SP 500 and NDX Futures Daily Charts - Pity the Plight of the Corporate Welfare Queens

Big rally today and a relaxation of the fear trade.

Republican candidates debate tonight.

Obama, more right of center than the raving socialist than the spinsters paint him, should join them as a placeholder for the Nelson Rockefeller wing of that party. 

Ron Paul will stick out like a sore thumb.  He is third party material, although his libertarianism suits the rapacious.  Still, he is not in favor of supporting the Wall Street Welfare Queens and the Military Industrial Complex  in the manner to which they have become accustomed, so he will be marginalized by the GOP.

Better accept your corporate masters, or the socialists will take your money and give it to the weak, the immigrant, the unworthy. Such simplistic arguments rarely fail to sway the unthinking and the fearful.

The plight of US corporations, which are enjoying the lowest effective tax rates and fattest profits in years, and who are still digesting the gains of fraud from deregulation and pocket politicians, will be trotted out en masse like a Memorial Day Telethon for Pig-itis.

Cut corporate taxes, deregulate, free the market from the burdens of government, and the riches will trickle down to the middle class. That is what we will hear, with little to the contrary.

One would think that CEOs are standing in breadlines, the banksters are going to Coney Island instead of frolicking in the Hamptons, and their wives are driving Fords instead of Ferraris.

Where is the Justice? Where is the Reform?

US Dollar Very Long Term Chart

Please bear in mind that the DX dollar index will become increasingly irrelevant because of its outdated structure, heavily weighted to the euro yen and the pound, to the exclusion of the emerging currencies and the precious metals.

The shorter term chart has been rallying largely on euro weakness. We might see another eurodollar short squeeze if things continue to deteriorate in the European banking system.

A stronger dollar is something that the wealthy and the financial sector may enjoy, to the detriment of the rest of the country and any hopes of economic recovery.   However the realities of things make a stronger dollar problematic. 

So the next best thing is to slowly devalue the dollar by printing money and selectively distributing it, with tax benefits, to the most powerful and fortunate members of society.

In a 'free market' for currencies the dollar would have been much lower by now because of the persistent trade deficit, and the enormous dollar balances held by some of her trading partners.

The financial engineers favor a slow decline so as not to disclocate any of the major banking concerns. The currency discussions between China and the US are political theater for their respective peoples and the currency tourists, i.e. the small speculators who provide a snack for the wolves.

Gold Daily and Silver Weekly Charts - Refuse to Be Used

As a reminder, the choice between inflation and deflation in a fiat currency system that is not otherwise externally constrained is a policy decision.

In a democratic republic that is also a net debtor with a trade balance problem, the most likely outcome from a financial credit contraction is stagflation.

However, this does not mean that deflation is not possible. I want to be completely clear on this point. A program of artificial austerity, in which painful cuts are visited upon the bulk of the people, further exacerbating slack aggregate demand, with the creation of national wealth flowing to the top few percent, makes a prolonged deflation, economic stagnation, and a national misery, possible.

This is characteristic of many third world countries, wherein the majority live in povery while the few monopolize the nation's wealth and income. The government would have to become a more overtly repressive authoritarian oligarchy to support this for any length of time.

SP 500 and NDX Futures Daily Charts

The hardy individualists in the financial sector are letting Benny know that they need another government QE handout, and expect it to be delivered at their September meeting.

Despite the big decline in the overnight, it fell to a predictable support level, and drifted up much of the day on light volume.

The bulls are still not out of the woods. Obama gives his jobs speech on Thursday. He sounds like Nelson Rockefeller moreso than Franklin Roosevelt, so I am not expecting much in the way of innovative ideas.

SP Futures This Morning

I am certainly not going to get in front of this.

But we are still in familiar territory.

Here are some markers to be able to see if things fall apart, or not.

A controlled decline would be harder to buy than a capitulation selloff, which would probably find its bottom near the prior lows as indicated on the second chart, IF a bottom was being made.

I own no stocks now, only bullion.

The market will have its eyes on Obama's Jobs speech, the continuing politics of excess in Washington, and the September FOMC meeting which is now scheduled for two days.

About Those Falling Interest Rates and the Fallacy of Monetary Deflation at the Zero Bound

Liquidity Trap, Straight Up, with a Twist

I think we are all familiar with the recently popular viewpoint that as the financial economy crashed, what people called 'money destruction' would follow. Well actually the destruction of credit which some considered the same as money, as money itself. There were many detailed and complex thought experiments to explain why this must happen, involving monetary theories.

This would result in a much stronger dollar, since in fewer dollars would result in an outsized dollar demand, especially to pay off debt, a simple equation resulting from what might best be described as pidgin monetarism, favored heavily by non-economists, using what passes for common sense. Unfortunately these are uncommon times.

In this monetary deflation interest rates would fall, and commodities would be crushed, including gold and silver, falling before the almighty dollar.

The example most often cited was that of post-bubble Japan. America was doomed to decades of a stronger dollar and slack demand.

Well it didn't happen, despite the resurgent hope that the expected deflation will finally occur. There are even fresh definitions of what deflation really is, in Clintonesque manner, to accommodate it to the unexpected outcome we see today.   Unexpected at least by those theorists and their true believers.

When you have no model and are a little right by accident, it is fairly easy to adapt your forecast to what is really happening. But you simply cannot explain it. One might have successful investment results, and my congratulations to such flexibility, but it is the result of momentum following and not from a deep understanding of what is happening.

Let me give you three things to think about.

First, credit is NOT money. Money can be created from a number of sources throughout an economy. The expansion of credit at the business and banking level, often involving savings and fractional reserve leverage, is the major organic source of money, the point of its creation from economic activity or transactions themselves.   It is the most utilitarian form of money, because it is directly tied to what one might ordinarily expect to be productive investment and economic benefits.

Sometimes this mechanism is distorted and abused, in the case of fraud or reckless lending for speculation as an example, and then the money supply begins to decouple from the real economy.  It is the job of the regulators and the Fed to control this.

Like gold or any other asset or liability, credit must be transformed into a utilitarian form of wealth, or money, in order to effect the exchange. You may HAVE a million dollars in credit somewhere, but at some point someone must agree to transform that credit into actual money for you to use it. If an unused million dollar credit line expires, we do not see ourselves as a million dollars poorer.

When organic credit expansion fails to create money, the Fed or the Treasury can step in and create money non-organically, that is, not as the result of economic activity. In the case of an external standard, the Treasury can formally devalue the currency, as the US had done in the first half of the 1930s. Monetary authorities do not like to do this, because it makes their activity more transparent, and therefore more controversial.

By the way, Roosevelt did not have to take the US off the gold standard, or disallow the holding of gold by US citizens, in order to devalue the dollar as he did. This was a more complex arrangement designed to recapitalize the banking system, which I covered in some detail in an earlier blog.

Money is created from the assets on the Fed's balance sheet. These include various forms of credit, forex, and gold. The money as notes and reserves is held on the liability side of the balance sheet, in banking fashion.

The second thing to remember is that the extent of inflation or deflation is a policy decision in an otherwise unconstrained environment.

Greece does not have such a choice, for example, because the ECB controls their currency.  The US probably has the most choice of all, because it not only owns its currency, but the dollar is also still the world's reserve currency. While the audience is not captive, it is at a disadvantage.

The third thing is that the creation of money from the Fed or Treasury may result in more money, but it may not result in a sustainable recovery.    Money created by the Fed is high powered money, created as it were from the will of the monetary authority's policy.

Money creation, or monetary stimulus, works well in situations wherein the economy has fallen into a temporary slump, especially because of some exogenous shock or a slack period that is cyclical in nature, such as seasonal variation.

But in the event of a secular crisis or problem, monetary stimulation is a palliative, but no cure.   The remedy lies generally on the fiscal and political policy actions, with the aim of correcting or repairing whatever had caused the problem in the first place.  

Monetary stimulus alone, without the will to effect political reform for example, results in very uncommon economic conditions, one of which Keynes described as a 'liquidity trap.'

In this case now in the US, we see a lack of political will to reform the outsized and corrupt banking system, and the nation's flows of funds.  The stagnant median wage is a major impediment to sustainable recovery.  Most of the economic benefit for the last twenty years has flowed to the top one percent of the population. 

How that is remedied is another matter, and will be subject to a great deal of political debate as the various interests fight for their portion of the pie as they say.

But in the case of monetary stimulus coupled with a lack of organic recovery, and the sort of slack aggregate demand that comes from economic imbalances, too much money in too few hands, what we will see is money being hoarded in safe havens of wealth, especially short term Treasuries, gold and silver, and bank reserves.   It really makes perfect sense.

Can this go on indefinitely?  No way.  Unless the system is reformed, it will resolve in one of three ways, or a combination of them: a hyperinflation, an authoritarian oligarchy with grinding stagflation, or a civil insurrection with a fascist response. 

I don't think a true deflation is in the cards unless the US becomes isolationist, or mercantilist, and it is forced upon the  population through a policy of austerity.   Then we might see that authoritarian oligarchy with a grinding deflation instead of stagflation.

It should be noted that all three are variations on a theme of the breakdown of the market system and individual economic liberty.

Finally, and this is directed primarily at the Modern Monetary Theorists, while one can create money without using a debt based system, the money creation must act as though it is governed by some restraint.  Traditionally this had been gold and silver, and in the case of a national bank, the debt markets.  Government may indeed print on their own volition, in those areas wherein they lack legal tender controls, most notably international trade, they are beholden to those parties in the manner of debtors to creditors, since the dollars are really promissory notes based on the full faith and credit of the government.

Hyperinflation is no certain outcome by any means at all.  Furthermore, it is not even likely yet except for a further string of remarkable policy errors.  It is therefore somewhat of a policy decision of incompetence.  But as things progress, the latitude of the policy makers becomes increasingly constrained by the sustainability of the real economy in particular and the social fabric as a whole. 

It should also be noted that there is a growing and largely unreported overhang of eurodollars around the world.  If at some time the world begins to repudiate US dollars and debt in a de facto devaluation, the resolution may not be in the hands of policy makers, and the progress of change could accelerate, dramatically.

Endnote:  People like to send me things that are basically chicken and egg examples with regard to money creation, wrapped in lots of accounting language.

These so called proofs are largely word plays, and mostly misunderstandings of the system because of lag times and complex relationships crushed into meaningless by overly simplistic models.

So, in other words, I have looked at most of them, and please don't bother. They are just rationalizations for reasons why certain things that have happened could not happen, and are thus a bit outdated.

I am not interested in resurveying the same real estate that I have already been over many times since 1996, when this current cycle of economic history began in earnest. Some of those dead horse theories have already been beaten thoroughly into glue, so it is time to move on.

And I am becoming somewhat indifferent to those who will not, since they obviously wish to live the destructive experience to the fullest. It must be some perversity in human nature, or the will of God, or some combination thereof that is beyond my power to affect or obtain value from any more.

But it is necessary to understand how things work, and what went wrong, to reform and recover from a crisis such as the Western world is undergoing, and so I leave you with this summary of where I am to date.

The economy will not enjoy a sustainable recovery without a significant improvement in the media wage, if you wish to look at some simplistic indicator. Those reforms that people propose, if any, since continuing to steal from the weak seems to be in vogue in some vocal circles, will be effective to the extent that they increase it.

Of the outcomes outlined above, America seems to be flirting with the path of an authoritarian oligarchy with a grinding stagflation, which has also been called financial repression in other quarters.  It is a monetary inflation in the face of slack aggregate demand, with an unreformed financial and political sector.

 This could look a bit like the mercantilist command economy of Japan, dominated as it is by a deeply entrenched oligarchy that honors its social contract with the mass of its people however.  I expect China to go down this route when their time comes.  I am not suggesting outright fascism except as a response to civil insurrection.

But in the case of the much larger and more open US economy, that is going to produce some interesting anomalies, and a mix of disinflation and soaring price inflation. I am not sure how long the aggregate demand slump will be able to hold its ground against the tide of paper.

And quite a few people seem to favor that, if they think it benefits them. So the things we see happen might well perk along as they are, at least for the time being, until the anger of the broader public reaches critical mass, and action with reaction intensifies.

Gold Daily and Silver Weekly Charts - Smacked By the Invisible Hand

"People who hold strong opinions on complex social issues are likely to examine relevant empirical evidence in a biased manner. They are apt to accept confirming evidence at face value while subjecting disconfirming evidence to critical evaluation, and as a result to draw undue support for their initial positions from mixed or random empirical findings.

Thus, the result of exposing contending factions in a social dispute to an identical body of relevant empirical evidence may be not a narrowing of disagreement but rather an increase in polarization."

Charles G Lord, L Ross, Mark R Lepper, Biased Assimilation and Attitude Polarization: The Effects of Prior Theories on Subsequently Considered Evidence

This is an elegant way of saying that people tend to talk their books, and treat the truth rather lightly. And that therefore most arguments and anecdotal evidence are so selective as to be worthless because they merely support a bias, and not a scientifically based theory with a coherent model.

"Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof."

John Kenneth Galbraith

In the face of the general and woefully abysmal failure of an idea, people may cling to even outlandish theories, and listen most eagerly to the baseless rationalizations and propaganda that provide them some level of comfort and validation. And so we have the resilience of absurd notions like naturally efficient markets, trickle down economics, the virtues of regulatory nihilism, and the deflationary effect that a failing currency will have on the price of gold.

The dirty little secret is that some people don't really care for the truth when they are just issuing opinions for pay, or talking their books, their perceived self-interest. They just wish to have their cake, and eat it, and the rest of society be damned.

"Après nous, le déluge." Madame de Pompadour

That is very much the story in the US today, and the source of many of its problems. It is a house divided against itself. Honor and duty are quaint notions, trumped by virulent greed. For a few coins and a little power, truth is led down a blind alley, and quietly strangled.

And in that most cosmic twist of irony, when people love themselves and the will to power more than they love the truth, it eventually drags them over the precipice and destroys them, absolutely.

"Then you will know the truth, and the truth will set you free." John 8:32

There are no sidelines, for everyone serves something or someone, if only by default. The most significant choice we make is whom we serve, and to whom we therefore gradually bind ourselves. It is a terrible choice, with profound implications, but so often made with little thought, lightly, without a view to the consequences. We live on forever with whom we have served in this world.

Free will. Ain't it a bitch?

Have a pleasant weekend.

SP 500 and NDX Futures Daily Charts

"Mr. Obama wishes to be president of a country that does not exist. In his fantasy US, politicians bury differences in bipartisan harmony. In fact, he faces an opposition that would prefer their country to fail than their president to succeed."

Martin Wolf, Financial Times

The Non-Farm Payrolls number came in at exactly zero. I had to check the numbers to make sure of that headline, and sure enough, the number was flat month to month. Considering all the adjustments that are made to that number it was a remarkable feat indeed to have such an exact headline number.

This sets up the O-man's big speech next week, and the conversation amongst the pundits on the long holiday weekend.

The pampered princes on Bloomberg TV were touting their outrage all day, not for the dire state of the economy and jobs, but that the government might be taking some steps to rein in the banks, and fine them for some of their frauds perpetrated on the country during the run up to the financial crisis.

How dare the commoners criticize the banks! Indeed.

Gold Daily and Silver Weekly Charts

"The terrible, cold, cruel part is Wall Street. Rivers of gold flow there from all over the earth, and death comes with it. There, as nowhere else, you feel a total absence of the spirit: herds of men who cannot count past three, herds more who cannot get past six, scorn for pure science and demoniacal respect for the present.

And the terrible thing is that the crowd that fills the Street believes that the world will always be the same, and that it is their duty to keep that huge machine running, day and night, forever."

Federico Garcia Lorca


"There have been tyrannical gods, and there is the God who makes us free. Tyrant gods, nowadays, do not, as a rule, assume the names of gods. They prefer pseudonyms. But their tyranny remains the same."

Henri de Lubac


"And I looked, and behold, a pale horse, and the name of him that sat on it was Death, and Hell followed with it."

Rev 6:8

Gold and silver have been resilient in the face of the traditional bear raids ahead of the Non-Farm Payrolls number.

Perhaps they are saving their ammunition for Obama economic announcement next week.

The NFP number tomorrow might provoke a counter-intuitive reaction.

SP 500 and NDX Futures Daily Charts

Markets sputtered on light volumes and largely technical trade ahead of the Non-Farm Payrolls tomorrow.

Consensus of economists is +110,000 jobs for non-farm private payrolls, and +70,000 overall including government.

I am of an open mind to see the equity market react perversely to a low number tomorrow. It would be one of this reactions that says, 'since the number is bad, then the Fed will ease and so stocks can rally.'

Or not. This is an iffy one especially because it comes in front of a three day holiday weekend.

Greenberger: Secret Exemptions Allow Futures Price Manipulation - RealNews

Michael Greenberger is one of my lights into these types of issues. He is a nice remedy to the mistaken theories of many, including alas Paul Krugman, who does not believe that speculators can influence prices, even in the short term. But there are far, far worse, who know better but sell themselves for pay.

Greenberger highlights the speculative pools activity of Goldman Sachs and Morgan Stanley. But there are far worse excesses being done by other actors through their own trading desks, among these JPM and HSBC it appears at least from government records, in the derivatives markets.

Anyone who watches the markets closely knows full well how derivatives and leverage can be used to manipulate the physical markets with paper in a fiat regime, especially where the "delivery" of goods can be financialized, leveraged, and nakedly shorted, behind the cover of opaqueness and complexity.

Thus the use of such financial tools allows some participants to essentially defer the equilibrium of supply and demand for unusually long periods of time, until some event or accident triggers an exposure, a sudden reckoning, and a subsequent collapse.

I think the extreme fractional reserve nature of the current metals markets is an accident waiting to happen, awaiting only the right mix of margin calls and short term demand. And then everyone will be surprised that such a grand theft went on for so many years, unnoticed, except that is by a stalwart few, much in the manner of the Madoff fund and Harry Markopolos.

The remedy for much that is wrong in the markets today can be remedied by transparency and limitations on things like positions, and a return to laws passed after the last financial crisis of this magnitude that had served the nation well for over sixty years.