The next reality that has impacted investor confidence is the total destruction of the hedge fund industry that is under way. So many legitimate hedge funds did just that, hedged their bets using a shorting strategy or Credit Default Swaps to collect on bets that companies made horrid investment decisions and strategies for the long term. The problem now is that some hedge funds were properly playing the side of the trade where the companies are collapsing and obligated to pay for their mistakes or other companies on the same side (Insurers for example) refused or used regulatory shields to avoid settling. This of course started a spiral of redemption requests because in the minds of the investors, they should have been substantially in the green, reaping huge profits from the bungling of the likes of Bear Stearns, Citigroup, Merrill Lynch, etc.
What they were handed was a “too bad, so sad” card by our government and told “you’re rich, suck it up.” Of course wealthy people generally do not get that way by being told by the government that the role of casinos is to insure the house wins 99.9% of the time and oh, by the way, the Congress and Executive branches are the house, so they start to divert their money out of capital markets and search for safety in economies overseas, selected short term bonds, or precious metals. This means that the wealthy who normally perform the vulture role in recession clean up duty are no longer there to clean up behind the losers and restart the capitalist process by resetting asset prices to realistic levels. With that model now broken for the foreseeable future, very bad things are on the American horizon.
Lastly, the loss of faith has not only stymied capital creation outside of government mandated capital creation, it has destroyed the faith of many in our banking system. If a bank, which has a legal and fiduciary responsibility to manage your monies, deposited or invested, fails to do so, and requires a government takeover or bailout yet no one is arrested or the situation continues unabated across the nation, why would anyone deposit more than the FDIC insured amount or invest in their equities or bonds? The entire fractional reserve banking system has been leveraged illegally beyond original intent to accommodate not just social policy but central banking desires that the risks taken by ordinary investors are beyond any potential rewards. There is no reason for any sane soul to risk a dime, especially when a jaundiced eye can question the authenticity and accuracy of quarterly and annual financial reports with just a cursory view and finding our worse when the reports are analyzed in full detail.
Until regulatory reform along with a redesign of the structural integrity of our markets and banking systems is undertaken, there will be no true recovery nor reason for investors to be married to our current GSE known as the U.S. Financial system.
Broken Trust and PPBS (Promulgated Piles of Bovine Scatology)
Now that we have seen what happens when you follow the economic theories of a socialist named Keynes and elect to engage in the act of putting make up on a frog’s butt and calling it “Ms. World” it is only appropriate to address the final issue of broken trust and why our markets as they exist now may not recover in our lifetime.
For over four decades now, statistical reports issued by the U.S. government have been politicized. While to the uninitiated that might seem shocking, but many have taken all government reports for what they are: Propaganda.
The most recent examples of this nonsense can beset be illustrated by the extremely delayed of a recession call by the National Bureau of Economic Research (NBER) and of course the November 2008 unemployment, PPI and CPI reports. The fascinating part of the data collection process the NBER has spoken about in past interviews is the lack of current and accurate data from government agencies when making recession determinations. The recent call that we witnessed proclaiming we were in a recession since December of 2007 was somewhat irrelevant as the majority of the large population states of the union figured that out already. The reason for the delayed call though should be of interest to anyone fascinated with the mechanics of the process. The “markets” put a lot of faith in the Fed’s Beige Book which is the only portion of their analysis which is offered to the public or our elected officials. The Green book and Blue book are for internal use only, yet decisions which impact the lives of every citizen are made with the data sets and projections within those issues presented at each Fed meeting. The NBER does not receive the Blue Book as I understand it, but after one calendar year they can get a copy of the Green Book and that assists along with the numerous statistical revisions in making determinations of the status of our economy.
So how does this impact the price of a Double Cheeseburger Extra Value Meal in Podunk, KY?
Start thinking gang. If the Fed is using an alternative measure of our economy that we are not a party to, then that information will be leaked to the club of 300 (the owners of the bank) and decisions are made which allow them to profit while impacts occur on many aspects of the economy that hurt Mr. and Mrs. Main Street. Does anyone honestly think that the losses announced by Goldman Sachs truly impacts the board members who sit on the Federal Reserve as stock holders of our Central Bank? Uh, that answer would be “no” and the losses are eaten by the pension holders and other schmucks who think this game is not rigged.
Thus while we are stuck witnessing and using data sets that will be revised in some cases up to 8 times before being declared final, the profiteers who make the decisions that can steer the economy are already seated in the club seats sucking down lobster tails and champagne while we are still waiting in line for cheap seats, stale beer and sitting in the rain with obnoxious Philadelphia Eagle fans (and they really should be banished from the U.S., I mean that).
Doesn’t that just make you want to double down on your pension plan or 401K?
The next report is the unemployment report issued each month which I have been calling bogus bovine scatology for over two years now as there is and always has been a questionable methodology to their reports and the headline numbers always heralded as the facts, despite revision after revision going unreported by the mainstream media.
Let us review the report for November 2008 issued last week on December 5, 2008. The headline number was a miserable 6.7% with a loss of 533,000 jobs per the Bureau of Labor Statistics (BLS-the “L” is optional). The real number which best illustrates the true unemployment rate can be found in the BLS Table A-12 Alternative Measures of Labor Utilization , section U-6 where the real unemployment rate is closer to the 12.5% seasonally adjusted that they submit there. The fallacy of the data reporting and cheerleading which has been promoted by government officials, elected and appointed, was somewhat exposed in the December 15, 2008 edition of Business Week’s story titled Unemployment: Worse Than it Looks where the methodology was finally called into question. Add in the joke of the CES Birth/Death Model which claimed that 5,000 jobs were created in the Financial Activities section in November and claim that 7,000 construction jobs were created in Construction in October, then you can see why investors and other nations are starting to wonder just what kind on nonsense the U.S. government is peddling with obviously subjective political data sets and not the reality on the ground. This is amplified by no measure of unemployed contractors or 1099 workers who have no claim to unemployment and have to do whatever it takes to survive in this current economy and the number is probably closer to 14% real unemployment which puts it firmly into the depression category as far as qualifications and determinations go.
Let us move next to the Producer Price Index (PPI) report released on Friday, December 12, 2008. The headlines so proudly proclaimed:
U.S. Economy: Retail Sales, Producer Prices Slumped (Bloomberg)
Producer prices fall in November (Reuters)
US wholesale prices fall 2.2% in fourth straight decline (AFP)
Producer prices fall sharply in November (DJ Marketwatch)
Wholesale prices drop 2.2 percent in November (AP)
Without going into a tiring detail, the stories are pretty much the same down the line for this bit of news. Just for fun though, let’s go read the actual report from the BLS located here :
Hmmm, according to the government “data” the headlines are maybe not so impressive. The “core” rate which the mainstream media used to beat us over the head with as prices were moving dramatically higher was still up 0.1% month over month excluding that evil food and energy.
What the media nor financial press does not want to report in almost every news event is the year over year price which if you note, it was still up 0.4%. How many of you heard about that our paid attention to it last week? To give you the graphical illustration of this, check these charts out below and notice the cost of finished goods which is what the distributor or retailer is paying for before their mark ups to you, the consumer.
I rest my case. While prices have moderated they are not indicating a massive collapse which will benefit the consumer. And as for the money supply debate, we’ll address that later in the week so we can try to kill this “deflation” vampire sleeping under your bed once and for all.
If the PPI is indicating a slower rate of change or increase then just what is the Consumer Price Index telling us? More lies, but we’ve already hashed the fallacy of hedonic modeling over and over again in these pages and on the air so if you are a hedonist, you will not care (just kidding). Let us play make believe and use the BLS statistics released today and address the issue head on.
Here is the key paragraph directly from the news release this morning:
‘The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) decreased 2.3 percent in November, prior to seasonal adjustment. The November level of 207.296 (1982-84=100) was 0.7 percent higher than in November 2007.” So month over month, down, year over year, up.
Hmmmm, I don’t recall Kudlow, Booyah Boy or anyone in the mainstream media observing this very important fact. Promoting the headline number and not reporting all of the details has become the modus operandi of our half-truth government and the media is working as a willing accomplice.
If you start to dissect the report further, you notice that year over year Food and Beverages were up 5.9%, Housing up 2.7% (primarily rent), Medical Care up 2.7%, Education up 3.6% and “Other” up 3.8%. Why is this important? Energy costs are distorted also by the massive drop in gasoline prices at the retail level but overall, things we use and have to have every day are still increasing in price.
For those that are in the Keynesian price deflation camp, I do have one parting shot in this section from today’s CPI report under Table 1, page 2 located here.
Purchasing Power of the Consumer Dollar (1982-84=$1):
November 2008 $0.471
Purchasing Power of the Consumer Dollar (1967=$1.00):
October 08: $0.154
November 08: $0.157
Why is this important? For those that are in the “buy and hold” camp and have $1000 invested since 1984, multiply your returns by $0.462 and get back to me if you feel inflation, real monetary inflation, might be hurting your returns. Because you know it has been, and this lie about inflation being managed and controlled is about to create a larger problem than just the theories of John Maynard Keynes and the wishes of a banking system corrupted by decades of illicit activities.
Lies, Damned Lies and Statistics: Maybe Ketchup will make the Digestible
The reports, as detailed above and the media’s treatment of them is the perfect illustration of just one of many of the issues which are major headwinds facing our recovery economically in the years to come. The complexities introduced into our system are so vast that even they can not keep track of which lies to tell, expound upon or obfuscate to insure the investors play along and collect meager returns while the real money is managed, controlled and masked by activities of the economic and political club known as the Fed and our Government. Unfortunately for them, the bills are now due and they have bankrupted their casino guests, leaving a tab unseen in the history of quasi-capitalism and now to be paid on the backs of socialist serfs as Keynes said would be necessary.
Marx must be smiling from his seat in hell. We are committing the very suicide many warned about with the creation of the creature in 1913 and devolving into a system which destroys freedom and free thought to salvage our economic souls because we can not handle the difficult concept of winners and losers.
I pray my readers have elected to be winners and prepared for the storm.
Or have plans to become a member of The 300, where ethics, morals and our Constitution are irrelevant and money is yours for the taking.