As Americans know all too well by this point, commodity prices — for corn, wheat, soybeans, crude oil, gold and even farmland — have been going through the roof for what seems like forever. There are many causes, primarily supply and demand pressures driven by fears about the unrest in the Middle East, the rise of consumerism in China and India, and the Fed’s $600 billion campaign to increase the money supply.
Nonetheless, how to explain the price of silver? In the past six months, the value of the precious metal has increased nearly 80 percent, to more than $34 an ounce from around $19 an ounce. In the last month alone, its price has increased nearly 23 percent. This kind of price action in the silver market is reminiscent of the fortune-busting, roller-coaster ride enjoyed by the Hunt Brothers, Nelson Bunker and William Herbert, back in 1970s and early 1980s when they tried unsuccessfully to corner the market. When the Hunts started buying silver in 1973, the price of the metal was $1.95 an ounce. By early 1980, the brothers had driven the price up to $54 an ounce before the Federal Reserve intervened, changed the rules on speculative silver investments and the price plunged. The brothers later declared bankruptcy.
Accusations that JPMorganChase and HSBC allegedly manipulated precious metal markets are worth looking into.
The Hunts may be gone from the market, but there are still plenty of people suspicious about the trading in silver, and now they have the Web to explore and to expand their conspiracy narratives. This time around — according to bloggers and commenters on sites with names like Silverseek, 321Gold and Seeking Alpha — silver shot up in price after a whistleblower exposed an alleged conspiracy to keep the price artificially low despite the inflationary pressure of the Fed’s cheap money policy. (Some even suspect that the Fed itself was behind the effort to keep silver prices low, as a way to keep the dollar’s value artificially high.) Trying to unravel the mysterious rise in silver’s price is a conspiracy theorist’s dream, replete with powerful bankers, informants, suspicious car accidents and a now a squeeze on short sellers. Most intriguingly, however, much of the speculation seems highly plausible.
The gist goes something like this: When JPMorgan Chase bought Bear Stearns in March 2008, it inherited Bear Stearns’ large bet that the price of silver would fall. Over time, it added to that bet, and then the international bank HSBC got into the market heavily on the bear side as well. These actions “artificially depressed the price of silver dramatically downward,” according to a class-action lawsuit initiated by a Florida futures trader and filed against both banks in November in federal court in the Southern District of New York.
“The conspiracy and scheme was enormously successful, netting the defendants substantial illegal profits” in the billions of dollars between June 2008 and March 2010, according to the suit. The suit claims that JPMorgan and HSBC together “controlled over 85 percent the commercial net short positions” in silvers futures contracts at Comex, a Chicago-based exchange on which silver is traded, along with “25 percent of all open interest short positions” and a “a market share in excess of 9o percent of all precious metals derivative contracts, excluding gold.”
In the United States, trading in precious metals and other commodities is regulated and closely monitored by a federal agency, the Commodity Futures Trading Commission. In September 2008, after receiving hundreds of complaints that silver future prices were being manipulated downward by JPMorgan and HSBC, the commission’s enforcement division started an investigation. In November 2009, an informant, described in the law suit only as a former employee of Goldman Sachs and a 40-year industry veteran, approached the commission with tales of how the silver traders at JPMorgan were bragging about all the money they were making “as a result of the manipulation,” which entailed “flooding the market” with “short positions” every time the price of silver started to creep upward. The idea was that by unloading its short positions like a time-released capsule, JPMorgan’s traders were keeping the price of silver artificially low.
Soon enough, the informant was identified as Andrew Maguire, an independent precious metals trader in London. On Jan. 26, 2010, Maguire sent Bart Chilton, a member of the futures trading commission, an e-mail urging him to look into the silver trading that day. “It was a good example of how a single seller, when they hold such a concentrated position in the very small silver market can instigate a sell off at will,” Maguire wrote.
On Feb. 3, 2010, Maguire gave the futures trading commission word about an impending “manipulation event” that he said would occur two days later, when the Labor Department’s non-farm payroll numbers would be released. He then spelled out two trading scenarios about which he had been told. “Both scenarios will spell an attempt by the two main short holders” — JPMorganChase and HSBC — “to illegally drive the market down and reap very large profits,” Maguire wrote in an e-mail to a trading-commission investigator.
On Feb. 5, Maguire took a victory lap, writing in another e-mail to the trading commission that “silver manipulation was a great success and played out EXACTLY to plan as predicted.” He added, “I hope you took note of how and who added the short sales (I certainly have a copy) and I am certain you will find it is the same concentrated shorts who have been in full control since JPM took over the Bear Stearns position … I feel sorry for all those not in this loop. A serious amount of money was made and lost today and in my opinion as a result of the CFTC’s allowing by your own definition an illegal concentrated and manipulative position to continue.”
In March 2010, Maguire released his e-mails publicly, in part because he felt the trading commission’s enforcement arm was not taking swift enough action. He was also unhappy over not being invited to a commission hearing on position limits scheduled for March 25. Then came the cloak and dagger element: the day after the hearing, Maguire was involved in a bizarre car accident in London. As he was at a gas station, a car came out of a side street and barreled into his car and two others; London police, using helicopters and chase cars, eventually nabbed the hit-and-run driver. Reports that the perpetrator was given a slap on the wrist inflamed the online crowds that had become captivated by Maguire’s odd story.
In any case, the class-action lawsuit contends that between March 2010 and November 2010, JPMorgan Chase and HSBC reduced their short positions in the silver market by 30 percent, causing the metal’s price to rise dramatically, but leaving them still with a large short position. Now, with the value of silver rising nearly every day, the two banks are caught in a “massive short squeeze,” according to one market participant, that appears to be costing them the billions they made originally plus billions more. Whether these huge losses will show up on the books of JPMorgan Chase and HSBC remains to be seen. (Parsing through the publicly filed footnotes of derivative trades is no easy task.)
Nonetheless, the conspiracy-minded have claimed that the Fed must have somehow agreed to make JPMorgan and HSBC whole for any losses the banks suffered if and when the price of silver rose above the artificially maintained low levels — as in right now, for instance. (About all this, a JPMorganChase spokesman declined to comment.)
Some two-and-a-half years later, the Commodity Futures Trading Commission’s investigation is still unresolved, and at least one commissioner — Bart Chilton — thinks that after interviewing more than 32 people and reviewing more than 40,000 documents, there has been enough investigating and not enough prosecuting. “More than two years ago, the agency began an investigation into silver markets,” Chilton said at a commission hearing last October. “I have been urging the agency to say something on the matter for months … I believe violations to the Commodity Exchange Act have taken place in silver markets and that any such violation of the law in this regard should be prosecuted.”
What’s more, Chilton said in an interview last week, that “one participant” in the silver market still controlled 35 percent of the silver market as recently as a few months ago, “enough to move prices,” he said, and well above the 10 percent “position limits” the commission has proposed to comply with Dodd-Frank financial reform law. Since that law’s passage last summer, the commodities exchanges have issued waivers permitting the ownership of silver positions above the limits the C.F.T.C. has proposed, and which were supposed to be in place by January of this year. Yet the waivers remain in place, and the big traders have not been penalized, much to Chilton’s frustration And the mystery deepens: last Thursday, the price of silver fell $1.50 per ounce in less than an hour before recovering. “This was robbery at its most obvious and most vindictive,” wrote Richard Guthrie, a London-based trader, in an e-mail to Chilton. “How many investors lost money and positions to the financial benefit of an elite few?”
It’s getting harder and harder to continue to brush off Andrew Maguire’s claims as the rantings of a rogue trader with a nutty online following. The Commodities Futures Trading Commission should immediately release the files from its investigation into the supposed manipulation of the silver market so the public can determine whether JPMorganChase and HSBC did anything illegal, with or without the help of the Fed. In addition, the commission should start enforcing the 10 percent threshold on silver positions it has proposed to comply with Dodd-Frank law. Basically, the other commissioners must join with Bart Chilton to do the job they are required to do: Protecting the sanctity of the markets and preventing the sorts of manipulation we’ve seen all too often.
http://opinionator.blogs.nytimes.com/2011/03/02/a-conspiracy-with-a-silver-lining/?hp
19 February 2011
GEAB N°52 is available! Global systemic crisis / World geopolitical breakup – End of 2011: Fall of the “Petro-dollar wall” and a major monetary-oil sh
Gold and silver seemed to be responding to the stress....
With this issue our team is celebrating two important anniversaries in anticipation terms. Exactly five years ago, in February 2006, the GEAB N°2 suddenly encountered worldwide success by announcing the next "Triggering of a major global crisis" characterized especially by "The end of the West as we have known it since 1945”. And exactly two years ago, in February 2009, in the GEAB N°32, LEAP/E2020 anticipated the start of global geopolitical dislocation phase by the end of that same year. In both cases, it is important to note that the undeniable interest aroused by these anticipations at international level, measurable particularly by millions of people reading the related public announcements, has been matched only by mainstream media silence over these same analyses and the fierce opposition (on the internet) of the vast majority of economic, financial or geopolitical experts and specialists.
Official unemployment rates (12/2010) – Source: BMGBullion, 01/2011
However, in early 2011, most of the world has no doubt that we are engaged in a process of historic proportions which is seeing the world after 1945 collapse before our eyes, the US in the lead, while the international community breaks down a little more each day, like the social and economic fabric of most countries in the world (1). But the current evidence didn’t, of course, prevent “decision-makers and experts” (2) to be sure in 2006 that there was no risk of a serious crisis on the horizon and, in 2009, that it was absurd to imagine the slightest risk of breakdown in the existing world order, let alone the social order. Alas, today, the elite’s intellectual capacity to cope with the changes currently taking place doesn’t seem to have improved since the same “decision-makers and experts” never imagined it possible just two months ago that Tunisia and then Egypt would shortly see their regimes overthrown. Blind governments and international institutions (3), outdated experts and media (4) ... the Western elite and their clones in different regions of the world continue to sink in the “holzweg” of history, those forest trails that lead nowhere, or more precisely as Heidegger pointed out, that lead somewhere only if you have the humility to be constantly listening to the forest and its signals (5).
However, whilst the signals become real warning sirens, our elite seem to have decided to do anything and everything to ignore them. Take a very recent example: the comparison of events affecting the Arab world with the fall of the Berlin Wall. Our team has been very interested to note that this image which we have used since 2006 to help understand the ongoing process of the disintegration of US power, has now blithely been taken up by the political leaders (led by Angela Merkel (6)) and experts of all kinds. Yet today, even those who make this comparison abstain from continuing their intellectual journey to the end, until it leads to an understanding of the dynamics of events. They settle for describing, without analyzing.
Yet this "wall" which is collapsing has been built by someone, or something, and for a specific purpose. The "Berlin Wall" was built by the East German government in the broader context of the "Iron Curtain", which the USSR wanted in order to separate the Communist bloc from the West as tightly as possible. And it was mainly to avoid any questioning of the power held by the single party in each communist country to perpetuate Moscow’s control of the East European countries; in return, Moscow guaranteed full support and stipends of all kinds to the leaders of Eastern European countries. The fall of the "Berlin Wall", challenging these monopolies of power and therefore the purposes that they served, thus caused, in a few short months, the successive fall of all the Eastern European communist regimes, ending two years later with the dissolution of the USSR and the end of seventy years absolute power of the Russian Communist Party.
Unemployment rate in the Arab world and Iran - Source: Le Temps, 02/11/2011
So if it's also a "wall" that’s falling before our eyes in the Arab world, in order to hope to anticipate the subsequent events it is essential to be able to answer these questions: who built it? for what purpose? And the answers are not that difficult to find for those who don’t watch the news with ideological blinkers:
. this "wall" was built by each Arab dictator (or regime) of the region to ensure their continued monopoly on the power and wealth of the country, avoiding any calling into question of their single party or dynastic legitimacy (for the kingdoms). In this sense, there is very little difference between the cliques in power in the Arab countries and those which led the communist countries.
. this "wall" was part of the broader system set up by Washington to preserve their preferential access (in US Dollars) to the region's oil resources and protect Israel’s interests. The forced integration of the military and security apparatus of these countries (except Syria and Libya) with the US defence system ensures (ensured) unwavering US support and allows (allowed) the Arab leaders involved to receive all kinds of stipends without being called into question by internal or external forces.
So, in thinking a little more about her comparison with the fall of the Berlin Wall during the Munich Security Conference, the German Chancellor could have turned to her neighbour in the discussion, the US Secretary of State Hillary Clinton, and asked her: "Don’t you think that current events in Tunisia and Egypt are the early signs of the fall of all the regimes that depend on Washington for their survival? And that, in particular, they can lead to a rapid collapse of the system supplying oil to the United States set up decades ago? And thus the global system for oil billing and the central role of the Dollar here (7) ? Whilst the Munich Security Conference audience would have suddenly realized that they were finally discussing something serious (8), Angela Merkel could have added: "What about Israel? Don’t you think that this fall of the "wall" will involve the need to reconsider the entire US-Israeli policy in the region very quickly (9) ? And then miraculously, the Munich Security Conference would have regained a foothold in the XXIst century and the Euro-American debate could recharge its batteries in the real world instead of rambling in the transatlantic virtual world and the fight against terrorism.
Sadly, as we all know, this exchange didn’t take place. And the ramblings of our leaders are, therefore, likely to continue with the effect of accentuating the shocks of 2011 and its ruthlessness as GEAB No. 51 anticipated.
Annual relative performance of 40 asset classes (in %, expressed in USD) (in green: profit / in red: loss) - Source: Chris Martenson, 02/04/2011
Yet LEAP/E2020 is convinced that the current events in the Arab world, of which we had correctly anticipated the mechanics, are above all the regional translation of fundamental trends of the global systemic crisis, and in particular global geopolitical dislocation (10). As such, they are evidence of major shocks in the coming quarters. We consider, in particular, that the end of 2011 will be marked by what our team calls the "Fall of the petro-dollar Wall" (11) that will immediately generate a major monetary-oil shock for the United States. It is also one of the main topics of this issue with the broader anticipation of more developments in the Arab world (including an accurate country risk indicator for the region). Also, our team analyzes the current acceleration of the Eurozone emergence process and its implications for the Euro and the situation in Europe. Finally, we give our recommendations regarding all these events.
http://www.leap2020.eu/geab-n-52-is-available-global-systemic-crisis-world-geopolitical-breakup-end-of-2011-fall-of-the-petro-dollar-wall-and_a5927.html
With this issue our team is celebrating two important anniversaries in anticipation terms. Exactly five years ago, in February 2006, the GEAB N°2 suddenly encountered worldwide success by announcing the next "Triggering of a major global crisis" characterized especially by "The end of the West as we have known it since 1945”. And exactly two years ago, in February 2009, in the GEAB N°32, LEAP/E2020 anticipated the start of global geopolitical dislocation phase by the end of that same year. In both cases, it is important to note that the undeniable interest aroused by these anticipations at international level, measurable particularly by millions of people reading the related public announcements, has been matched only by mainstream media silence over these same analyses and the fierce opposition (on the internet) of the vast majority of economic, financial or geopolitical experts and specialists.
Official unemployment rates (12/2010) – Source: BMGBullion, 01/2011
However, in early 2011, most of the world has no doubt that we are engaged in a process of historic proportions which is seeing the world after 1945 collapse before our eyes, the US in the lead, while the international community breaks down a little more each day, like the social and economic fabric of most countries in the world (1). But the current evidence didn’t, of course, prevent “decision-makers and experts” (2) to be sure in 2006 that there was no risk of a serious crisis on the horizon and, in 2009, that it was absurd to imagine the slightest risk of breakdown in the existing world order, let alone the social order. Alas, today, the elite’s intellectual capacity to cope with the changes currently taking place doesn’t seem to have improved since the same “decision-makers and experts” never imagined it possible just two months ago that Tunisia and then Egypt would shortly see their regimes overthrown. Blind governments and international institutions (3), outdated experts and media (4) ... the Western elite and their clones in different regions of the world continue to sink in the “holzweg” of history, those forest trails that lead nowhere, or more precisely as Heidegger pointed out, that lead somewhere only if you have the humility to be constantly listening to the forest and its signals (5).
However, whilst the signals become real warning sirens, our elite seem to have decided to do anything and everything to ignore them. Take a very recent example: the comparison of events affecting the Arab world with the fall of the Berlin Wall. Our team has been very interested to note that this image which we have used since 2006 to help understand the ongoing process of the disintegration of US power, has now blithely been taken up by the political leaders (led by Angela Merkel (6)) and experts of all kinds. Yet today, even those who make this comparison abstain from continuing their intellectual journey to the end, until it leads to an understanding of the dynamics of events. They settle for describing, without analyzing.
Yet this "wall" which is collapsing has been built by someone, or something, and for a specific purpose. The "Berlin Wall" was built by the East German government in the broader context of the "Iron Curtain", which the USSR wanted in order to separate the Communist bloc from the West as tightly as possible. And it was mainly to avoid any questioning of the power held by the single party in each communist country to perpetuate Moscow’s control of the East European countries; in return, Moscow guaranteed full support and stipends of all kinds to the leaders of Eastern European countries. The fall of the "Berlin Wall", challenging these monopolies of power and therefore the purposes that they served, thus caused, in a few short months, the successive fall of all the Eastern European communist regimes, ending two years later with the dissolution of the USSR and the end of seventy years absolute power of the Russian Communist Party.
Unemployment rate in the Arab world and Iran - Source: Le Temps, 02/11/2011
So if it's also a "wall" that’s falling before our eyes in the Arab world, in order to hope to anticipate the subsequent events it is essential to be able to answer these questions: who built it? for what purpose? And the answers are not that difficult to find for those who don’t watch the news with ideological blinkers:
. this "wall" was built by each Arab dictator (or regime) of the region to ensure their continued monopoly on the power and wealth of the country, avoiding any calling into question of their single party or dynastic legitimacy (for the kingdoms). In this sense, there is very little difference between the cliques in power in the Arab countries and those which led the communist countries.
. this "wall" was part of the broader system set up by Washington to preserve their preferential access (in US Dollars) to the region's oil resources and protect Israel’s interests. The forced integration of the military and security apparatus of these countries (except Syria and Libya) with the US defence system ensures (ensured) unwavering US support and allows (allowed) the Arab leaders involved to receive all kinds of stipends without being called into question by internal or external forces.
So, in thinking a little more about her comparison with the fall of the Berlin Wall during the Munich Security Conference, the German Chancellor could have turned to her neighbour in the discussion, the US Secretary of State Hillary Clinton, and asked her: "Don’t you think that current events in Tunisia and Egypt are the early signs of the fall of all the regimes that depend on Washington for their survival? And that, in particular, they can lead to a rapid collapse of the system supplying oil to the United States set up decades ago? And thus the global system for oil billing and the central role of the Dollar here (7) ? Whilst the Munich Security Conference audience would have suddenly realized that they were finally discussing something serious (8), Angela Merkel could have added: "What about Israel? Don’t you think that this fall of the "wall" will involve the need to reconsider the entire US-Israeli policy in the region very quickly (9) ? And then miraculously, the Munich Security Conference would have regained a foothold in the XXIst century and the Euro-American debate could recharge its batteries in the real world instead of rambling in the transatlantic virtual world and the fight against terrorism.
Sadly, as we all know, this exchange didn’t take place. And the ramblings of our leaders are, therefore, likely to continue with the effect of accentuating the shocks of 2011 and its ruthlessness as GEAB No. 51 anticipated.
Annual relative performance of 40 asset classes (in %, expressed in USD) (in green: profit / in red: loss) - Source: Chris Martenson, 02/04/2011
Yet LEAP/E2020 is convinced that the current events in the Arab world, of which we had correctly anticipated the mechanics, are above all the regional translation of fundamental trends of the global systemic crisis, and in particular global geopolitical dislocation (10). As such, they are evidence of major shocks in the coming quarters. We consider, in particular, that the end of 2011 will be marked by what our team calls the "Fall of the petro-dollar Wall" (11) that will immediately generate a major monetary-oil shock for the United States. It is also one of the main topics of this issue with the broader anticipation of more developments in the Arab world (including an accurate country risk indicator for the region). Also, our team analyzes the current acceleration of the Eurozone emergence process and its implications for the Euro and the situation in Europe. Finally, we give our recommendations regarding all these events.
http://www.leap2020.eu/geab-n-52-is-available-global-systemic-crisis-world-geopolitical-breakup-end-of-2011-fall-of-the-petro-dollar-wall-and_a5927.html
20 January 2011
GEAB N°51 is available! Systemic global crisis - 2011: The ruthless year, at the crossroads of three roads of global chaos
This GEAB issue marks the fifth anniversary of the publication of the Global Europe Anticipation Bulletin. In January 2006, on the occasion of the first issue, the LEAP/E2020 team indicated that a period of four to seven years was opening up which would be characterized by the “Fall of the Dollar Wall”, an event similar to the fall of the Berlin Wall which resulted, in the following years, in the collapse of the communist bloc then that of the USSR. Today, in this GEAB issue, which presents our thirty-two anticipations for 2011, we believe that the coming year will be a pivotal year in the roll out of this process between 2010 and 2013. It will be, in any case, a ruthless year because it will mark the entry into the terminal phase of the world before the crisis (1).
Since September 2008, when the evidence of the global and systemic nature of the crisis became clear to all, the United States, and behind it the Western countries, were content with palliative measures that have merely hidden the undermining effects of the crisis on the foundations of the present-day international system. 2011 will, according to our team, mark the crucial moment when, on the one hand, these palliative measures see their anesthetic effect fade away whilst, in contrast, the consequences of systemic dislocation in recent years will dramatically surge to the forefront (2).
In summary, 2011 will be marked by a series of violent shocks that will explode the faulty safety devices put in place since 2008 (3) and will carry off, one by one, the “pillars” on which the “Dollar Wall” has rested for decades. Only the countries, communities, organizations and individuals which, over the last three years, have actually undertaken to learn the lessons from the current crisis to distance themselves as quickly as possible from the pre-crisis patterns, values and behavior will get through this year unscathed; the others will be carried away in the procession of monetary, financial, economic, social and political difficulties that 2011 holds.
Thus, as we believe that 2011 will, globally, be the most chaotic year since 2006, the date of the beginning of our work on the crisis, in this GEAB issue our team has focused on 32 anticipations for 2011, which also include a number of recommendations to deal with future shocks. Thus, this GEAB issue offers a kind of map forecasting financial, monetary, political, economic and social shocks for the next twelve months.
If our team believes that 2011 will be the worst year since 2006, the beginning of our anticipation work on the systemic crisis, it’s because it’s at the crossroads of three paths to global chaos. Absent fundamental treatment of the causes of the crisis, since 2008 the world has only gone back to take a better jump forward.
A bloodless international system
The first path that the crisis can take to cause world chaos is simply a violent and unpredictable shock. The dilapidated state of the international system is now so advanced that its cohesion is at the mercy of any large-scale disaster (4). Just look at the inability of the international community to effectively help Haiti over the past year (5), the United States to rebuild New Orleans for six years, the United Nations to resolve the problems in Darfur, Côte d'Ivoire for a decade, the United States to progress peace in the Middle East, NATO to beat the Taliban in Afghanistan, the Security Council to control the Korean and Iranian issues, the West to stabilize Lebanon, the G20 to end the global crisis be it financial, food, economic, social, monetary, ... to see that over the whole range of climatic and humanitarian disasters, like economic and social crises, the international system is now powerless.
In fact, since the mid-2000s at least, all the major global players, at their head of course the United States and its cortege of Western countries, do no more than give out information, or gesticulate. In reality, all bets are off: The crisis ball rolls and everyone holds their breath so it doesn’t fall on their square. But gradually the increasing risks and issues of the crisis have changed the casino’s roulette wheel into Russian roulette. For LEAP/E2020, the whole world has begun to play Russian roulette (6), or rather its 2011 version, “American Roulette” with five bullets in the barrel.
Monthly progression of the FAO food index (2010) and the price of principal foodstuffs (2009/2010) (base 100: averaged over 2002-2004) - Source: FAO/Crikey, 01/2011
Soaring commodity prices (food, energy (7),...) should remind us of 2008 (8). It was indeed in the six months preceding Lehman Brothers and Wall Street’s collapse that the previous episode of sharp increases in commodity prices was set. And the actual causes are the same as before: a flight from financial and monetary assets in favour of “concrete” investments. Last time the big players fled the mortgage market and everything that depended on it, as well as the U.S. Dollar; today they are fleeing all financial stocks, Treasury bonds (9) and other public debts. Therefore, we have to wait for a time between Spring and Autumn 2011 for the explosion of the quadruple bubble of Treasury bonds, public debt (10), bank balance sheets (11) and real estate (American, Chinese, British, Spanish,... and commercial (12)), all taking place against a backdrop of a heightened currency war (13).
The inflation induced by US, British and Japanese Quantitative Easing and similar stimulus measures of the Europeans and Chinese will be one of the destabilizing factors in 2011 (14). We will come back to this in more detail in this issue. But what is now clear with respect to what is happening in Tunisia (15), is that this global context, especially the rise in food and energy prices, now leads on to radical social and political shocks (16). The other reality that the Tunisian case reveals is the impotence of the French, Italian or American “godfathers” to prevent the collapse of a “friendly regime” (17).
Impotence of the major global geopolitical players
And this impotence of the major global geopolitical players is the other path that the crisis can use to produce world chaos in 2011. In effect, one can place the major G20 powers in two groups whose only point in common is that they are unable to influence events decisively.
On one side we haves a moribund West with, on the one hand, the United States, for whom 2011 will show that its leadership is no more than fiction (see this issue) and which is trying to freeze the entire international system in its configuration of the early 2000s (18), and on the other hand we have Euroland, “sovereign” in the pipeline, which is currently mainly focused on adapting to its new environment (19) and new status as an emerging geopolitical entity (20), and which, therefore, has neither the energy nor the vision necessary to influence world events (21).
And on the other side are the BRIC countries (with China and Russia in particular) who are, at the moment, proving to be incapable of taking control of all or part of the international system and whose only action is therefore limited to quietly undermine what remains of the foundations of the pre-crisis order (22).
Ultimately, impotence is widespread (23) at the international community level, increasing not only the risk of major shocks, but also the significance of the consequences of these shocks. The world of 2008 was taken by surprise by the violent impact of the crisis, but paradoxically the international system was better equipped to respond being organized around an undisputed leader (24). In 2011, this is no longer the case: not only is there no undisputed leader, but the system is bloodless as we have seen above. And the situation is aggravated further by the fact that the societies of many countries in the world are on the verge of socio-economic break-up.
US petrol prices (2009-2011) - Source: GasBuddy, 01/2011
Societies on the edge of socio-economic break-up
This is particularly the case in the United States and Europe where three years of crisis are beginning to weigh very heavily on the socio-economic and therefore political balance. US households, now insolvent in their tens of millions, oscillate between sustained poverty (25) and rage against the system. European citizens, trapped between unemployment and the dismantling of the welfare state (26), are starting to refuse to pay the bills for financial and budget crises and are beginning to look for culprits (banks, the Euro, government political parties…).
But amongst the emerging powers too, the violent transition which constitutes the crisis is leading societies towards situations of break-up: in China, the need to control expanding financial bubbles is hampered by the desire to improve the lot of whole sectors of society such as the need for employment for tens of millions of casual workers; in Russia, the weakness of the social security system fits badly with the enrichment of the elite, just as in Algeria shaken by riots. In Turkey, Brazil and India, everywhere the rapid change these countries are seeing is triggering riots, protests and terrorist attacks. For reasons that are sometimes contradictory, growth for some, penury for others, across the globe our diverse societies tackle 2011 in a context of strong tensions and socio-economic break-up, which have the making of political time bombs.
It’s its position at the crossroads of three paths which thus makes 2011 a ruthless year. And ruthless it will be for the States (and local authorities) which have chosen not to draw hard conclusions from the three years of crisis which have gone before and / or who have contented themselves with cosmetic changes not altering their fundamental imbalances at all. It will also be so for businesses (and States (27)) who believed that the improvement in 2010 was a sign of a return to “normal” of the global economy. And finally it will be so for investors who have not understood that yesterday’s investments (securities, currencies,...) couldn’t be those of tomorrow (in any case for several years). History is usually a “good girl”. She often gives a warning shot before sweeping away the past. This time, it gave the warning shot in 2008. We estimate that in 2011, it will do the sweeping. Only players who have undertaken, even painstakingly, even partially, to adapt to the new conditions generated by the crisis will be able to hang on; for the others, chaos is at the end of the road.
----------
Notes:
(1) Or of the world that we have known since 1945 to repeat our 2006 description.
(2) The recent decision by the US Department of Labor to extend the inclusion of the measure of long-term unemployment in the US employment statistics to five years instead of the maximum of two years until now, is a good indicator of the entry into a new stage of the crisis, a step that has seen the disappearance of the “practices” of the world before. As a matter of fact, the US government cites “the unprecedented rise” of long-term unemployment to justify this decision. Source: The Hill, 12/28/2010
(3) These measures (monetary, financial, economic, budgetary, strategic) are now closely linked. That’s why they will be carried away in a series of successive shocks.
(4) Source: The Independent, 01/13/2011
(5) It’s even worse because it was international aid that brought cholera to the island, causing thousands of deaths.
(6) Moreover Timothy Geithner, US Treasury Secretary, little known for his overactive imagination, has just indicated that “the US government could once again have to do exceptional things”, referring to the bank bailout in 2008. Source: MarketWatch, 01/13/2011
(7) Moreover, India and Iran are in the course of establishing a system of exchange “gold for oil” to try and avoid supply disruptions. Source: Times of India, 01/08/2011
(8) In January 2011 the FAO food price index (at 215) has just exceeded its previous record set in May 2008 (at 214).
(9) Wall Street banks are currently unloading their US Treasury bonds as fast as possible (unseen since 2004). Their official explanation is “the remarkable improvement in the US economy which no longer requires us to seek refuge in Treasury Bonds”. Of course, you are free to believe it, like Bloomberg ’s journalist on 01/10/2011.
(10) Thus Euroland is already taking big steps forward along the path described in the GEAB N°50 with a discount in the case of refinancing the debts of a member state, whilst Japanese and US debt are now about to enter the storm. Sources: Bloomberg, 01/07/2011; Telegraph, 01/05/2011
(11) We believe that, in general, global banks’ balance sheets contain at least 50% ghost assets which in the coming year will require to be discounted by between 20% to 40% due to the return of the global recession combined with austerity, the rise in defaults on household, business, community and state loans, currency wars and a pickup in the fall of real estate prices. The American, European, Chinese, Japanese and others “stress-tests” can still continue to try and reassure markets with “Care Bears” scenarios except that this year it’s “Alien against Predator ” which is on the banks’ agenda. Source: Forbes, 01/12/2011
(12) Each of these real estate markets will fall sharply again in 2011 in the case of those which have already started falling in recent years, or in the case of China, which will begin its sharp deflation amid economic slowdown and monetary tightening.
(13) The Japanese economy is, moreover, one of the first victims of this currency war, with 76% of the CEOs of 110 major Japanese companies surveyed by Kyodo News now reported being pessimistic about Japanese growth in 2011 following the rise in the yen. Source: JapanTimes, 01/04/2011
(14) Here are several instructive examples put together by the excellent John Rubino. Source: DollarCollapse, 01/08/2011
(15) By way of reminder, in the GEAB N°48 we had classified Tunisia in the category of countries “with significant risks” in 2011.
(16) No doubt, moreover, that the Tunisian example is generating a round of reassessment amongst the rating agencies and the “experts in geopolitics”, who, as usual, didn’t see anything coming. The Tunisian case also illustrates the fact that it’s now the satellite countries of the West in general and the US in particular, who are on the way to shocks in 2011 and in the years to come. And it confirms what we regularly repeat: a crisis accelerates all the historical processes. The Ben Ali regime, twenty-three years old, collapsed in a few weeks. When political obsolescence is involved everything changes quickly. Now it's all the pro-Western Arab regimes which are obsolete in the light of events in Tunisia.
(17) No doubt this « Western godfather » paralysis will be carefully analyzed in Rabat, Cairo, Jeddah and Amman, for example.
(18) A configuration that was all the more favorable because it was without a counterweight to their influence.
(19) We will return in more detail in this GEAB issue, but seen from China we are not mistaken. Source: Xinhua, 01/02/2011
(20) Little by little Europeans are discovering that they are dependent on centres of power other than Washington. Beijing, Moscow, Brazilia, New Dehli,… Source: La Tribune, 01/05/2011; Libération, 12/24/2010; El Pais, 01/05/2011
(21) All Japan's energy is focused on its desperate attempt to resist the attraction of China. As for other Western countries, they are not able to significantly influence global trends.
(22) The US Dollar’s place in the global system is a part of these last foundations that the BRIC countries are actively eroding day after day.
(23) As regards deficit, the US case is textbook. Beyond the speeches, everything continues as before the crisis with a deficit swelling exponentially. However, even the IMF is now ringing the alarm. Source: Reuters, 01/08/2011
(24) Moreover, even the Wall Street Journal on 01/12/2011, echoing the Davos Forum, is concerned over the lack of international coordination, which is in itself a major risk to the global economy.
(25) Millions of Americans are discovering food banks for the first time in their lives, whilst in California, as in many other states, the education system is disintegrating fast. In Illinois, studies on the state deficit are now comparing it to the Titanic. 2010 broke the record for real estate foreclosures. Sources: Alternet, 12/27/2010; CNN, 01/08/2011; IGPA-Illinois, 01/2011; LADailyNews, 01/13/2011
(26) Ireland, which is facing, purely and simply, a reconstruction of its economy, is a good example of situations to come. But even Germany, with remarkable current economic results however can’t escape this development as shown by the funding crisis for cultural activities. Whilst in the United Kingdom, millions of retirees are seeing their incomes cut for the third year running. Sources : Irish Times, 12/31/2010; Deutsche Welle, 01/03/2011; Telegraph, 01/13/2011
(27) In this regard, US leaders confirm that they are rushing straight into the wall of public debt, failing to anticipate the problems. Indeed, the recent statement by Ben Bernanke, the Fed chairman, that the Fed will not help the States (30% fall in 2009 tax revenues according to the Washington Post on 01/05/2011) and the cities collapsing under their debts, just as Congress decides to stop issuing “Build America Bonds” which enabled States to avoid bankruptcy these last few years, shows a Washington blindness only equal to that which Washington demonstrated in 2007/2008 in the face of the mounting consequences of the “subprime” crisis. Sources: Bloomberg, 01/07/2011; WashingtonBlog, 01/13/2011
Dimanche 16 Janvier 2011
http://www.leap2020.eu/geab-n-51-is-available-systemic-global-crisis-2011-the-ruthless-year-at-the-crossroads-of-three-roads-of-global-chaos_a5775.html
Since September 2008, when the evidence of the global and systemic nature of the crisis became clear to all, the United States, and behind it the Western countries, were content with palliative measures that have merely hidden the undermining effects of the crisis on the foundations of the present-day international system. 2011 will, according to our team, mark the crucial moment when, on the one hand, these palliative measures see their anesthetic effect fade away whilst, in contrast, the consequences of systemic dislocation in recent years will dramatically surge to the forefront (2).
In summary, 2011 will be marked by a series of violent shocks that will explode the faulty safety devices put in place since 2008 (3) and will carry off, one by one, the “pillars” on which the “Dollar Wall” has rested for decades. Only the countries, communities, organizations and individuals which, over the last three years, have actually undertaken to learn the lessons from the current crisis to distance themselves as quickly as possible from the pre-crisis patterns, values and behavior will get through this year unscathed; the others will be carried away in the procession of monetary, financial, economic, social and political difficulties that 2011 holds.
Thus, as we believe that 2011 will, globally, be the most chaotic year since 2006, the date of the beginning of our work on the crisis, in this GEAB issue our team has focused on 32 anticipations for 2011, which also include a number of recommendations to deal with future shocks. Thus, this GEAB issue offers a kind of map forecasting financial, monetary, political, economic and social shocks for the next twelve months.
If our team believes that 2011 will be the worst year since 2006, the beginning of our anticipation work on the systemic crisis, it’s because it’s at the crossroads of three paths to global chaos. Absent fundamental treatment of the causes of the crisis, since 2008 the world has only gone back to take a better jump forward.
A bloodless international system
The first path that the crisis can take to cause world chaos is simply a violent and unpredictable shock. The dilapidated state of the international system is now so advanced that its cohesion is at the mercy of any large-scale disaster (4). Just look at the inability of the international community to effectively help Haiti over the past year (5), the United States to rebuild New Orleans for six years, the United Nations to resolve the problems in Darfur, Côte d'Ivoire for a decade, the United States to progress peace in the Middle East, NATO to beat the Taliban in Afghanistan, the Security Council to control the Korean and Iranian issues, the West to stabilize Lebanon, the G20 to end the global crisis be it financial, food, economic, social, monetary, ... to see that over the whole range of climatic and humanitarian disasters, like economic and social crises, the international system is now powerless.
In fact, since the mid-2000s at least, all the major global players, at their head of course the United States and its cortege of Western countries, do no more than give out information, or gesticulate. In reality, all bets are off: The crisis ball rolls and everyone holds their breath so it doesn’t fall on their square. But gradually the increasing risks and issues of the crisis have changed the casino’s roulette wheel into Russian roulette. For LEAP/E2020, the whole world has begun to play Russian roulette (6), or rather its 2011 version, “American Roulette” with five bullets in the barrel.
Monthly progression of the FAO food index (2010) and the price of principal foodstuffs (2009/2010) (base 100: averaged over 2002-2004) - Source: FAO/Crikey, 01/2011
Soaring commodity prices (food, energy (7),...) should remind us of 2008 (8). It was indeed in the six months preceding Lehman Brothers and Wall Street’s collapse that the previous episode of sharp increases in commodity prices was set. And the actual causes are the same as before: a flight from financial and monetary assets in favour of “concrete” investments. Last time the big players fled the mortgage market and everything that depended on it, as well as the U.S. Dollar; today they are fleeing all financial stocks, Treasury bonds (9) and other public debts. Therefore, we have to wait for a time between Spring and Autumn 2011 for the explosion of the quadruple bubble of Treasury bonds, public debt (10), bank balance sheets (11) and real estate (American, Chinese, British, Spanish,... and commercial (12)), all taking place against a backdrop of a heightened currency war (13).
The inflation induced by US, British and Japanese Quantitative Easing and similar stimulus measures of the Europeans and Chinese will be one of the destabilizing factors in 2011 (14). We will come back to this in more detail in this issue. But what is now clear with respect to what is happening in Tunisia (15), is that this global context, especially the rise in food and energy prices, now leads on to radical social and political shocks (16). The other reality that the Tunisian case reveals is the impotence of the French, Italian or American “godfathers” to prevent the collapse of a “friendly regime” (17).
Impotence of the major global geopolitical players
And this impotence of the major global geopolitical players is the other path that the crisis can use to produce world chaos in 2011. In effect, one can place the major G20 powers in two groups whose only point in common is that they are unable to influence events decisively.
On one side we haves a moribund West with, on the one hand, the United States, for whom 2011 will show that its leadership is no more than fiction (see this issue) and which is trying to freeze the entire international system in its configuration of the early 2000s (18), and on the other hand we have Euroland, “sovereign” in the pipeline, which is currently mainly focused on adapting to its new environment (19) and new status as an emerging geopolitical entity (20), and which, therefore, has neither the energy nor the vision necessary to influence world events (21).
And on the other side are the BRIC countries (with China and Russia in particular) who are, at the moment, proving to be incapable of taking control of all or part of the international system and whose only action is therefore limited to quietly undermine what remains of the foundations of the pre-crisis order (22).
Ultimately, impotence is widespread (23) at the international community level, increasing not only the risk of major shocks, but also the significance of the consequences of these shocks. The world of 2008 was taken by surprise by the violent impact of the crisis, but paradoxically the international system was better equipped to respond being organized around an undisputed leader (24). In 2011, this is no longer the case: not only is there no undisputed leader, but the system is bloodless as we have seen above. And the situation is aggravated further by the fact that the societies of many countries in the world are on the verge of socio-economic break-up.
US petrol prices (2009-2011) - Source: GasBuddy, 01/2011
Societies on the edge of socio-economic break-up
This is particularly the case in the United States and Europe where three years of crisis are beginning to weigh very heavily on the socio-economic and therefore political balance. US households, now insolvent in their tens of millions, oscillate between sustained poverty (25) and rage against the system. European citizens, trapped between unemployment and the dismantling of the welfare state (26), are starting to refuse to pay the bills for financial and budget crises and are beginning to look for culprits (banks, the Euro, government political parties…).
But amongst the emerging powers too, the violent transition which constitutes the crisis is leading societies towards situations of break-up: in China, the need to control expanding financial bubbles is hampered by the desire to improve the lot of whole sectors of society such as the need for employment for tens of millions of casual workers; in Russia, the weakness of the social security system fits badly with the enrichment of the elite, just as in Algeria shaken by riots. In Turkey, Brazil and India, everywhere the rapid change these countries are seeing is triggering riots, protests and terrorist attacks. For reasons that are sometimes contradictory, growth for some, penury for others, across the globe our diverse societies tackle 2011 in a context of strong tensions and socio-economic break-up, which have the making of political time bombs.
It’s its position at the crossroads of three paths which thus makes 2011 a ruthless year. And ruthless it will be for the States (and local authorities) which have chosen not to draw hard conclusions from the three years of crisis which have gone before and / or who have contented themselves with cosmetic changes not altering their fundamental imbalances at all. It will also be so for businesses (and States (27)) who believed that the improvement in 2010 was a sign of a return to “normal” of the global economy. And finally it will be so for investors who have not understood that yesterday’s investments (securities, currencies,...) couldn’t be those of tomorrow (in any case for several years). History is usually a “good girl”. She often gives a warning shot before sweeping away the past. This time, it gave the warning shot in 2008. We estimate that in 2011, it will do the sweeping. Only players who have undertaken, even painstakingly, even partially, to adapt to the new conditions generated by the crisis will be able to hang on; for the others, chaos is at the end of the road.
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Notes:
(1) Or of the world that we have known since 1945 to repeat our 2006 description.
(2) The recent decision by the US Department of Labor to extend the inclusion of the measure of long-term unemployment in the US employment statistics to five years instead of the maximum of two years until now, is a good indicator of the entry into a new stage of the crisis, a step that has seen the disappearance of the “practices” of the world before. As a matter of fact, the US government cites “the unprecedented rise” of long-term unemployment to justify this decision. Source: The Hill, 12/28/2010
(3) These measures (monetary, financial, economic, budgetary, strategic) are now closely linked. That’s why they will be carried away in a series of successive shocks.
(4) Source: The Independent, 01/13/2011
(5) It’s even worse because it was international aid that brought cholera to the island, causing thousands of deaths.
(6) Moreover Timothy Geithner, US Treasury Secretary, little known for his overactive imagination, has just indicated that “the US government could once again have to do exceptional things”, referring to the bank bailout in 2008. Source: MarketWatch, 01/13/2011
(7) Moreover, India and Iran are in the course of establishing a system of exchange “gold for oil” to try and avoid supply disruptions. Source: Times of India, 01/08/2011
(8) In January 2011 the FAO food price index (at 215) has just exceeded its previous record set in May 2008 (at 214).
(9) Wall Street banks are currently unloading their US Treasury bonds as fast as possible (unseen since 2004). Their official explanation is “the remarkable improvement in the US economy which no longer requires us to seek refuge in Treasury Bonds”. Of course, you are free to believe it, like Bloomberg ’s journalist on 01/10/2011.
(10) Thus Euroland is already taking big steps forward along the path described in the GEAB N°50 with a discount in the case of refinancing the debts of a member state, whilst Japanese and US debt are now about to enter the storm. Sources: Bloomberg, 01/07/2011; Telegraph, 01/05/2011
(11) We believe that, in general, global banks’ balance sheets contain at least 50% ghost assets which in the coming year will require to be discounted by between 20% to 40% due to the return of the global recession combined with austerity, the rise in defaults on household, business, community and state loans, currency wars and a pickup in the fall of real estate prices. The American, European, Chinese, Japanese and others “stress-tests” can still continue to try and reassure markets with “Care Bears” scenarios except that this year it’s “Alien against Predator ” which is on the banks’ agenda. Source: Forbes, 01/12/2011
(12) Each of these real estate markets will fall sharply again in 2011 in the case of those which have already started falling in recent years, or in the case of China, which will begin its sharp deflation amid economic slowdown and monetary tightening.
(13) The Japanese economy is, moreover, one of the first victims of this currency war, with 76% of the CEOs of 110 major Japanese companies surveyed by Kyodo News now reported being pessimistic about Japanese growth in 2011 following the rise in the yen. Source: JapanTimes, 01/04/2011
(14) Here are several instructive examples put together by the excellent John Rubino. Source: DollarCollapse, 01/08/2011
(15) By way of reminder, in the GEAB N°48 we had classified Tunisia in the category of countries “with significant risks” in 2011.
(16) No doubt, moreover, that the Tunisian example is generating a round of reassessment amongst the rating agencies and the “experts in geopolitics”, who, as usual, didn’t see anything coming. The Tunisian case also illustrates the fact that it’s now the satellite countries of the West in general and the US in particular, who are on the way to shocks in 2011 and in the years to come. And it confirms what we regularly repeat: a crisis accelerates all the historical processes. The Ben Ali regime, twenty-three years old, collapsed in a few weeks. When political obsolescence is involved everything changes quickly. Now it's all the pro-Western Arab regimes which are obsolete in the light of events in Tunisia.
(17) No doubt this « Western godfather » paralysis will be carefully analyzed in Rabat, Cairo, Jeddah and Amman, for example.
(18) A configuration that was all the more favorable because it was without a counterweight to their influence.
(19) We will return in more detail in this GEAB issue, but seen from China we are not mistaken. Source: Xinhua, 01/02/2011
(20) Little by little Europeans are discovering that they are dependent on centres of power other than Washington. Beijing, Moscow, Brazilia, New Dehli,… Source: La Tribune, 01/05/2011; Libération, 12/24/2010; El Pais, 01/05/2011
(21) All Japan's energy is focused on its desperate attempt to resist the attraction of China. As for other Western countries, they are not able to significantly influence global trends.
(22) The US Dollar’s place in the global system is a part of these last foundations that the BRIC countries are actively eroding day after day.
(23) As regards deficit, the US case is textbook. Beyond the speeches, everything continues as before the crisis with a deficit swelling exponentially. However, even the IMF is now ringing the alarm. Source: Reuters, 01/08/2011
(24) Moreover, even the Wall Street Journal on 01/12/2011, echoing the Davos Forum, is concerned over the lack of international coordination, which is in itself a major risk to the global economy.
(25) Millions of Americans are discovering food banks for the first time in their lives, whilst in California, as in many other states, the education system is disintegrating fast. In Illinois, studies on the state deficit are now comparing it to the Titanic. 2010 broke the record for real estate foreclosures. Sources: Alternet, 12/27/2010; CNN, 01/08/2011; IGPA-Illinois, 01/2011; LADailyNews, 01/13/2011
(26) Ireland, which is facing, purely and simply, a reconstruction of its economy, is a good example of situations to come. But even Germany, with remarkable current economic results however can’t escape this development as shown by the funding crisis for cultural activities. Whilst in the United Kingdom, millions of retirees are seeing their incomes cut for the third year running. Sources : Irish Times, 12/31/2010; Deutsche Welle, 01/03/2011; Telegraph, 01/13/2011
(27) In this regard, US leaders confirm that they are rushing straight into the wall of public debt, failing to anticipate the problems. Indeed, the recent statement by Ben Bernanke, the Fed chairman, that the Fed will not help the States (30% fall in 2009 tax revenues according to the Washington Post on 01/05/2011) and the cities collapsing under their debts, just as Congress decides to stop issuing “Build America Bonds” which enabled States to avoid bankruptcy these last few years, shows a Washington blindness only equal to that which Washington demonstrated in 2007/2008 in the face of the mounting consequences of the “subprime” crisis. Sources: Bloomberg, 01/07/2011; WashingtonBlog, 01/13/2011
Dimanche 16 Janvier 2011
http://www.leap2020.eu/geab-n-51-is-available-systemic-global-crisis-2011-the-ruthless-year-at-the-crossroads-of-three-roads-of-global-chaos_a5775.html
17 January 2011
Long Shadows Cast Over Useconomy
Numerous are the threats to the USEconomy and US financial structures. Many are hidden threats, subtle challenges to undermine increasingly fragile support systems, planks, and cables that hold the system together. The year 2011 will be when the system breaks in open visible fashion, when the explanations that justify it sound silly and baseless, when the entire bond world endures major crashes. All thing financial are inter-related. Recall that in summer 2007, the professor occupying the US Federal Reserve claimed the subprime mortgage crisis was isolated. The Jackass countered with a claim that the bond market was suffering a crisis in absolute terms, where all bond markets were on the verge of fracture, perhaps globally. In year 2008 the banking system in the Western world broke, fatally and irreparably in my view. In 2009, the solutions, the treatment, the official programs were all exaggerated for their effectiveness while banker welfare became a fixture. Neglect of the people on Main Street became policy. In 2010, the system revealed it is still broken. The global monetary system after all rests atop the sovereign bond market. This year, it must fight off a collapse. Many are the hidden points of vulnerability. Gold & Silver will continue to be the great beneficiaries.
BOND OUTFLOWS
Huge outflows have struck from US-based bond funds, while the outflows continue for stock funds since may 2010. Even the flagship pimco bond fund saw net redemptions. The public is stepping aside as the usfed does its destructive work. No end is in sight for the stock fund outflows. A public boycott seems firmly in place. The new event is the largest bond fund outflow in almost 30 months. The Investment Company Institute reported that in the week ended December 15th, another massive outflow took place from domestic stock funds. It was the 33rd week in a row, amounting to an exit of $2.4 billion. Worse, taxable and municipal bonds saw a nasty shocker of $8.62 billion in outflows, which included another record $4.9 billion in muni bond outflows. Bond mutual funds had the biggest client withdrawals in more than two years, as a flight from fixed income investments has accelerated. The withdrawals were the largest since mid-October 2008, when investors pulled out $17.6 billion from bond funds. The US bond fund retreat showed acceleration signs, since the rise was from $1.66 billion the week before, according to the ICI report. So outflows are in progress for both US stocks and US bonds!! Year to date, investors have yanked $100 billion in funds from US-focused equity mutual funds, offset by a smaller $16 billion in comparable inflows into equity strategies via ETFunds. The $250 billion PIMCO Total Return Fund, managed by Bill Gross, had its first net withdrawals in two years in November as investors pulled $1.9 billion, according to Morningstar.
The public has grown jaded by stories of flash trading smears of the stock market, insider trading scandals, and incessant internal reports of stock support from the Working Group for Financial Markets. They sense stock prices are heavily manipulated and not a reflection of true value. They might on a wider basis believe that most US financial markets are either in ruins or corrupted. The vast record outflows accompany a rise in the S&P500 stock index, which is a clear signal of USGovt prop programs in a corrupt market. Ridiculous illogical and ludicrous interpretations continue to be disseminated about the USEconomy in recovery. The false story has become a billboard message of deception. We are told that investors are retreating from bond funds after signs of an economic recovery and a stock market rally, which have lifted interest rates broadly. The reality is something quite different. The selloff in USTreasurys happened exactly after the US Federal Reserve in November offered specific details on its pledge to purchase $600 billion in bond assets to revive the sluggish USEconomy. The 10-year USTreasury yields lie in the 3.2% to 3.4% range, much higher than the 2.49% in the first week of November. The bond market contradiction to the USFed monetization plan is without precedent in US bond market history, a grandiose insult.
The QE2 team is buying $100 billion in USTBonds per month, taking up the slack, without producing any decline in bond yields. The USFed is running a dangerous desperate gambit. Attempts to hold together the ustreasury market during its QE2 strongarm episode are underway. Obviously the USFed is the USTreasury market, with outsized USTBond purchases as part of its QE2 program. An approved posse of market specialists is buying hundreds of $billions of USTreasury securities on the open market. They are filling a vacuum. They are offsetting global creditors in abandonment. They bought in 2011 a full 75% of all USGovt debt issuance, just like Banana Republics!! They must keep the interest rates low. They must prevent a credit derivative blowup event. The USFed is fast losing all credibility, exhausting its power, testing its limits, fighting off demands for independent audits. The QE2 team seeks the best price available. However, due the fully advertised initiative and the heavy volume, is destined to pay a premium price. They have tipped their hand, as they buy $100 billion per month in USTreasurys. It is not possible to be a known buyer with a schedule and agenda, and execute favorable prices. An unexpected backfire occurred on the way to the QE2 launch. Bond yields fell sharply between August and November as the markets anticipated the new program. Bond yields have defiantly risen since details on QE2 were formally announced in November, delivering losses to the frontrunners in the autumn months. Too much doubt was left lingering on the volume of the program, and furthermore, whether a QE3 would launch. Bernanke actually hinted of a third launch, foolishly. The states need several hundred $billion, another monetization object.
GOLD & SILVER PREPARE FOR ANOTHER BREAKOUT
A major consolidation is taking place in the Gold price. A near total disconnect has occurred between the physical Gold & Silver markets and the control strings from the paper futures market held by the maestros. Grotesque shortages exist in silver. Difficulties in gold delivery are commonplace. The central banks and Bank For Intl Settlements scramble to keep gold & silver supplied to the exchanges, in order to avert openly visible defaults. A strong uptrend with rising moving averages is evident in Gold. The breakout in October has been consolidating for three full months, while Europe experiences its open sores of sovereign debt distress. Its price will soon encounter the uptrend lines for likely ignition. When a European aid package is assembled, whether of substance or not, merely if it seems credible, the Euro currency will rebound and the Gold bull will resume. In year 2011, the global monetary system will fracture in visible fashion. Its broken debt foundation will be the proximal cause. Gold is widely regarded as a reserve asset, no longer a stodgy secure asset for Arab sheiks. The dirtiest little secret might be that private Wall Street firm accounts own vast Gold bullion accounts, while their corporate banking entities in South Manhattan own the short futures positions, soon to be dumped on the USGovt in formal fashion. The greatest propulsion force to the Gold price is obviously the USFed and its grandiose QE2 initiative. Their purchase of $100 billion in USTBonds per month signifies that they are the USTreasury Bond market. PIMCO is worried sick about the unbridled monetization. The USFed monetized 75% of USGovt debt in 2011. When the USFed is done with QE2, they will argue for a QE3, probably to cover state debt shortfalls. The precedent has been set. The global currency war is in full swing. Simply put, the Gold price will rise when China is prepared to pay a higher price, after exhausting supply at lower prices.
The greatest offender in currency manipulation and currency undermine is the United States. It is essential that the USGovt continue to make accusations against foreign central bankers, in order to deflect attention. The problem is QE2, and the likelihood of a followup QE3. The USGovt is without permission forcing a debt writedown on foreign USTreasury creditors by installing inflation engines. See the commodity prices, led by food & energy. The USFed and USDept Treasury will proclaim victory by mid-summer, as price inflation begins to rage much hotter. They will call it economic growth. Check import price inflation from the last three months of 2011. Import prices rose 3.7% during that brief time. Not just emerging economies like China and Brazil are contending with price inflation. The US does too, but it calls it growth, since its economic trackers are much more accomplished decepticons. When job losses mount in the second half of 2011, the lies will be unmasked. The USFed is the greatest destoyer of working capital in the history of the world. Their balance sheet is negative $1 trillion and growing worse, their highly appropriate report card. Their wretched financial condition matches their decaying reputation. They are the buyer of worthless toxic bonds, the buyer of last resort. The housing market will NOT recover to bail them out.
USGOVT BUDGET BATTLES
Budget battles are sure to reveal the true fascist motives of those in power. The people will be denied while the war machine is preserved, guns & bombs over bread & butter, big banks over households. In fact, the defense budgets will not be reduced. Rather, defense contractors will be forced to eat cost overruns without volume cutbacks in weapon units at all. The war is sacred, the signature mark of the fascist state. The USGovt seems to have suddenly found religion in reducing the budget and its deeply engrained deficit. It is more superficial than from the heart with conviction. The new wave is all about perceptions. To be sure, some in the USCongress are worried sick and scared pale over the prospects of a structural $trillion deficit. A decade ago such a deficit magnitude would be considered a telltale signature of a Banana Republic nation sliding toward the Third World perilously. The budget battle with the new USCongress will be extremely revealing of the priorities for the Syndicate in full control of the USGovt and press networks. The budget process will in my view continue to place the war as a sacred priority not to be touched, not to be altered, not to be disrupted. In rough terms, the USGovt budget contains components 20.0% Defense, 21.0% Social Security & Medicare, and 14.0% Safety Net System.
In my view, the budget cuts will come exclusively from the people and their homes and work centers, their pensions, their Social Security & Medicare. Tax deduction removals and phaseouts will be a centerpiece. The war machine has given stress to the defense contractors, who will be expected to absorb cost overruns in weapons programs, according to recent Pentagon pronouncements. Enormous costs are involved with the war machine support. The base military budget is $536 billion. The extended budget for the wars adds another $170 billion in supplemental spending, which officials prefer to call Overseas Contingency Operations since it sounds more sophisticated.
The total sum, over $700 billion per year, is the sacred cost of the USMilitary. It includes hundreds of overseas bases, lavish embassies, and endless weapon systems, of types conventional, nuclear, and drones. The United States spends as much on annual military investment as the rest of the world combined, according to the Stockholm Intl Peace Research Institute. One must wonder if the wars are to produce enemies. The United States maintains troops at more than 560 bases and other sites abroad. The outsized yawning Defense spending is a primary cause for USGovt insolvency. It has a staggering deficit impact on the budget and the negative international image of the nation. Watch the unfolding events as the USGovt and USCongress grapple with spending cuts. They will avoid Pentagon and defense budget cuts with fierce opposition. This is a key part of the Fascist Business Model, as sacred as Wall Street largesse.
Harken back to the 1950 decade, during the post-WW2 glow. President Dwight Eisenhower once said, "Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed." The words from Ike fell on deaf ears. Not until the last decade have his words rung shrill. He never met the current crowd in control, but he could see a path to their evolution, which he called the Military Industrial Complex. No disrespect is meant to soldiers who have sacrificed. One must wonder for what cause their sacrifice has been, and toward what outsized profits to defense and service contractors, even Syndicate bank accounts. Talk has already begun, that "out of respect for our fighting soldiers and veterans" who have served in active duty, the defense budget will be spared of cuts. Watch the priorities be revealed as the battle unfolds over the budget. In my view, the potential for defense cuts and huge savings is great but it will not be tapped. Instead the people will be asked to expect less aid, to rely upon less, to eat less, to expect less federal help, and endure poverty more.
SHADOW HOME INVENTORY
The standard inventory of homes comes from brokers and multilists. The hidden inventory of homes adds another 50% to 80% to the working supply, half of that from pending seizures, half from bank owned units festering on their balance sheets. Home prices cannot rise in such a deeply distressed climate. The unofficial shadow inventory is another one million homes. Any economist who overlooks the hidden supply of homes is a hack. The housing market cannot recovery for another two years, until it works off the hidden inventory. The problem is that the ongoing home foreclosures results in more bank seizures, and a steady source of renewed hidden inventory. Housing is a crippled market, one that acts like a gigantic millstone around the USEconomy. Housing prices will descend further in 2011, as the shadow inventory acts with powerful forces upon the Supply & Demand equation. It still applies despite any messianic proclamations from banking high priests or Wall Street marketing agents. The mainstream has finally begun to grasp the wreckage and ruin, but not that the housing sector will cause a systemic failure for the nation. It is most assuredly coming. The contradictions and shallow work of Roubini are worth a pass. His work has been ridiculed in the past by the Jackass, like a few months ago when he expected the gold market to turn down. Instead, it rose another 10% to 15% in a string of breakouts. Yet he is still revered, and sought as a guest on the financial networks.
Nouriel Roubini offers some obvious commentary, followed by contradictory nonsense about a USEconomic recovery. His inconsistency earns him a 'C Minus' grade in his own class. The professor is a fool once again. Roubini acknowledges that the housing market is in a double dip, as prices can only go down. He brought attention to what he called below trend economic growth as baseline, but also two negative factors specific to the housing market. The first factor is the expiration of federal home buyer tax credits for first-time home buyers. The housing prices have been falling every month since the tax credit expired last May. He correctly identified the stolen demand from the future to take advantage of the home buyer credit. So he makes an obvious point. The second factor putting downward pressure on home prices is the ongoing chaos with mortgage documentation, and the related temporary moratorium by banks for mortgage foreclosure proceedings. The suspension appears to be ending. Aware of an imminent flood of housing supply, Roubini said "There has been an effective moratorium on foreclosures. The shadow inventory of not-yet-foreclosed homes, due to the moratorium, will surge in the next year. Supply will increase, demand will drop." Obvious points, enough to force a USEconomic recession without a remote chance otherwise.
Roubini remains a shallow economist without strong basis for his opinions, even plain contradictions. He does not expect a double dip recession, since he believes the USGovt kool-aid on doctored statistics. The dull blade Roubini said, "The rest of the economy is recovering. Most of the numbers are consistent with a growth rate of 2.7%, still below trend. So unemployment will likely remain above 9%. The EuroZone shock, long-term structural deficits, and state & local governments operating near bankruptcy are other ominous economic signs on the horizon. The 12 million households are already in negative equity and 8 million more have an Loan-to-Value between 95% and 100%. Thus even a 5% fall in home price will push an extra 8 million in negative equity with risk of millions walking away from their home, i.e. jingle mail." Without realization, he undermines his own assessment of slow USEconomic growth, and provides ample justification for a worse recession than already is in progress. His housing market observations contradict his economic outlook. He does not realize (or admit) that price inflation is running at over 7% right here, right now. Therefore the GDP estimates are all way high, exaggerated by 5% or more. The USEconomy is mired in a deep recession. Sadly, Roubini is a victim of the establishment, which ordered him to compromise his work in order to continue to occupy an important post. See the CNBC article.
The Great Roubini is awakening to the disaster in housing, but he does not yet grasp how it will result in a systemic USEconomic failure. He begins with a slow growth scenario, then cannot justify it, even to contradict it while discussing relevant factors. He will be one of the first shoddy economists to claim the USEconomy is in recovery, as price inflation accelerates, which will incorrectly be labeled it growth. My theory is simple. If the entire USEconomy depended upon the housing boom to expand from 2003 to 2007, then it will be capable of collapsing the same structures given the extreme vulnerability to debt. The vicious cycle will be powerful, unstoppable, and deadly. It has been game over since the September 2008 events when the US banking system collapsed and died, led by Lehman Brothers, Fannie Mae, and AIG. The weight of the continuing housing market decline, combined with strangulation in the banks with toxic debt paper and a surplus of home inventory, is easily sufficient to cause a systemic failure to the entire USEconomy. The big banks are stuck in mud at the cemetery gate. That failure is in progress with momentum. Guys like Roubini and Krugman will be the last to realize the collapse. They are celebrated cheerleaders within the system, compromised souls.
LABOR MARKET STEP-DOWN
The economic step-down is a hidden powerful effect in the de-industrialization of America. The job growth is not a sufficient condition for the USEconomy recovery. People are taking lesser jobs, with huge declines in income. Fewer opportunities exist, while survival demands tough decisions. The endless USEconomic recession has an ugly trademark. People are taking steep pay cuts, enduring lasting reductions in wages. People are taking jobs far below their skill levels. Between 2007 and 2009, more than half the full-time workers who lost jobs (held for at least three years) and found new jobs later reported wage declines, according to the USDept Labor. The detail is 36% of them reported the new job paid 20% less than the previous lost job. An effect rarely seen in recessions since the Great Depression, wages have taken a sharp and swift decline for a significant slice of the labor market. THIS IS A THIRD WORLD HARBINGER. It is worse for many others. The unemployment rolls include 14.5 million people, even 6.4 million stuck jobless for more than six months. A key part of earnings losses, according to the survey, is that workers skills acquired over the last two decades that are fast becoming outdated and obsolete. Then instead of gaining new skills for a higher paying job, they often settle for a lower wage and stop their job hunts, unable to benefit from training. Lack of retraining programs is a huge dropped ball by the USGovt, whose economists cannot find their hind parts with their hands. Research shows that children of displaced workers also suffer in a domino effect. Even those fortunate to remain on the same jobs have seen wage cuts. Many assume more duties too.
RETAIL LEADERS ON THE ROPES
Howard Davidowitz screams his case on the broad retail distress, with details. He warns of huge unresolved problems with commercial property loans, with great stress for landlords. A Paradigm Shift is underway, for smaller footprint shopping centers, as the United States footprint is double anything reasonable. The consumer model is fast breaking down. Davidowitz does not mince words, as he destroyed the illusion of a USEconomic recovery, pointing out absolutely no consumer renaissance. During a recent Bloomberg interview, retail expert Howard Davidowitz shattered the consensus klapptrapp, with quality content and logical thought. He said, "I am not surprised by the strength of retail sales, because I knew that 30% of consumers are responsible for retail sales, and these 30% did much better because of the performance of capital markets. I do not think it is indicative of anything going forward. I do not think the economy is going to get any better. If you look at our fiscal and monetary policy, we went two trillion dollars in the hole last year. Two trillion, to produce this, and unemployment went up to 9.8%! We have spent two trillion dollars. We are printing money. We are going bananas. Our the balance sheet, we have $2.6 trillion on there, and for what? Look at government securities, and mortgage backed securities. If interest rates go up a point Bernanke's bankrupt. Everything he has bought is underwater. All the mortgage bonds are underwater, the whole country is underwater. Does anyone see the issue now with why rising interest rates, aside from predicting a supposed recovery, may also, courtesy of its [greatly increased wrecked bond investments], actually predicts the insolvency of the Federal Reserve?" His comments are not a breath of fresh air, strewn with honesty.
Davidowitz provided several key observations on the supposed retail renaissance. Wal-Mart makes for 10% of US retail sales, has 150 million customers, and its stock it is down six consecutive quarters, not a good sign. Sears is the largest department store in America, but their stock is in terrible shape. Best Buy suffered a huge earnings miss. The financial loss recorded by ToysRUs increased last quarter. Supermarket chain A&P recently filed for bankruptcy. Department store chain Loehmanns just filed for bankruptcy. Charming Shoppes announced plans to close 100 stores. TJMaxx just liquidated AJRight. Davidowitz honed in on Sears for crucifixion. Sears is in the tank, ready to fold its tents in his opinion. Eddie Lampert took over the company recently from his hedge fund position, lacking any conceivable operational experience. He has engrained a policy that departs from price competition. He has not invested in capital equipment upgrades. He has sold his best stores. His online investment has not succeeded. The corporation is gutted, heading for the dumpster, then cemetery. If Lampert were smart, he would sell the company to a greater fool. A joke has surfaced, that A&P might merge with Stop & Shop, with a new corporate name of Stop & Pee, which would open enormous marketing potential.
In addition to dissecting the collapse of Sears, analyst Davidowitz observed what should be a loud glaring alarm signal for guys like Ackman and all those who are betting on the resurgence of the US mall storefront with vehicles like General Growth. The bulk of retail store traffic is moving online, where incidentally the only jobs created are those of packagers and quality control line people either in China or in some warehouse in Texas, California, or Florida. Davidowitz said, "Online sales have to lead you to question the whole retail selling strategy. We have 21 square feet of selling space for every man woman and child in this country. We already have double of what we need. With the explosion of online sales, what happens to all these retail malls and shopping centers which are marginals? Huge changes are going to be taking place as people continue shopping online. A revolution in retail is coming in both size and location of stores, a trend starting with the advent of much smaller Wal-Mart stores. In the end what to do with the retail space is going to be a huge question for retail in the next ten years. That is why Wal-Mart is starting to build smaller stores. That is why Wal-Mart is building more overseas than they are building here. It is going to be the biggest retail change that we have ever seen." The bulldozing of half the US retail malls will be a positive move for economic progress, but extremely disruptive.
The biggest losers in the maverick analyst's estimation will be commercial real estate landlords. Expect great pain for the REIT investments (stock trusts). Howard continues in his railing, making the point of commercial loans next collapsing, a point made by the Jackass for the last 18 months or more. He said "Landlords better start figuring it out pretty quick because they already have occupancy problems, rent problems, and everything else right now. I do not think the Commercial Real Estate (CRE) problems are fixed by any means. That is why we are going to close hundreds of community banks going forward. We are going to close hundreds more. Those CRE debts are coming due and they will not be able to be rolled over. We have lots of problems still coming up in the banking system, and the problems in the real estate issue is here for a long time. In other news, Kool Aid to be served in aisle 5 of the next door Sears box from now until permanent closing time." The man is solid as a rock in his retail analysis, accurate as a sharp knife, with no nonsense.
COMPLEX SOCIETIES & SYSTEMS
Complex societies do not last forever. They break down from internal stresses as often as from external. A society must maintain its system, with more energy expended when more complex. The reserves can be tapped repeatedly if crisis is not averted from regulatory machinery. In time, neglect enters the picture, as stresses break the fabric. Joseph Tainter is well-known for his classic book entitled "The Collapse of Complex Societies" despite his expertise as an archeologist. He must have done much thinking about the collapse of societies whose ruins he unearthed in massive digs. Tainter is on record with his developed thesis, born out of his dissatisfaction with prevailing collapse theories. His argument is straightforward. Human societies are problem solving organizations, which supply the necessities along with entertainment, as well as training to ensure continuation. The over-arching Sociopolitical systems require energy for their maintenance. If left without proper tending, they fall apart like a garden without attention. Increasing complexity carries with it increased cost per capita. Simple monarchies need much less maintenance than democracies, as voices are heard and justice grinds slowly. Investment in sociopolitical complexity often reaches a point of declining marginal returns, as time passes, interest wanes, justice disappoints. When debt saturation occurs, like today, the cost of maintenance and decline can be overwhelming. The complex system becomes vulnerable to collapse after great stresses and what Tainter calls perturbations, better thought of as disruptions or disturbances.
Stress and perturbation are a constant feature of any complex society, always occurring somewhere in its territory. The developed operating regulatory machinery is designed to deal with unplanned changes. Imagine spotty agricultural failures, border conflicts, large scale accidents, social eruptions, and disease outbreaks. Such localized stress tends to recur with regularity, and thus can be anticipated with preparations. To meet major unexpected stress surges, the society must have some form of net reserve. It can take the form of excess productive capacities in farm output, stored energy, or stockpiled minerals, or hoarded surpluses from past production, even reserve savings. Stress surges of great magnitude cannot be accommodated without such a reserve. A society beset by regular self-inflicted crises will be forced to draw upon its stored reserves too quickly. As declining marginal returns are experienced, the society must contend with rising systemic risk. The costs outweigh the yield put in reserve. Excess productive capacity will at some point be exhausted, and accumulated surpluses allocated to current operating needs will be used up. Even when the adversities are met and the surges are dealt with, a detriment to the system as a whole occurs. The society is weakened in the process, and made more vulnerable to the next crisis. Once a complex society develops the vulnerabilities of declining marginal returns, collapse might require the sufficient passage of time to render probable the occurrence of an insurmountable calamity.
More importantly, declining marginal returns make complexity a less attractive goal to maintain. The problem solving strategy takes a secondary role to instituting simpler systems. The society tends to accept the option for less costly and less sophisticated social forms. The alternative embraced eventually is an endorsed level of disintegration. This has occurred to the United States in grand style. As marginal returns deteriorate, tax rates rise with less benefit to the local level. Irrigation systems go untended, bridges and roads are not maintained, the frontier is not adequately defended, product liability is not protected, and fraud prevention is compromised. Notice in the US how cities exhaust their funds with pension programs, unable to provide proper services like police protection. Notice how the US has countless bridges and pipelines (water, sewer, energy) that have gone without proper care. The nation has turned too much attention to war.
As the process degrades, many of the social units that comprise a complex society no longer pursue the increased general advantage, and instead pursue a strategy of personal independence. Then begins a different pursuit of their own immediate goals rather than long-term goals of the networked hierarchy. They see little benefit coming from systemic contributions. Behavioral interdependence (constructive groups) yields way to broader independence (working on one's own). Shrinking resources are strained even more, as control slides away and is lost. The investment in regulatory systems is crucial, as efficiency devices. When they degrade into support systems for corruption, the system falters from its own rotten moral fabric and invites the seeds of rebellion. Eventually, perturbation occurs from within, as civil disobedience takes root. The lack of justice, the apparent predation by the upper hierarchy levels (bankers), and public frustration breeds anarchy like thousands of microdots within the society. See the home mortgage voluntary defaults. Justice is a delicate factor within a society. When justice is dealt, order tends to be preserved. When justice is absent, like for the big US banks, like for military aggression, the people object and depart from norms. The presence in the last two decades of bigger amplitudes in the crisis pain and cost, together with greater frequency of events in cycles, has combined to deplete the reserves of the nation. The Rubin Doctrine of surviving today even if taking aware reserves from tomorrow has assured much greater risk of systemic ruin. In my view, it has guaranteed ruin and collapse. See the Naked Capitalism for a thought provoking article. Complex systems are fascinating, especially when they enter a period of dysfunction.
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January 12, 2011
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BOND OUTFLOWS
Huge outflows have struck from US-based bond funds, while the outflows continue for stock funds since may 2010. Even the flagship pimco bond fund saw net redemptions. The public is stepping aside as the usfed does its destructive work. No end is in sight for the stock fund outflows. A public boycott seems firmly in place. The new event is the largest bond fund outflow in almost 30 months. The Investment Company Institute reported that in the week ended December 15th, another massive outflow took place from domestic stock funds. It was the 33rd week in a row, amounting to an exit of $2.4 billion. Worse, taxable and municipal bonds saw a nasty shocker of $8.62 billion in outflows, which included another record $4.9 billion in muni bond outflows. Bond mutual funds had the biggest client withdrawals in more than two years, as a flight from fixed income investments has accelerated. The withdrawals were the largest since mid-October 2008, when investors pulled out $17.6 billion from bond funds. The US bond fund retreat showed acceleration signs, since the rise was from $1.66 billion the week before, according to the ICI report. So outflows are in progress for both US stocks and US bonds!! Year to date, investors have yanked $100 billion in funds from US-focused equity mutual funds, offset by a smaller $16 billion in comparable inflows into equity strategies via ETFunds. The $250 billion PIMCO Total Return Fund, managed by Bill Gross, had its first net withdrawals in two years in November as investors pulled $1.9 billion, according to Morningstar.
The public has grown jaded by stories of flash trading smears of the stock market, insider trading scandals, and incessant internal reports of stock support from the Working Group for Financial Markets. They sense stock prices are heavily manipulated and not a reflection of true value. They might on a wider basis believe that most US financial markets are either in ruins or corrupted. The vast record outflows accompany a rise in the S&P500 stock index, which is a clear signal of USGovt prop programs in a corrupt market. Ridiculous illogical and ludicrous interpretations continue to be disseminated about the USEconomy in recovery. The false story has become a billboard message of deception. We are told that investors are retreating from bond funds after signs of an economic recovery and a stock market rally, which have lifted interest rates broadly. The reality is something quite different. The selloff in USTreasurys happened exactly after the US Federal Reserve in November offered specific details on its pledge to purchase $600 billion in bond assets to revive the sluggish USEconomy. The 10-year USTreasury yields lie in the 3.2% to 3.4% range, much higher than the 2.49% in the first week of November. The bond market contradiction to the USFed monetization plan is without precedent in US bond market history, a grandiose insult.
The QE2 team is buying $100 billion in USTBonds per month, taking up the slack, without producing any decline in bond yields. The USFed is running a dangerous desperate gambit. Attempts to hold together the ustreasury market during its QE2 strongarm episode are underway. Obviously the USFed is the USTreasury market, with outsized USTBond purchases as part of its QE2 program. An approved posse of market specialists is buying hundreds of $billions of USTreasury securities on the open market. They are filling a vacuum. They are offsetting global creditors in abandonment. They bought in 2011 a full 75% of all USGovt debt issuance, just like Banana Republics!! They must keep the interest rates low. They must prevent a credit derivative blowup event. The USFed is fast losing all credibility, exhausting its power, testing its limits, fighting off demands for independent audits. The QE2 team seeks the best price available. However, due the fully advertised initiative and the heavy volume, is destined to pay a premium price. They have tipped their hand, as they buy $100 billion per month in USTreasurys. It is not possible to be a known buyer with a schedule and agenda, and execute favorable prices. An unexpected backfire occurred on the way to the QE2 launch. Bond yields fell sharply between August and November as the markets anticipated the new program. Bond yields have defiantly risen since details on QE2 were formally announced in November, delivering losses to the frontrunners in the autumn months. Too much doubt was left lingering on the volume of the program, and furthermore, whether a QE3 would launch. Bernanke actually hinted of a third launch, foolishly. The states need several hundred $billion, another monetization object.
GOLD & SILVER PREPARE FOR ANOTHER BREAKOUT
A major consolidation is taking place in the Gold price. A near total disconnect has occurred between the physical Gold & Silver markets and the control strings from the paper futures market held by the maestros. Grotesque shortages exist in silver. Difficulties in gold delivery are commonplace. The central banks and Bank For Intl Settlements scramble to keep gold & silver supplied to the exchanges, in order to avert openly visible defaults. A strong uptrend with rising moving averages is evident in Gold. The breakout in October has been consolidating for three full months, while Europe experiences its open sores of sovereign debt distress. Its price will soon encounter the uptrend lines for likely ignition. When a European aid package is assembled, whether of substance or not, merely if it seems credible, the Euro currency will rebound and the Gold bull will resume. In year 2011, the global monetary system will fracture in visible fashion. Its broken debt foundation will be the proximal cause. Gold is widely regarded as a reserve asset, no longer a stodgy secure asset for Arab sheiks. The dirtiest little secret might be that private Wall Street firm accounts own vast Gold bullion accounts, while their corporate banking entities in South Manhattan own the short futures positions, soon to be dumped on the USGovt in formal fashion. The greatest propulsion force to the Gold price is obviously the USFed and its grandiose QE2 initiative. Their purchase of $100 billion in USTBonds per month signifies that they are the USTreasury Bond market. PIMCO is worried sick about the unbridled monetization. The USFed monetized 75% of USGovt debt in 2011. When the USFed is done with QE2, they will argue for a QE3, probably to cover state debt shortfalls. The precedent has been set. The global currency war is in full swing. Simply put, the Gold price will rise when China is prepared to pay a higher price, after exhausting supply at lower prices.
The greatest offender in currency manipulation and currency undermine is the United States. It is essential that the USGovt continue to make accusations against foreign central bankers, in order to deflect attention. The problem is QE2, and the likelihood of a followup QE3. The USGovt is without permission forcing a debt writedown on foreign USTreasury creditors by installing inflation engines. See the commodity prices, led by food & energy. The USFed and USDept Treasury will proclaim victory by mid-summer, as price inflation begins to rage much hotter. They will call it economic growth. Check import price inflation from the last three months of 2011. Import prices rose 3.7% during that brief time. Not just emerging economies like China and Brazil are contending with price inflation. The US does too, but it calls it growth, since its economic trackers are much more accomplished decepticons. When job losses mount in the second half of 2011, the lies will be unmasked. The USFed is the greatest destoyer of working capital in the history of the world. Their balance sheet is negative $1 trillion and growing worse, their highly appropriate report card. Their wretched financial condition matches their decaying reputation. They are the buyer of worthless toxic bonds, the buyer of last resort. The housing market will NOT recover to bail them out.
USGOVT BUDGET BATTLES
Budget battles are sure to reveal the true fascist motives of those in power. The people will be denied while the war machine is preserved, guns & bombs over bread & butter, big banks over households. In fact, the defense budgets will not be reduced. Rather, defense contractors will be forced to eat cost overruns without volume cutbacks in weapon units at all. The war is sacred, the signature mark of the fascist state. The USGovt seems to have suddenly found religion in reducing the budget and its deeply engrained deficit. It is more superficial than from the heart with conviction. The new wave is all about perceptions. To be sure, some in the USCongress are worried sick and scared pale over the prospects of a structural $trillion deficit. A decade ago such a deficit magnitude would be considered a telltale signature of a Banana Republic nation sliding toward the Third World perilously. The budget battle with the new USCongress will be extremely revealing of the priorities for the Syndicate in full control of the USGovt and press networks. The budget process will in my view continue to place the war as a sacred priority not to be touched, not to be altered, not to be disrupted. In rough terms, the USGovt budget contains components 20.0% Defense, 21.0% Social Security & Medicare, and 14.0% Safety Net System.
In my view, the budget cuts will come exclusively from the people and their homes and work centers, their pensions, their Social Security & Medicare. Tax deduction removals and phaseouts will be a centerpiece. The war machine has given stress to the defense contractors, who will be expected to absorb cost overruns in weapons programs, according to recent Pentagon pronouncements. Enormous costs are involved with the war machine support. The base military budget is $536 billion. The extended budget for the wars adds another $170 billion in supplemental spending, which officials prefer to call Overseas Contingency Operations since it sounds more sophisticated.
The total sum, over $700 billion per year, is the sacred cost of the USMilitary. It includes hundreds of overseas bases, lavish embassies, and endless weapon systems, of types conventional, nuclear, and drones. The United States spends as much on annual military investment as the rest of the world combined, according to the Stockholm Intl Peace Research Institute. One must wonder if the wars are to produce enemies. The United States maintains troops at more than 560 bases and other sites abroad. The outsized yawning Defense spending is a primary cause for USGovt insolvency. It has a staggering deficit impact on the budget and the negative international image of the nation. Watch the unfolding events as the USGovt and USCongress grapple with spending cuts. They will avoid Pentagon and defense budget cuts with fierce opposition. This is a key part of the Fascist Business Model, as sacred as Wall Street largesse.
Harken back to the 1950 decade, during the post-WW2 glow. President Dwight Eisenhower once said, "Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed." The words from Ike fell on deaf ears. Not until the last decade have his words rung shrill. He never met the current crowd in control, but he could see a path to their evolution, which he called the Military Industrial Complex. No disrespect is meant to soldiers who have sacrificed. One must wonder for what cause their sacrifice has been, and toward what outsized profits to defense and service contractors, even Syndicate bank accounts. Talk has already begun, that "out of respect for our fighting soldiers and veterans" who have served in active duty, the defense budget will be spared of cuts. Watch the priorities be revealed as the battle unfolds over the budget. In my view, the potential for defense cuts and huge savings is great but it will not be tapped. Instead the people will be asked to expect less aid, to rely upon less, to eat less, to expect less federal help, and endure poverty more.
SHADOW HOME INVENTORY
The standard inventory of homes comes from brokers and multilists. The hidden inventory of homes adds another 50% to 80% to the working supply, half of that from pending seizures, half from bank owned units festering on their balance sheets. Home prices cannot rise in such a deeply distressed climate. The unofficial shadow inventory is another one million homes. Any economist who overlooks the hidden supply of homes is a hack. The housing market cannot recovery for another two years, until it works off the hidden inventory. The problem is that the ongoing home foreclosures results in more bank seizures, and a steady source of renewed hidden inventory. Housing is a crippled market, one that acts like a gigantic millstone around the USEconomy. Housing prices will descend further in 2011, as the shadow inventory acts with powerful forces upon the Supply & Demand equation. It still applies despite any messianic proclamations from banking high priests or Wall Street marketing agents. The mainstream has finally begun to grasp the wreckage and ruin, but not that the housing sector will cause a systemic failure for the nation. It is most assuredly coming. The contradictions and shallow work of Roubini are worth a pass. His work has been ridiculed in the past by the Jackass, like a few months ago when he expected the gold market to turn down. Instead, it rose another 10% to 15% in a string of breakouts. Yet he is still revered, and sought as a guest on the financial networks.
Nouriel Roubini offers some obvious commentary, followed by contradictory nonsense about a USEconomic recovery. His inconsistency earns him a 'C Minus' grade in his own class. The professor is a fool once again. Roubini acknowledges that the housing market is in a double dip, as prices can only go down. He brought attention to what he called below trend economic growth as baseline, but also two negative factors specific to the housing market. The first factor is the expiration of federal home buyer tax credits for first-time home buyers. The housing prices have been falling every month since the tax credit expired last May. He correctly identified the stolen demand from the future to take advantage of the home buyer credit. So he makes an obvious point. The second factor putting downward pressure on home prices is the ongoing chaos with mortgage documentation, and the related temporary moratorium by banks for mortgage foreclosure proceedings. The suspension appears to be ending. Aware of an imminent flood of housing supply, Roubini said "There has been an effective moratorium on foreclosures. The shadow inventory of not-yet-foreclosed homes, due to the moratorium, will surge in the next year. Supply will increase, demand will drop." Obvious points, enough to force a USEconomic recession without a remote chance otherwise.
Roubini remains a shallow economist without strong basis for his opinions, even plain contradictions. He does not expect a double dip recession, since he believes the USGovt kool-aid on doctored statistics. The dull blade Roubini said, "The rest of the economy is recovering. Most of the numbers are consistent with a growth rate of 2.7%, still below trend. So unemployment will likely remain above 9%. The EuroZone shock, long-term structural deficits, and state & local governments operating near bankruptcy are other ominous economic signs on the horizon. The 12 million households are already in negative equity and 8 million more have an Loan-to-Value between 95% and 100%. Thus even a 5% fall in home price will push an extra 8 million in negative equity with risk of millions walking away from their home, i.e. jingle mail." Without realization, he undermines his own assessment of slow USEconomic growth, and provides ample justification for a worse recession than already is in progress. His housing market observations contradict his economic outlook. He does not realize (or admit) that price inflation is running at over 7% right here, right now. Therefore the GDP estimates are all way high, exaggerated by 5% or more. The USEconomy is mired in a deep recession. Sadly, Roubini is a victim of the establishment, which ordered him to compromise his work in order to continue to occupy an important post. See the CNBC article.
The Great Roubini is awakening to the disaster in housing, but he does not yet grasp how it will result in a systemic USEconomic failure. He begins with a slow growth scenario, then cannot justify it, even to contradict it while discussing relevant factors. He will be one of the first shoddy economists to claim the USEconomy is in recovery, as price inflation accelerates, which will incorrectly be labeled it growth. My theory is simple. If the entire USEconomy depended upon the housing boom to expand from 2003 to 2007, then it will be capable of collapsing the same structures given the extreme vulnerability to debt. The vicious cycle will be powerful, unstoppable, and deadly. It has been game over since the September 2008 events when the US banking system collapsed and died, led by Lehman Brothers, Fannie Mae, and AIG. The weight of the continuing housing market decline, combined with strangulation in the banks with toxic debt paper and a surplus of home inventory, is easily sufficient to cause a systemic failure to the entire USEconomy. The big banks are stuck in mud at the cemetery gate. That failure is in progress with momentum. Guys like Roubini and Krugman will be the last to realize the collapse. They are celebrated cheerleaders within the system, compromised souls.
LABOR MARKET STEP-DOWN
The economic step-down is a hidden powerful effect in the de-industrialization of America. The job growth is not a sufficient condition for the USEconomy recovery. People are taking lesser jobs, with huge declines in income. Fewer opportunities exist, while survival demands tough decisions. The endless USEconomic recession has an ugly trademark. People are taking steep pay cuts, enduring lasting reductions in wages. People are taking jobs far below their skill levels. Between 2007 and 2009, more than half the full-time workers who lost jobs (held for at least three years) and found new jobs later reported wage declines, according to the USDept Labor. The detail is 36% of them reported the new job paid 20% less than the previous lost job. An effect rarely seen in recessions since the Great Depression, wages have taken a sharp and swift decline for a significant slice of the labor market. THIS IS A THIRD WORLD HARBINGER. It is worse for many others. The unemployment rolls include 14.5 million people, even 6.4 million stuck jobless for more than six months. A key part of earnings losses, according to the survey, is that workers skills acquired over the last two decades that are fast becoming outdated and obsolete. Then instead of gaining new skills for a higher paying job, they often settle for a lower wage and stop their job hunts, unable to benefit from training. Lack of retraining programs is a huge dropped ball by the USGovt, whose economists cannot find their hind parts with their hands. Research shows that children of displaced workers also suffer in a domino effect. Even those fortunate to remain on the same jobs have seen wage cuts. Many assume more duties too.
RETAIL LEADERS ON THE ROPES
Howard Davidowitz screams his case on the broad retail distress, with details. He warns of huge unresolved problems with commercial property loans, with great stress for landlords. A Paradigm Shift is underway, for smaller footprint shopping centers, as the United States footprint is double anything reasonable. The consumer model is fast breaking down. Davidowitz does not mince words, as he destroyed the illusion of a USEconomic recovery, pointing out absolutely no consumer renaissance. During a recent Bloomberg interview, retail expert Howard Davidowitz shattered the consensus klapptrapp, with quality content and logical thought. He said, "I am not surprised by the strength of retail sales, because I knew that 30% of consumers are responsible for retail sales, and these 30% did much better because of the performance of capital markets. I do not think it is indicative of anything going forward. I do not think the economy is going to get any better. If you look at our fiscal and monetary policy, we went two trillion dollars in the hole last year. Two trillion, to produce this, and unemployment went up to 9.8%! We have spent two trillion dollars. We are printing money. We are going bananas. Our the balance sheet, we have $2.6 trillion on there, and for what? Look at government securities, and mortgage backed securities. If interest rates go up a point Bernanke's bankrupt. Everything he has bought is underwater. All the mortgage bonds are underwater, the whole country is underwater. Does anyone see the issue now with why rising interest rates, aside from predicting a supposed recovery, may also, courtesy of its [greatly increased wrecked bond investments], actually predicts the insolvency of the Federal Reserve?" His comments are not a breath of fresh air, strewn with honesty.
Davidowitz provided several key observations on the supposed retail renaissance. Wal-Mart makes for 10% of US retail sales, has 150 million customers, and its stock it is down six consecutive quarters, not a good sign. Sears is the largest department store in America, but their stock is in terrible shape. Best Buy suffered a huge earnings miss. The financial loss recorded by ToysRUs increased last quarter. Supermarket chain A&P recently filed for bankruptcy. Department store chain Loehmanns just filed for bankruptcy. Charming Shoppes announced plans to close 100 stores. TJMaxx just liquidated AJRight. Davidowitz honed in on Sears for crucifixion. Sears is in the tank, ready to fold its tents in his opinion. Eddie Lampert took over the company recently from his hedge fund position, lacking any conceivable operational experience. He has engrained a policy that departs from price competition. He has not invested in capital equipment upgrades. He has sold his best stores. His online investment has not succeeded. The corporation is gutted, heading for the dumpster, then cemetery. If Lampert were smart, he would sell the company to a greater fool. A joke has surfaced, that A&P might merge with Stop & Shop, with a new corporate name of Stop & Pee, which would open enormous marketing potential.
In addition to dissecting the collapse of Sears, analyst Davidowitz observed what should be a loud glaring alarm signal for guys like Ackman and all those who are betting on the resurgence of the US mall storefront with vehicles like General Growth. The bulk of retail store traffic is moving online, where incidentally the only jobs created are those of packagers and quality control line people either in China or in some warehouse in Texas, California, or Florida. Davidowitz said, "Online sales have to lead you to question the whole retail selling strategy. We have 21 square feet of selling space for every man woman and child in this country. We already have double of what we need. With the explosion of online sales, what happens to all these retail malls and shopping centers which are marginals? Huge changes are going to be taking place as people continue shopping online. A revolution in retail is coming in both size and location of stores, a trend starting with the advent of much smaller Wal-Mart stores. In the end what to do with the retail space is going to be a huge question for retail in the next ten years. That is why Wal-Mart is starting to build smaller stores. That is why Wal-Mart is building more overseas than they are building here. It is going to be the biggest retail change that we have ever seen." The bulldozing of half the US retail malls will be a positive move for economic progress, but extremely disruptive.
The biggest losers in the maverick analyst's estimation will be commercial real estate landlords. Expect great pain for the REIT investments (stock trusts). Howard continues in his railing, making the point of commercial loans next collapsing, a point made by the Jackass for the last 18 months or more. He said "Landlords better start figuring it out pretty quick because they already have occupancy problems, rent problems, and everything else right now. I do not think the Commercial Real Estate (CRE) problems are fixed by any means. That is why we are going to close hundreds of community banks going forward. We are going to close hundreds more. Those CRE debts are coming due and they will not be able to be rolled over. We have lots of problems still coming up in the banking system, and the problems in the real estate issue is here for a long time. In other news, Kool Aid to be served in aisle 5 of the next door Sears box from now until permanent closing time." The man is solid as a rock in his retail analysis, accurate as a sharp knife, with no nonsense.
COMPLEX SOCIETIES & SYSTEMS
Complex societies do not last forever. They break down from internal stresses as often as from external. A society must maintain its system, with more energy expended when more complex. The reserves can be tapped repeatedly if crisis is not averted from regulatory machinery. In time, neglect enters the picture, as stresses break the fabric. Joseph Tainter is well-known for his classic book entitled "The Collapse of Complex Societies" despite his expertise as an archeologist. He must have done much thinking about the collapse of societies whose ruins he unearthed in massive digs. Tainter is on record with his developed thesis, born out of his dissatisfaction with prevailing collapse theories. His argument is straightforward. Human societies are problem solving organizations, which supply the necessities along with entertainment, as well as training to ensure continuation. The over-arching Sociopolitical systems require energy for their maintenance. If left without proper tending, they fall apart like a garden without attention. Increasing complexity carries with it increased cost per capita. Simple monarchies need much less maintenance than democracies, as voices are heard and justice grinds slowly. Investment in sociopolitical complexity often reaches a point of declining marginal returns, as time passes, interest wanes, justice disappoints. When debt saturation occurs, like today, the cost of maintenance and decline can be overwhelming. The complex system becomes vulnerable to collapse after great stresses and what Tainter calls perturbations, better thought of as disruptions or disturbances.
Stress and perturbation are a constant feature of any complex society, always occurring somewhere in its territory. The developed operating regulatory machinery is designed to deal with unplanned changes. Imagine spotty agricultural failures, border conflicts, large scale accidents, social eruptions, and disease outbreaks. Such localized stress tends to recur with regularity, and thus can be anticipated with preparations. To meet major unexpected stress surges, the society must have some form of net reserve. It can take the form of excess productive capacities in farm output, stored energy, or stockpiled minerals, or hoarded surpluses from past production, even reserve savings. Stress surges of great magnitude cannot be accommodated without such a reserve. A society beset by regular self-inflicted crises will be forced to draw upon its stored reserves too quickly. As declining marginal returns are experienced, the society must contend with rising systemic risk. The costs outweigh the yield put in reserve. Excess productive capacity will at some point be exhausted, and accumulated surpluses allocated to current operating needs will be used up. Even when the adversities are met and the surges are dealt with, a detriment to the system as a whole occurs. The society is weakened in the process, and made more vulnerable to the next crisis. Once a complex society develops the vulnerabilities of declining marginal returns, collapse might require the sufficient passage of time to render probable the occurrence of an insurmountable calamity.
More importantly, declining marginal returns make complexity a less attractive goal to maintain. The problem solving strategy takes a secondary role to instituting simpler systems. The society tends to accept the option for less costly and less sophisticated social forms. The alternative embraced eventually is an endorsed level of disintegration. This has occurred to the United States in grand style. As marginal returns deteriorate, tax rates rise with less benefit to the local level. Irrigation systems go untended, bridges and roads are not maintained, the frontier is not adequately defended, product liability is not protected, and fraud prevention is compromised. Notice in the US how cities exhaust their funds with pension programs, unable to provide proper services like police protection. Notice how the US has countless bridges and pipelines (water, sewer, energy) that have gone without proper care. The nation has turned too much attention to war.
As the process degrades, many of the social units that comprise a complex society no longer pursue the increased general advantage, and instead pursue a strategy of personal independence. Then begins a different pursuit of their own immediate goals rather than long-term goals of the networked hierarchy. They see little benefit coming from systemic contributions. Behavioral interdependence (constructive groups) yields way to broader independence (working on one's own). Shrinking resources are strained even more, as control slides away and is lost. The investment in regulatory systems is crucial, as efficiency devices. When they degrade into support systems for corruption, the system falters from its own rotten moral fabric and invites the seeds of rebellion. Eventually, perturbation occurs from within, as civil disobedience takes root. The lack of justice, the apparent predation by the upper hierarchy levels (bankers), and public frustration breeds anarchy like thousands of microdots within the society. See the home mortgage voluntary defaults. Justice is a delicate factor within a society. When justice is dealt, order tends to be preserved. When justice is absent, like for the big US banks, like for military aggression, the people object and depart from norms. The presence in the last two decades of bigger amplitudes in the crisis pain and cost, together with greater frequency of events in cycles, has combined to deplete the reserves of the nation. The Rubin Doctrine of surviving today even if taking aware reserves from tomorrow has assured much greater risk of systemic ruin. In my view, it has guaranteed ruin and collapse. See the Naked Capitalism for a thought provoking article. Complex systems are fascinating, especially when they enter a period of dysfunction.
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13 January 2011
Harry Schultz’s last testament Commentary: Letter gives final investment allocation recommendation
NEW YORK (MarketWatch) — After 45 years, Harry Schultz has just published the last issue of his International Harry Schultz Letter. He’s superbearish but opportunistic.
Schultz, now 87, is one of the legendary characters of the investment letter industry: a hard-driving promoter who specialized in bold, radical high-concept stands. ( See Sept. 16, 2010 column.) I named him Letter of the Year in 2008, because he indisputably predicted the Crash (a “financial tsunami”) although paradoxically failed to benefit very much. ( See Dec. 28, 2008 column.)
But Schultz is also a trader, with a great respect for short-term trends. In this respect, if no other, he’s like the Aden sisters, to whose Aden Forecast he will be contributing occasional columns. ( See Dec. 30, 2010 column.)
The International Harry Schultz Letter has been something of a tsunami itself, with dozens of recommendations and opinions on an amazing range of subjects. Its relationship with the Hulbert Financial Digest’s monitoring system has been complex and sometimes strained.
But one thing is clear: In recent years, HSL has done brilliantly. It’s the third-best performer over the last past 12 months, up 39.65% by Hulbert Financial Digest count, versus 17.16% for the dividend-reinvested Wilshire 5000 Total Stock Market Index. Over the past ten years, the letter was up an annualized 8.94%, versus 2.5% annualized for the total return Wilshire 5000.
In his last issue, Schultz does not attempt a grand summing-up. But he does observe this:
“Roughly speaking, the mess we are in is the worst since 17th century financial collapse. Comparisons with the 1930’s are ludicrous. We’ve gone far beyond that. And, alas, the courage & political will to recognize the mess & act wisely to reverse gears, is absent in U.S. leadership, where the problems were hatched & where the rot is by far the deepest.”
He writes favorably of investment advice given in a recent interview by former Reagan Office of Management and Budget Director David Stockman:
“Stockman replied (to my huge surprise, coming from a former top government official) ‘Get some gold, beans, water, anything that Bernanke can’t destroy. Ron Paul is right. We’re entering a global monetary conflagration. If a sell-off of U.S. bonds starts, it will be an Armageddon.’”
About gold, Schultz retains his long-term bullishness. He quotes the respected Seeking Alpha service:
“For gold to match the growth in US M1, M2, public debt & budget deficit, gold will have to reach $1,800, $2,400, $7,800 & $13,200, respectively. While I can’t imagine gold going to $13k, these numbers tell me that calling gold a bubble is a bit premature. In my view, money supply, public debt & the budget deficit are in a bubble, not gold, not yet.”
Schultz’s comment: “Wake me up at $2,400 gold.”
But Schultz also retains short-term flexibility. Looking at a chart of iShares MSCI EAFE Index ETF (EFA 58.93, +1.27, +2.20%) , he notes:
“It’s a stock market index for Europe, Australasia and the Far East. Chart shows massive bullish base. If it breaks upside, these areas are where we should buy some new investments. Some modest pre-emptive buying in stocks there, having good chart patterns, is justified.”
Schultz’s final investment allocation recommendation:
• 5-10% Stocks (nongolds).
• 15-20% Commodities: via futures, commodity stocks &/or physical assets.
• 50% gold stocks & bullion: 15% blue chips, 5% junior, 5% bullion via futures, 25-35% in physical bullion.
• 0% currencies (“Close out ALL fiduciary time/call deposits, money market funds & municipal bonds, pension funds…”)
• 1-5% Cash in hand. (“Stored privately.”)
• 0-5% bear stock market protection via ETFs like ProShares UltraShort Dow30 (DXD 20.06, -0.02, -0.10%) .
• 15-20% Government notes/bills/bonds (“In 3-6 month T-Bills/bonds only — buy these only in Swiss Francs, Australian dollars, Canadian dollars, Brazilian reals, Singapore dollars, Chinese Yuan only).”
Harry Schultz’s final words: “Good luck to us all.”
Schultz, now 87, is one of the legendary characters of the investment letter industry: a hard-driving promoter who specialized in bold, radical high-concept stands. ( See Sept. 16, 2010 column.) I named him Letter of the Year in 2008, because he indisputably predicted the Crash (a “financial tsunami”) although paradoxically failed to benefit very much. ( See Dec. 28, 2008 column.)
But Schultz is also a trader, with a great respect for short-term trends. In this respect, if no other, he’s like the Aden sisters, to whose Aden Forecast he will be contributing occasional columns. ( See Dec. 30, 2010 column.)
The International Harry Schultz Letter has been something of a tsunami itself, with dozens of recommendations and opinions on an amazing range of subjects. Its relationship with the Hulbert Financial Digest’s monitoring system has been complex and sometimes strained.
But one thing is clear: In recent years, HSL has done brilliantly. It’s the third-best performer over the last past 12 months, up 39.65% by Hulbert Financial Digest count, versus 17.16% for the dividend-reinvested Wilshire 5000 Total Stock Market Index. Over the past ten years, the letter was up an annualized 8.94%, versus 2.5% annualized for the total return Wilshire 5000.
In his last issue, Schultz does not attempt a grand summing-up. But he does observe this:
“Roughly speaking, the mess we are in is the worst since 17th century financial collapse. Comparisons with the 1930’s are ludicrous. We’ve gone far beyond that. And, alas, the courage & political will to recognize the mess & act wisely to reverse gears, is absent in U.S. leadership, where the problems were hatched & where the rot is by far the deepest.”
He writes favorably of investment advice given in a recent interview by former Reagan Office of Management and Budget Director David Stockman:
“Stockman replied (to my huge surprise, coming from a former top government official) ‘Get some gold, beans, water, anything that Bernanke can’t destroy. Ron Paul is right. We’re entering a global monetary conflagration. If a sell-off of U.S. bonds starts, it will be an Armageddon.’”
About gold, Schultz retains his long-term bullishness. He quotes the respected Seeking Alpha service:
“For gold to match the growth in US M1, M2, public debt & budget deficit, gold will have to reach $1,800, $2,400, $7,800 & $13,200, respectively. While I can’t imagine gold going to $13k, these numbers tell me that calling gold a bubble is a bit premature. In my view, money supply, public debt & the budget deficit are in a bubble, not gold, not yet.”
Schultz’s comment: “Wake me up at $2,400 gold.”
But Schultz also retains short-term flexibility. Looking at a chart of iShares MSCI EAFE Index ETF (EFA 58.93, +1.27, +2.20%) , he notes:
“It’s a stock market index for Europe, Australasia and the Far East. Chart shows massive bullish base. If it breaks upside, these areas are where we should buy some new investments. Some modest pre-emptive buying in stocks there, having good chart patterns, is justified.”
Schultz’s final investment allocation recommendation:
• 5-10% Stocks (nongolds).
• 15-20% Commodities: via futures, commodity stocks &/or physical assets.
• 50% gold stocks & bullion: 15% blue chips, 5% junior, 5% bullion via futures, 25-35% in physical bullion.
• 0% currencies (“Close out ALL fiduciary time/call deposits, money market funds & municipal bonds, pension funds…”)
• 1-5% Cash in hand. (“Stored privately.”)
• 0-5% bear stock market protection via ETFs like ProShares UltraShort Dow30 (DXD 20.06, -0.02, -0.10%) .
• 15-20% Government notes/bills/bonds (“In 3-6 month T-Bills/bonds only — buy these only in Swiss Francs, Australian dollars, Canadian dollars, Brazilian reals, Singapore dollars, Chinese Yuan only).”
Harry Schultz’s final words: “Good luck to us all.”
21 December 2010
GEAB N°50 is available! Global systemic crisis: Second half of 2011 - European context and US catalyst - Explosion of the Western public debt bubble
The second half of 2011 will mark the point in time when all the world’s financial operators will finally understand that the West will not repay in full a significant portion of the loans advanced over the last two decades. For LEAP/E2020 it is, in effect, around October 2011, due to the plunge of a large number of US cities and states into an inextricable financial situation following the end of the federal funding of their deficits, whilst Europe will face a very significant debt refinancing requirement (1), that this explosive situation will be fully revealed. Media escalation of the European crisis regarding sovereign debt of Euroland’s peripheral countries will have created the favourable context for such an explosion, of which the US “Muni” (2) market incidentally has just given a foretaste in November 2010 (as our team anticipated last June in GEAB No. 46 ) with a mini-crash that saw all the year’s gains go up in smoke in a few days. This time this crash (including the failure of the monoline reinsurer Ambac (3)) took place discreetly (4) since the Anglo-Saxon media machine (5) succeeded in focusing world attention on a further episode of the fantasy sitcom "The end of the Euro, or the financial remake of Swine fever" (6). Yet the contemporaneous shocks in the United States and Europe make for a very disturbing set-up comparable, according to our team, to the "Bear Stearn " crash which preceded Lehman Brothers’ bankruptcy and the collapse of Wall Street in September 2008 by eight months. But the GEAB readers know very well that major crashes rarely make headlines in the media several months in advance, so false alarms are customary (7)!
Net cash outflows from Mutual Funds investing in « Munis » (2007-11/2010) (in USD billions) - Withdrawals were higher than in October 2008 - Source: New York Times, 11/2010
In this GEAB issue, we therefore anticipate the progression of the terminal crash of Western public debt (in particular US and European debt) as well as ways to protect oneself. Furthermore, we analyze the very important structural consequences of the Wikileaks revelations on the United States’ international influence as well as their interaction with the global consequences of the US Federal Reserve’s QE II programme. This GEAB December issue is, of course, the opportunity to assess the validity of our anticipations for 2010, with a of 78% success rate for the year. We also develop strategic advice for Euroland (8) and the United States. And we publish the GEAB-$ index that will now allow us to synthetically follow the progress of US Dollar against major world currencies every month (9).
In this issue, we have chosen to present an excerpt of the forecast on the explosion of the Western public debt bubble.
Thus, the Western public debt crisis is growing very rapidly under the pressure of four increasingly strong limitations:
. the absence of economic recovery in the United States which strangles all public bodies (including the federal state (10)) accustomed to an easy flow of debt and significant tax revenues in recent decades (11)
. the accelerated structural weakening of the United States in monetary, financial as well as diplomatic (12) affairs which reduces their ability to attract world savings (13)
. the global drying up of sources of cheap finance, which precipitates the crisis of excessive debt in Europe’s peripheral countries (in Euroland like Greece, Ireland, Portugal, Spain, ... and the United Kingdom as well (14)) and is starting to touch key countries (USA, Germany, Japan) (15) in a context of very large European debt refinancing in 2011
. the transformation of Euroland into a new "sovereign" that gradually develops new rules for the continent’s public debts.
These four constraints generate varying phenomena and reactions in different regions / countries.
The European context: the price of the path from laxity to austerity will be partly paid for by investors
From the European side, we have thus witnessed the difficult, but ultimately incredibly fast, transformation of the Eurozone into a sort of semi-state entity, Euroland. The delays in the process weren’t only due to the poor quality of the political individuals concerned (16) as the interviews of the "forerunners" such as Helmut Schmidt, Valéry Giscard d'Estaing or Jacques Delors hammered on at length. They themselves never having had to face a historic crisis of this magnitude, a little modesty would have done them good.
These delays are equally due to the fact that current developments in the Eurozone are on a huge political scale (17) and conducted without any democratic political mandate: this situation paralyzes the European leaders who consequently spend their time denying that they are really doing what they do, i.e. namely, building a kind of political entity with its own economic, social and fiscal constituent parts, .... (18) Elected before the crisis erupted, they do not know that their voters (and the economic and financial players at the same time) would be largely satisfied with an explanation about the decisions being planned (19). Because most of major decisions to come are already identifiable, as we analyze in this issue.
Finally, it is a fact that the actions of these same leaders are dissected and manipulated by the main media specializing in economic and financial issues, none of which belong to the Eurozone, and all of which are, on the contrary, entrenched in the $ / £ zone where the strengthening of the euro is considered a disaster. This same media very directly contributes to blur the process underway in Euroland (20) even more.
However, we can see that this adverse effect decreases because between the "Greek crisis" and the "Irish crisis", the resulting Euro exchange rate volatility has weakened. For our team, in spring 2011, it will become an insignificant event. This only leaves, therefore, the issue of the quality of Euroland’s political personnel which will be profoundly changed beginning in 2012 (21) and, more fundamentally, the significant problem of the democratic legitimacy of the tremendous advances in European integration (22). But in a certain fashion, we can say that by 2012/2013, Euroland will have really established mechanisms which will have allowed it to withstand the shock of the crisis, even if it’s necessary to legitimize their existence retrospectively (23).
Comparison of yields on Euroland 10 year government bonds - Source: Thomson Reuters Datastream, 11/16/2010
In this regard, what will help accelerate the bursting of the Western public debt bubble, and what will occur concomitantly for its US catalyst, is the understanding by financial operators of what lies behind the "Eurobligations” (or E-Bonds) (24) debate which has begun to be talked about in recent weeks (25). It is from late 2011 (at the latest) that the merits of this debate will begin to be unveiled within the framework of the preparation for the permanent European Financial Stabilisation Fund (26). Although, what will suddenly appear for the majority of investors who currently speculate on the exorbitant rates of Greek, Irish,... debt is that Euroland solidarity will not extend to them, especially when the case of Spain, Italy or Belgium will start being posed, whatever European leaders say today (27).
In short, according to LEAP/E2020, we should expect a huge operation of sovereign debt transactions (amid a government debt global crisis) which will offer Euroland guaranteed Eurobligations at very low rates in exchange of national securities at high interest rates with a 30% to 50% discount since, in the meantime, the situation of the entire Western public debt market will have deteriorated. Democratically speaking, the newly elected Euroland leaders (28) (after 2012) will be fully authorized to effect such an operation, of which the major banks (including European ones (29)) will be the first victims. It is highly likely that some privileged sovereign creditors like China, Russia, the oil producing countries,... will be offered preferential treatment. They will not complain since the undertaking will result in their sizeable assets in Euros being guaranteed.
Charts at link
Net cash outflows from Mutual Funds investing in « Munis » (2007-11/2010) (in USD billions) - Withdrawals were higher than in October 2008 - Source: New York Times, 11/2010
In this GEAB issue, we therefore anticipate the progression of the terminal crash of Western public debt (in particular US and European debt) as well as ways to protect oneself. Furthermore, we analyze the very important structural consequences of the Wikileaks revelations on the United States’ international influence as well as their interaction with the global consequences of the US Federal Reserve’s QE II programme. This GEAB December issue is, of course, the opportunity to assess the validity of our anticipations for 2010, with a of 78% success rate for the year. We also develop strategic advice for Euroland (8) and the United States. And we publish the GEAB-$ index that will now allow us to synthetically follow the progress of US Dollar against major world currencies every month (9).
In this issue, we have chosen to present an excerpt of the forecast on the explosion of the Western public debt bubble.
Thus, the Western public debt crisis is growing very rapidly under the pressure of four increasingly strong limitations:
. the absence of economic recovery in the United States which strangles all public bodies (including the federal state (10)) accustomed to an easy flow of debt and significant tax revenues in recent decades (11)
. the accelerated structural weakening of the United States in monetary, financial as well as diplomatic (12) affairs which reduces their ability to attract world savings (13)
. the global drying up of sources of cheap finance, which precipitates the crisis of excessive debt in Europe’s peripheral countries (in Euroland like Greece, Ireland, Portugal, Spain, ... and the United Kingdom as well (14)) and is starting to touch key countries (USA, Germany, Japan) (15) in a context of very large European debt refinancing in 2011
. the transformation of Euroland into a new "sovereign" that gradually develops new rules for the continent’s public debts.
These four constraints generate varying phenomena and reactions in different regions / countries.
The European context: the price of the path from laxity to austerity will be partly paid for by investors
From the European side, we have thus witnessed the difficult, but ultimately incredibly fast, transformation of the Eurozone into a sort of semi-state entity, Euroland. The delays in the process weren’t only due to the poor quality of the political individuals concerned (16) as the interviews of the "forerunners" such as Helmut Schmidt, Valéry Giscard d'Estaing or Jacques Delors hammered on at length. They themselves never having had to face a historic crisis of this magnitude, a little modesty would have done them good.
These delays are equally due to the fact that current developments in the Eurozone are on a huge political scale (17) and conducted without any democratic political mandate: this situation paralyzes the European leaders who consequently spend their time denying that they are really doing what they do, i.e. namely, building a kind of political entity with its own economic, social and fiscal constituent parts, .... (18) Elected before the crisis erupted, they do not know that their voters (and the economic and financial players at the same time) would be largely satisfied with an explanation about the decisions being planned (19). Because most of major decisions to come are already identifiable, as we analyze in this issue.
Finally, it is a fact that the actions of these same leaders are dissected and manipulated by the main media specializing in economic and financial issues, none of which belong to the Eurozone, and all of which are, on the contrary, entrenched in the $ / £ zone where the strengthening of the euro is considered a disaster. This same media very directly contributes to blur the process underway in Euroland (20) even more.
However, we can see that this adverse effect decreases because between the "Greek crisis" and the "Irish crisis", the resulting Euro exchange rate volatility has weakened. For our team, in spring 2011, it will become an insignificant event. This only leaves, therefore, the issue of the quality of Euroland’s political personnel which will be profoundly changed beginning in 2012 (21) and, more fundamentally, the significant problem of the democratic legitimacy of the tremendous advances in European integration (22). But in a certain fashion, we can say that by 2012/2013, Euroland will have really established mechanisms which will have allowed it to withstand the shock of the crisis, even if it’s necessary to legitimize their existence retrospectively (23).
Comparison of yields on Euroland 10 year government bonds - Source: Thomson Reuters Datastream, 11/16/2010
In this regard, what will help accelerate the bursting of the Western public debt bubble, and what will occur concomitantly for its US catalyst, is the understanding by financial operators of what lies behind the "Eurobligations” (or E-Bonds) (24) debate which has begun to be talked about in recent weeks (25). It is from late 2011 (at the latest) that the merits of this debate will begin to be unveiled within the framework of the preparation for the permanent European Financial Stabilisation Fund (26). Although, what will suddenly appear for the majority of investors who currently speculate on the exorbitant rates of Greek, Irish,... debt is that Euroland solidarity will not extend to them, especially when the case of Spain, Italy or Belgium will start being posed, whatever European leaders say today (27).
In short, according to LEAP/E2020, we should expect a huge operation of sovereign debt transactions (amid a government debt global crisis) which will offer Euroland guaranteed Eurobligations at very low rates in exchange of national securities at high interest rates with a 30% to 50% discount since, in the meantime, the situation of the entire Western public debt market will have deteriorated. Democratically speaking, the newly elected Euroland leaders (28) (after 2012) will be fully authorized to effect such an operation, of which the major banks (including European ones (29)) will be the first victims. It is highly likely that some privileged sovereign creditors like China, Russia, the oil producing countries,... will be offered preferential treatment. They will not complain since the undertaking will result in their sizeable assets in Euros being guaranteed.
Charts at link
11 December 2010
GEAB N°49 is available! Warning Global systemic crisis – First quarter 2011: Breach of the critical threshold of global geopolitical dislocation
As the LEAP/E2020 team anticipated in its open letter to the G20 leaders published in the international edition of the Financial Times of 24 March 2009, on the eve of the London Summit, the question of a fundamental reform of the international monetary system is central to any attempt to solve the current crisis. But sadly, as was demonstrated again at the failure of the G20 summit in Seoul, the window of opportunity for achieving such a reform peaceably closed at the end of summer 2009 and will not open again before 2012/2013 (1). The world is indeed in the throes of the global geopolitical dislocation that we had announced as beginning at the end of 2009 and which can be seen, less than a year later, in the proliferation of movements, the economic woes, the fiscal deficits, the monetary disagreements, all setting the scene for major geopolitical shocks. With the G20 summit in Seoul, which signalled to the planet in its entirety the end of US domination of the international agenda and its replacement by a generalised mood of “every man for himself”, a new phase of the crisis has begun, prompting the LEAP/E2020 team to issue a new warning. The world is about to breach a critical threshold in this phase of global geopolitical dislocation. And as with every breach of threshold in a complex system, this will generate, as from the first quarter of 2011, a suite of non-linear phenomena: developments that do not conform to the usual rules and the traditional projections, be they economic, monetary, financial, social or political.
In this GEAB N°49, in addition to the analysis of the six main steps marking the breach of this critical threshold of the global geopolitical, our team presents numerous recommendations to help cope with the consequences of this new phase of the crisis. They address, for example the currency/interest rates/gold and precious metals group; wealth preservation and the replacement of the US dollar by another measure of net worth; the bubbles in asset classes denominated in US dollars; and the stock markets and the most vulnerable corporate categories in this phase of the crisis. The LEAP/E2020 team also presents the “three simple reflexes” to adopt to understand and anticipate better the new world taking shape. Also in this issue, our team describes the double Franco-German electoral shock in store for 2012/2013. And we also present an excerpt from the Manual of Political Anticipation, written by the president of LEAP, Marie-Hélène Caillol, and published by Anticipolis in French, English, German and Spanish.
Trade balances of the G20 countries (forecast for 2010) - Source: Spiegel, 11/2010
In this press release for the GEAB N°49, our team chose to present three of the six steps that characterise the critical threshold that the world is about to breach.
The crisis that we are experiencing is characterised by developments on a planetary scale, taking place at two levels that, while correlated, are different in nature. On the one hand, the crisis is symptomatic of the profound changes to our world’s economic, financial and geopolitical reality. It accelerates and amplifies the underlying trends that have been at work for several decades, trends that we have described regularly in the GEAB since its launch at the beginning of 2006. On the other hand it reflects the steadily increasing collective awareness of those changes. This growing awareness is in itself a phenomenon of collective psychology on a global level and it influences the way the crisis develops and triggers sharp bursts of speed in its evolution. Several times in recent years, we have anticipated “inflexion points” in the crisis, corresponding to “sudden leaps” in this collective awareness of the changes under way. And we consider that all the pre-requisites for “rupture” crystallised around the G20 summit in Seoul, enabling a crucial advance in collective awareness of the global geopolitical dislocation. It is that phenomenon that led LEAP/E2020 to identify the breach of a critical threshold and to issue a warning about the consequences of that breach as from the first quarter of 2011.
Around the date of the G20 summit in Seoul, LEAP/E2020 identified a build-up of events likely to lead to “rupture”. Let us examine the main events concerned (2) and their chaotic consequences.
Concluding the quantitative easing: the Fed placed under “house arrest”
The Federal Reserve’s decision to launch “QE2” (by purchasing USD 600 billion of US Treasuries from now to 2011), triggered an outcry, for the first time since 1945, amongst almost all the other global powers: Japan, Brazil, China (3), India, Germany, the ASEAN countries (4), …(5) It is not the Fed’s decision that marks a rupture: it is the fact that for the first time, America’s central bank had its ears boxed by the rest of the world (6), and in a very public and determined manner (7). This is certainly not the cosy atmosphere of Jackson Hole and the central bankers’ meetings. It seems that Ben Bernanke’s threats to his colleagues, conveyed to our readers in GEAB No. 47, did not have the effect that the Fed’s chairman had hoped. The rest of the world made it clear in November 2010 that it had no intention of letting the US central bank continue printing US dollars at will in an attempt to solve America’s problems at the expense of every other country on the globe (8). The dollar is now getting back to being what every national currency is supposed to be: the currency and thus the problem of the country that prints it. In fact, in these last weeks of 2010, we have witnessed the end of an era where the dollar was the currency of the US and the problem of the rest of the world, as John Connally put it so neatly in 1971, when the US unilaterally terminated the convertibility of the dollar into gold. Why? Simply because from now on the Fed must take into account the opinion of the outside world (9). It is not yet under guardianship, but it is under “house arrest” (10). According to LEAP/E2020, we can already anticipate that there will be no QE3 (11) regardless of the US leaders’ opinions on the subject (12); or it will take place at the end of 2011 to the tune of major geopolitical conflict and the collapse of the US dollar (13).
U.S. Federal Reserve’s Assets (2008-2010) – Sources: Federal Reserve of Cleveland / New York Times, 10/2010
European austerity: spread of social resistance movements; mounting populism; risk of fostering radicalism in rising generations; higher taxes
From Paris to Berlin (14), Lisbon to Dublin, Vilnius to Bucharest, London to Rome,… the protest marches and strikes are spreading. The social dimension of the global geopolitical dislocation is clearly visible in the Europe of end-2010. While these events have not yet managed to disrupt the austerity programmes planned by the European governments, they point to a significant collective development: public opinions are emerging from their torpor at the beginning of the crisis, suddenly aware of its duration and cost (social and financial) (15). So the next elections should prove costly for all the current political teams who have forgotten that without fair treatment, austerity will never win popular support (16). In the meantime, the teams in office are still applying the recipes of the pre-crisis period (i.e. neo-liberal solutions based on tax cuts for the richest households and an assortment of higher indirect taxes). But the rise in social disputes (inevitable according to LEAP/E2020) and the policy changes that will emerge in the next national elections, country by country, will lead to a questioning of those solutions; and a dramatic strengthening of the populist and extremist parties (17): Europe is going to get politically “tougher”. In parallel, in view of what looks increasingly like an unconscious desire on the part of the baby-boomers to have younger citizens shoulder their costs, we can expect to see an increase in violent reactions from the rising generations (18). According to our team, they will probably become more radical if they feel that the situation is hopeless, unless a compromise can be reached. But without an improvement in tax receipts, the only compromise credible in their eyes would be cuts in existing pensions, rather than higher education costs. Today is always a compromise between yesterday and tomorrow, particularly when it comes to taxes. And the most likely fiscal consequences of these developments are higher taxes on high earnings and capital gains, a new bank tax and a new, community-wide drive to protect the borders (19). The EU’s trade partners should take rapid note (20).
Selected governments’ borrowing needs (2010-2011) - Sources: FMI / Wall Street Journal, 10/2010
Japan: the latest efforts to resist China’s power
For several weeks now Tokyo and Beijing have been locked in a diplomatic dispute of rare intensity. Under various pretexts (a Chinese trawler about to enter Japanese territorial waters (21), massive Chinese purchases of Japanese assets, causing the yen to appreciate) the two powers exchanged harsh words, suspended their high-level talks and appealed to international public opinion. To the countries in the region, the international visibility of this Sino-Japanese spat is especially revealing because of a glaring absence –that of the US. While these quarrels clearly illustrate Beijing’s growing determination to be recognised as the dominant power in East and South-East Asia and Japan’s bid to oppose that regional Chinese hegemony, there is no denying that the power supposed to dominate in this region of the world since 1945, namely the US, is strangely absent from table. We can therefore assume that what we are witnessing is a real-life test on China’s part to measure its new influence on Japan; and on Japan’s part to evaluate how much scope for action the US still has in Asia, faced with China. The events of recent weeks have shown that, hampered by political paralysis and its economic and financial dependence regarding China, Washington prefers not to get involved. No doubt throughout Asia this spectacle serves to accelerate the awareness that a new milestone has been passed in terms of regional order (22); and that in Japan, mired in an endless recession (23) the economic interests linked to the Chinese market have not been strengthened by the experience.
Global changes under way – massive growth in world port traffic, benefiting Asia (1994-2009) - Sources : Transport Trackers / Clusterstock, 10/2010
In conclusion, this accumulation of events, centred round a G20 summit that was patently incapable of resolving the sources of economic, financial and monetary tension between its principal members, contributed to a decisive advance in the world’s collective awareness of the process of global geographic dislocation under way. And in its turn, this increased awareness will, as from the beginning of 2011, accelerate and amplify the changes affecting the international system and our various societies, generating non-linear, chaotic phenomena such as those described in this issue of GEAB and previous issues. As we emphasised in September 2010, we focus on the fact that chief among those phenomena will be the entry of the US into an austerity phase, beginning in spring 2011. But we also bear in mind that one of the surprises of the next eighteen months could simply be the announcement that the Chinese economy had overtaken the US economy as from 2012 as the Wall Street Journal of 10/11/2010 indicates in its report of the Conference Board’s analysis.
http://www.leap2020.eu/GEAB-N-49-is-available-Warning-Global-systemic-crisis-First-quarter-2011-Breach-of-the-critical-threshold-of-global_a5458.html
- Public announcement GEAB N°49 (November 16, 2010) -
In this GEAB N°49, in addition to the analysis of the six main steps marking the breach of this critical threshold of the global geopolitical, our team presents numerous recommendations to help cope with the consequences of this new phase of the crisis. They address, for example the currency/interest rates/gold and precious metals group; wealth preservation and the replacement of the US dollar by another measure of net worth; the bubbles in asset classes denominated in US dollars; and the stock markets and the most vulnerable corporate categories in this phase of the crisis. The LEAP/E2020 team also presents the “three simple reflexes” to adopt to understand and anticipate better the new world taking shape. Also in this issue, our team describes the double Franco-German electoral shock in store for 2012/2013. And we also present an excerpt from the Manual of Political Anticipation, written by the president of LEAP, Marie-Hélène Caillol, and published by Anticipolis in French, English, German and Spanish.
Trade balances of the G20 countries (forecast for 2010) - Source: Spiegel, 11/2010
In this press release for the GEAB N°49, our team chose to present three of the six steps that characterise the critical threshold that the world is about to breach.
The crisis that we are experiencing is characterised by developments on a planetary scale, taking place at two levels that, while correlated, are different in nature. On the one hand, the crisis is symptomatic of the profound changes to our world’s economic, financial and geopolitical reality. It accelerates and amplifies the underlying trends that have been at work for several decades, trends that we have described regularly in the GEAB since its launch at the beginning of 2006. On the other hand it reflects the steadily increasing collective awareness of those changes. This growing awareness is in itself a phenomenon of collective psychology on a global level and it influences the way the crisis develops and triggers sharp bursts of speed in its evolution. Several times in recent years, we have anticipated “inflexion points” in the crisis, corresponding to “sudden leaps” in this collective awareness of the changes under way. And we consider that all the pre-requisites for “rupture” crystallised around the G20 summit in Seoul, enabling a crucial advance in collective awareness of the global geopolitical dislocation. It is that phenomenon that led LEAP/E2020 to identify the breach of a critical threshold and to issue a warning about the consequences of that breach as from the first quarter of 2011.
Around the date of the G20 summit in Seoul, LEAP/E2020 identified a build-up of events likely to lead to “rupture”. Let us examine the main events concerned (2) and their chaotic consequences.
Concluding the quantitative easing: the Fed placed under “house arrest”
The Federal Reserve’s decision to launch “QE2” (by purchasing USD 600 billion of US Treasuries from now to 2011), triggered an outcry, for the first time since 1945, amongst almost all the other global powers: Japan, Brazil, China (3), India, Germany, the ASEAN countries (4), …(5) It is not the Fed’s decision that marks a rupture: it is the fact that for the first time, America’s central bank had its ears boxed by the rest of the world (6), and in a very public and determined manner (7). This is certainly not the cosy atmosphere of Jackson Hole and the central bankers’ meetings. It seems that Ben Bernanke’s threats to his colleagues, conveyed to our readers in GEAB No. 47, did not have the effect that the Fed’s chairman had hoped. The rest of the world made it clear in November 2010 that it had no intention of letting the US central bank continue printing US dollars at will in an attempt to solve America’s problems at the expense of every other country on the globe (8). The dollar is now getting back to being what every national currency is supposed to be: the currency and thus the problem of the country that prints it. In fact, in these last weeks of 2010, we have witnessed the end of an era where the dollar was the currency of the US and the problem of the rest of the world, as John Connally put it so neatly in 1971, when the US unilaterally terminated the convertibility of the dollar into gold. Why? Simply because from now on the Fed must take into account the opinion of the outside world (9). It is not yet under guardianship, but it is under “house arrest” (10). According to LEAP/E2020, we can already anticipate that there will be no QE3 (11) regardless of the US leaders’ opinions on the subject (12); or it will take place at the end of 2011 to the tune of major geopolitical conflict and the collapse of the US dollar (13).
U.S. Federal Reserve’s Assets (2008-2010) – Sources: Federal Reserve of Cleveland / New York Times, 10/2010
European austerity: spread of social resistance movements; mounting populism; risk of fostering radicalism in rising generations; higher taxes
From Paris to Berlin (14), Lisbon to Dublin, Vilnius to Bucharest, London to Rome,… the protest marches and strikes are spreading. The social dimension of the global geopolitical dislocation is clearly visible in the Europe of end-2010. While these events have not yet managed to disrupt the austerity programmes planned by the European governments, they point to a significant collective development: public opinions are emerging from their torpor at the beginning of the crisis, suddenly aware of its duration and cost (social and financial) (15). So the next elections should prove costly for all the current political teams who have forgotten that without fair treatment, austerity will never win popular support (16). In the meantime, the teams in office are still applying the recipes of the pre-crisis period (i.e. neo-liberal solutions based on tax cuts for the richest households and an assortment of higher indirect taxes). But the rise in social disputes (inevitable according to LEAP/E2020) and the policy changes that will emerge in the next national elections, country by country, will lead to a questioning of those solutions; and a dramatic strengthening of the populist and extremist parties (17): Europe is going to get politically “tougher”. In parallel, in view of what looks increasingly like an unconscious desire on the part of the baby-boomers to have younger citizens shoulder their costs, we can expect to see an increase in violent reactions from the rising generations (18). According to our team, they will probably become more radical if they feel that the situation is hopeless, unless a compromise can be reached. But without an improvement in tax receipts, the only compromise credible in their eyes would be cuts in existing pensions, rather than higher education costs. Today is always a compromise between yesterday and tomorrow, particularly when it comes to taxes. And the most likely fiscal consequences of these developments are higher taxes on high earnings and capital gains, a new bank tax and a new, community-wide drive to protect the borders (19). The EU’s trade partners should take rapid note (20).
Selected governments’ borrowing needs (2010-2011) - Sources: FMI / Wall Street Journal, 10/2010
Japan: the latest efforts to resist China’s power
For several weeks now Tokyo and Beijing have been locked in a diplomatic dispute of rare intensity. Under various pretexts (a Chinese trawler about to enter Japanese territorial waters (21), massive Chinese purchases of Japanese assets, causing the yen to appreciate) the two powers exchanged harsh words, suspended their high-level talks and appealed to international public opinion. To the countries in the region, the international visibility of this Sino-Japanese spat is especially revealing because of a glaring absence –that of the US. While these quarrels clearly illustrate Beijing’s growing determination to be recognised as the dominant power in East and South-East Asia and Japan’s bid to oppose that regional Chinese hegemony, there is no denying that the power supposed to dominate in this region of the world since 1945, namely the US, is strangely absent from table. We can therefore assume that what we are witnessing is a real-life test on China’s part to measure its new influence on Japan; and on Japan’s part to evaluate how much scope for action the US still has in Asia, faced with China. The events of recent weeks have shown that, hampered by political paralysis and its economic and financial dependence regarding China, Washington prefers not to get involved. No doubt throughout Asia this spectacle serves to accelerate the awareness that a new milestone has been passed in terms of regional order (22); and that in Japan, mired in an endless recession (23) the economic interests linked to the Chinese market have not been strengthened by the experience.
Global changes under way – massive growth in world port traffic, benefiting Asia (1994-2009) - Sources : Transport Trackers / Clusterstock, 10/2010
In conclusion, this accumulation of events, centred round a G20 summit that was patently incapable of resolving the sources of economic, financial and monetary tension between its principal members, contributed to a decisive advance in the world’s collective awareness of the process of global geographic dislocation under way. And in its turn, this increased awareness will, as from the beginning of 2011, accelerate and amplify the changes affecting the international system and our various societies, generating non-linear, chaotic phenomena such as those described in this issue of GEAB and previous issues. As we emphasised in September 2010, we focus on the fact that chief among those phenomena will be the entry of the US into an austerity phase, beginning in spring 2011. But we also bear in mind that one of the surprises of the next eighteen months could simply be the announcement that the Chinese economy had overtaken the US economy as from 2012 as the Wall Street Journal of 10/11/2010 indicates in its report of the Conference Board’s analysis.
http://www.leap2020.eu/GEAB-N-49-is-available-Warning-Global-systemic-crisis-First-quarter-2011-Breach-of-the-critical-threshold-of-global_a5458.html
- Public announcement GEAB N°49 (November 16, 2010) -
19 October 2010
GEAB N°48 is available! Global systemic crisis - LEAP/E2020’s analysis of 39 countries’ risks 2010-2014: A collective but contrasting dive into the ph
No wonder Gold and everything else is going up.
- Public announcement GEAB N°48 (October 16, 2010) -
http://www.leap2020.eu/geab-n-48-is-available-global-systemic-crisis-leap-e2020-s-analysis-of-39-countries-risks-2010-2014-a-collective-but_a5295.html
In this issue, our team introduces the annual "country risk" update in the light of the crisis. Based on an analysis incorporating eleven criteria this year, this decision-making tool has already demonstrated its relevance in faithfully anticipating developments over these past twelve months. The identification, at the beginning of 2009, of a new phase of the crisis (the phase of global geopolitical dislocation) forced us to take new parameters into account (nine indicators were selected in 2009) to effectively incorporate trends that are reshaping the global system (1). As 2010 draws to a close, LEAP/E2020 now estimates that the world’s various countries are heading for a collective dive at the core of this phase of socio-economic and strategic geopolitical dislocation (2). Thus our studies enabled us to continue presenting the LEAP/E2020 anticipation of "country risk" for the 2010-2014 period (3), by adapting the categories to the crisis’ development, via four groups of countries (4) characterized by the contrasting impacts of this dive in the geopolitical dislocation phase of the global systemic crisis (5).
On the other hand, in this GEAB issue, we give our anticipations for the progress of Euro-Russian relations between now and 2014. In our recommendations, we pay particular attention to helping our readers deal with a currency market in global conflict, a fallout anticipated over 18 months ago by our team, as a result of geopolitical dislocation. Moreover, on the occasion of the publication of his book "The Global Crisis: The Path to the World After - France, Europe and the World in the 2010-2020 decade ", Franck Biancheri, Director of LEAP/E2020, and Anticipolis editions, have given us permission to publish his analysis of the process of the ongoing global geopolitical dislocation.
Documented instances of social unrest 2009-2010 - Source: IILS, 09/2010
The G20’s (or IMF’s) now patent failure to secure effective international cooperation to try and remedy the structural weaknesses of the current international monetary system perfectly illustrates LEAP/E2020’s anticipation which in March 2009, before the London G20 meeting, explained that the summit was the only window of opportunity to fundamentally rethink the global monetary system at the heart of the current crisis. In failing to seize this opportunity, we reported that the world would begin to enter the global geopolitical dislocation phase from late 2009. At that time, by way of an introduction to this new phase of the crisis, the world has seen the mid-flight explosion, during the Copenhagen summit, of the whole international process on global warming. Since then, every month brings a stream of public finance crises in one state or another, drastic austerity measures causing increase in social unrest (6), international meetings leading to reports of disagreement, the proliferation of threats between States over trade imbalances, etc., all against a background of a downward spiral into hell of the global system’s central power, namely the United States (7).
Change in labour force participation between the first quarters of 2009 and 2010 (Indonesia, Mexico, Brazil, Germany, France, South Korea, Argentina, Italy, Canada, United Kingdom, Japan and the United States) - Source: IILS, 09/2010
For several months now we have been witnessing the onset of a massive currency world war just like LEAP/E2020 anticipated nearly two years ago and reiterated in its time-frame of the crisis (8). Several weeks hence, the inevitable failure (9) of the FMI/G20 duo to resolve these currency-trade (10) tensions will provide both new evidence while marking a new tipping point of global geopolitical dislocation: every man for himself becoming the rule (11).
Two weeks from now, with the announcement of the actual details of a comprehensive plan to reduce spending, the United Kingdom will eventually have to face an unprecedented (12) socio-economic crisis that it has desperately tried to hide for months (13), and it will have to do it alone (since the United States are unable to help it, and it has put itself outside the European financial rescue system).
And in three weeks, the United States will concurrently expose an unprecedented political paralysis following the mid-term election (14), whilst the US Federal Reserve will launch a new attempt to rescue the US economy by monetizing a stimulus plan that the federal government is no longer able to launch (15). This attempt - whose size will be less than financial markets expect (because the Fed is now forced, in this case by the holders of US Dollar denominated assets: China, Japan, Europe, oil-producing countries (16)...) but more than enough to lead to a further fall in the dollar and plunge the world monetary system into an even worse conflict - will fail anyway because US society has, de facto, entered a phase of austerity that US leaders, in 2011, will have to recognize must also constrain the country’s fiscal and monetary policy (17).
From the world leaders’ side (18), the next four years’ global sequence can be summarized quite simply: last US attempts to "return to the world before the crisis" (stimulating consumption, maintaining deficits, debt monetization) that will all fail (19), last Western attempts to deal with the crisis using "Washington consensus" methods (limiting deficits by reducing social spending, no tax increases on high incomes, privatization of public services, ...) which will generate growing socio-political chaos, acceleration of the BRIC countries’ exit from the majority of Western financial and monetary markets (especially the two financial pillars of Wall Street and London) which will increase monetary instability, rising intensity of trade wars (coextensive with currency wars (20)), the coming to power from 2012 of groups of leaders who have decided to try new solutions (21) to exit the social, economic and political consequences of the crisis, taking note of the fact that the “Washington consensus” is dead ... because there is no consensus anymore and because Washington is a moribund world power.
As for the rest, the keeping the US debt’s Triple-A rating belongs to the same virtual world as the recent declaration by US economic authorities (22) of the end of recession: the growing disconnect between the words of a collapsing system’s key players and the reality perceived by the majority of citizens and socio-economic players is an infallible indication of systemic decline (23). But the financial markets are not mistaken because with the soaring cost of insuring US debt hot on the heels of Ireland and Portugal with a 28% third quarter increase in cost, the United States has become the third country for which the debt markets fear some very unpleasant surprises (24).
Comparative progression of the United States’ deficit (in trillions USD) and the amount of known global reserves held in U.S. Dollars (1999-2009) - Sources: Reuters/IMF/White House OMB, 10/2010
---------
Notes:
(1) From the beginning of 2006, in the GEAB No. 5, LEAP/E2020 indicated that the global systemic crisis would evolve in 4 major phases. "A global systemic crisis develops in a complex process that can be cut into four phases which may overlap:
. a first "trigger" phase that suddenly sees a whole series of factors, hitherto disconnected, start to converge and interact, and which mainly remain noticeable to alert watchers and the main players
. a second phase called "acceleration" which is characterized by the sudden realization by the vast majority of players and observers that the crisis is here because it starts affecting a rapidly growing number of the system’s elements
. a third "impact" phase which is formed by the radical transformation of the system itself (implosion and/or explosion) under the effect of accumulated factors and which simultaneously affects the entire system
. and finally, a fourth phase called "decanting" that sees the release of the new system’s characteristics resulting from the crisis. Source GEAB No. 5, 15/05/2006
. early 2009, in the GEAB No. 32, LEAP/E2020 identified a fifth phase of the crisis, called global geopolitical dislocation, which begins at the end of 2009, following the G20 failure to launch a credible process of establishing a new international system, particularly in the monetary field. This new phase has been, of course, integrated into the time-frame presented last year in GEAB No. 38.
(2) The ability of states to cope with social unrest that will multiply in the coming quarters and years is closely linked to their ability to contain the most traumatic social effects of the crisis; therefore, our team has introduced a tenth indicator correlated to the tax burden of the past twenty years, whilst an eleventh indicator has been added to assess the resilience to a global monetary war.
(3) Our team has analyzed indicators for 39 countries in addition to Euroland.
(4) These country- risk analyses may be particularly useful for those planning an investment in a given country, intending to settle there or wishing to make an investment in assets linked to that country.
(5) We chose to keep 2014 as an overview because we believe that the changes in political leadership occurring in many important countries (China, USA, Russia, France, ...) in 2012, and which are the principal potential positive factor looking at the next four years, will have no appreciable impact on these country-risks before 2014, the time that new policies are starting to yield results.
(6) France gives a striking example with the growing unpopularity of an executive which fails to prevent social unrest against its reforms and which risks turning into a general strike (France 24, 14/10/2010). Meanwhile, throughout Europe, there is a marked increase of extremist political forces. Source: Le Point, 20/09/2010
(7) All the lights are turning red. The road transport volume has started to decline again (Los Angeles Times, 13/10/2010). Foreclosures continued to grow last month, whilst the whole legal system on which they rest has now broken down (for the legal reasons mentioned in the GEAB a year ago) upsetting a real estate market on Fed and Federal Government life support even more (CNBC, 14/10/2010; USAToday, 14/10/2010; USAToday, 11/10/2010). Cities are sinking into vey deep deficits (such as their employee retirement funds estimated at over 500 billion USD, CNBC/FT, 12/10/2010) and are obliged to turn to the states to try and extricate themselves (CNBC/NYT, 05/10/2010), while the latter can no longer balance their budgets and are obliged to pay interest rates higher than developing countries (thus, Illinois must now pay more than Mexico to borrow, Bloomberg, 05/10/2010).
(8) See the GEAB N°43 particularly.
(9) History doesn’t repeat itself. If we pushed so hard (including at the cost of a full page advertisement in the global edition of the Financial Times) for world leaders to seize the opportunity at the G20 in Spring 2009, it was because we were aware that such a set-up would not happen again. Now the US is too weak to continue to steer the global game, no other player is able to take affairs in hand ... and therefore, the global financial system looks more and more like the "drunken boat; in Rimbaud's poem describing the drift towards unexplored beaches, a perfect description of the world’s course today.
(10) As for the negotiations on climate change, a "West" already clearly divided (here between the Dollar, Pound, Yen and Euro), tries to make the emerging countries (the Yuan in particular) pay the cost of adapting a system they invented and which no longer works. And it's not by ending the game as shown by US efforts to prevent any new Chinese rating agency from operating in the United States that will dissipate this feeling in the BRIC countries. One remembers the performance in Copenhagen. It will pale in comparison to what awaits us at the G20 meeting in Seoul. Besides, the soaring gold price is a very reliable indicator: even the European central banks have stopped their sales. Sources: New York Times, 21/09/2010; Vigile, 29/09/2010; PrisonPlanet/FT, 27/09/2010, Bloomberg, 10/10/2010; ChinaDaily, 27/09/2010
(11) The Telegraph summarized it admirably on 11/10/2010 in "Jobless America threatens to sweep us all away." Sign of the times, Bloomberg on 08/09/2010 announces the opening of a Ruble-Yuan currency exchange in Shanghai to finance Sino-Russian trade.
(12) There is a growing fear in the United Kingdom over the country’s social and political situation in the context of "super-austerity" planned by the government due to financial and budget crisis: the loss of nearly a million jobs, social crisis, unrest.... Sources: Independent, 02/10/2010; Telegraph, 13/10/2010; Guardian, 11/09/2010; MarketWatch, 21/09/2010.
(13) This was, moreover, the main reason for the “Greek crisis becoming the Euro crisis” in Spring 2010, in particular fed daily by articles in the Financial Times to divert attention from London and the Pound Sterling. See GEAB in the first half of 2010.
(14) Recent statements by Steve Schwarzman, head of the financial giant Blackstone, comparing Barack Obama's willingness to tax financial companies more heavily to Hitler’s invasion of Poland, illustrates the explosive atmosphere that rules at the core of the US elite. Source: NewYorkPost, 14/10/2010
(15) Because of the magnitude of existing deficits and political deadlock in Washington.
(16) In this regard, our team gives a timely reminder that there is no mystery about the simultaneous rise of different asset classes, like stocks or gold for example: operators are leaving the stock exchanges (as we showed in the last GEAB issue) and selling their financial and monetary assets for gold (or other less dangerous assets) and the Fed (and its partners) are injecting liquidity into the financial markets to prevent a widespread collapse. The only problem, when the music stops: it will be a tragedy for the stock exchanges. Source: CNBC, 08/10/2010
(17) The situation is so bad that a reading of the New York Times of 13/10/2010 started to look like a cut and paste of the GEAB a year or two ago ... that’s saying something! The article by Michael Powell and Motoko Rich, which describes the "recovery" as merely a continuation of this recession shows the plight of the middle classes across the country in a harsh light, while the very same day Paul Reyes unveils a remarkable collection of photographs showing the ravages of the "Very Great US Depression" as LEAP/E2020 has called it since late 2006.
(18) Franck Biancheri offers a detailed presentation, with the two likely main scenarios for 2010-2020, in his book "The Global Crisis: The Path to the World after;
(19) Source: SeekingAlpha, 24/09/2010
(20) Singapore’s recent announcement that from now on its currency’s trading band against the U.S. dollar will be wider, is the latest example (each day brings a new one) of increasingly defensive positions taken by individual states. Each one tries to increase its room for maneuver to cope with the unexpected. Incidentally, it is interesting to note that Singapore suffered a 19% third quarter fall in GDP, evidence that the mood in Asia is becoming gloomy. Source: YahooFinances, 14/10/2010; MarketWatch, 13/10/2010
(21) For China, one solution will most probably be to inject the country's huge US Dollar reserves into the economy as already suggested by the new generation of Chinese bankers. This will not help the US Dollar. Source: Dallasnews, 19/09/2010
(22) The National Bureau of Economic Research (NBER is in charge of "holding a Mass" on this subject.
(23) As MSNBC aptly described on 06/10/2010, it’s once a month at midnight that America’s great depression is revealed in the supermarkets, when tens of millions of food voucher recipients go and do their shopping. According to the study by the Center for Economic and Policy Research published on 16/09/2010, in effect now one in three Americans can no longer make ends meet (one hundred million people ).
(24) Source: CNNMoney, 12/10/2010
Samedi 16 Octobre 2010
- Public announcement GEAB N°48 (October 16, 2010) -
http://www.leap2020.eu/geab-n-48-is-available-global-systemic-crisis-leap-e2020-s-analysis-of-39-countries-risks-2010-2014-a-collective-but_a5295.html
In this issue, our team introduces the annual "country risk" update in the light of the crisis. Based on an analysis incorporating eleven criteria this year, this decision-making tool has already demonstrated its relevance in faithfully anticipating developments over these past twelve months. The identification, at the beginning of 2009, of a new phase of the crisis (the phase of global geopolitical dislocation) forced us to take new parameters into account (nine indicators were selected in 2009) to effectively incorporate trends that are reshaping the global system (1). As 2010 draws to a close, LEAP/E2020 now estimates that the world’s various countries are heading for a collective dive at the core of this phase of socio-economic and strategic geopolitical dislocation (2). Thus our studies enabled us to continue presenting the LEAP/E2020 anticipation of "country risk" for the 2010-2014 period (3), by adapting the categories to the crisis’ development, via four groups of countries (4) characterized by the contrasting impacts of this dive in the geopolitical dislocation phase of the global systemic crisis (5).
On the other hand, in this GEAB issue, we give our anticipations for the progress of Euro-Russian relations between now and 2014. In our recommendations, we pay particular attention to helping our readers deal with a currency market in global conflict, a fallout anticipated over 18 months ago by our team, as a result of geopolitical dislocation. Moreover, on the occasion of the publication of his book "The Global Crisis: The Path to the World After - France, Europe and the World in the 2010-2020 decade ", Franck Biancheri, Director of LEAP/E2020, and Anticipolis editions, have given us permission to publish his analysis of the process of the ongoing global geopolitical dislocation.
Documented instances of social unrest 2009-2010 - Source: IILS, 09/2010
The G20’s (or IMF’s) now patent failure to secure effective international cooperation to try and remedy the structural weaknesses of the current international monetary system perfectly illustrates LEAP/E2020’s anticipation which in March 2009, before the London G20 meeting, explained that the summit was the only window of opportunity to fundamentally rethink the global monetary system at the heart of the current crisis. In failing to seize this opportunity, we reported that the world would begin to enter the global geopolitical dislocation phase from late 2009. At that time, by way of an introduction to this new phase of the crisis, the world has seen the mid-flight explosion, during the Copenhagen summit, of the whole international process on global warming. Since then, every month brings a stream of public finance crises in one state or another, drastic austerity measures causing increase in social unrest (6), international meetings leading to reports of disagreement, the proliferation of threats between States over trade imbalances, etc., all against a background of a downward spiral into hell of the global system’s central power, namely the United States (7).
Change in labour force participation between the first quarters of 2009 and 2010 (Indonesia, Mexico, Brazil, Germany, France, South Korea, Argentina, Italy, Canada, United Kingdom, Japan and the United States) - Source: IILS, 09/2010
For several months now we have been witnessing the onset of a massive currency world war just like LEAP/E2020 anticipated nearly two years ago and reiterated in its time-frame of the crisis (8). Several weeks hence, the inevitable failure (9) of the FMI/G20 duo to resolve these currency-trade (10) tensions will provide both new evidence while marking a new tipping point of global geopolitical dislocation: every man for himself becoming the rule (11).
Two weeks from now, with the announcement of the actual details of a comprehensive plan to reduce spending, the United Kingdom will eventually have to face an unprecedented (12) socio-economic crisis that it has desperately tried to hide for months (13), and it will have to do it alone (since the United States are unable to help it, and it has put itself outside the European financial rescue system).
And in three weeks, the United States will concurrently expose an unprecedented political paralysis following the mid-term election (14), whilst the US Federal Reserve will launch a new attempt to rescue the US economy by monetizing a stimulus plan that the federal government is no longer able to launch (15). This attempt - whose size will be less than financial markets expect (because the Fed is now forced, in this case by the holders of US Dollar denominated assets: China, Japan, Europe, oil-producing countries (16)...) but more than enough to lead to a further fall in the dollar and plunge the world monetary system into an even worse conflict - will fail anyway because US society has, de facto, entered a phase of austerity that US leaders, in 2011, will have to recognize must also constrain the country’s fiscal and monetary policy (17).
From the world leaders’ side (18), the next four years’ global sequence can be summarized quite simply: last US attempts to "return to the world before the crisis" (stimulating consumption, maintaining deficits, debt monetization) that will all fail (19), last Western attempts to deal with the crisis using "Washington consensus" methods (limiting deficits by reducing social spending, no tax increases on high incomes, privatization of public services, ...) which will generate growing socio-political chaos, acceleration of the BRIC countries’ exit from the majority of Western financial and monetary markets (especially the two financial pillars of Wall Street and London) which will increase monetary instability, rising intensity of trade wars (coextensive with currency wars (20)), the coming to power from 2012 of groups of leaders who have decided to try new solutions (21) to exit the social, economic and political consequences of the crisis, taking note of the fact that the “Washington consensus” is dead ... because there is no consensus anymore and because Washington is a moribund world power.
As for the rest, the keeping the US debt’s Triple-A rating belongs to the same virtual world as the recent declaration by US economic authorities (22) of the end of recession: the growing disconnect between the words of a collapsing system’s key players and the reality perceived by the majority of citizens and socio-economic players is an infallible indication of systemic decline (23). But the financial markets are not mistaken because with the soaring cost of insuring US debt hot on the heels of Ireland and Portugal with a 28% third quarter increase in cost, the United States has become the third country for which the debt markets fear some very unpleasant surprises (24).
Comparative progression of the United States’ deficit (in trillions USD) and the amount of known global reserves held in U.S. Dollars (1999-2009) - Sources: Reuters/IMF/White House OMB, 10/2010
---------
Notes:
(1) From the beginning of 2006, in the GEAB No. 5, LEAP/E2020 indicated that the global systemic crisis would evolve in 4 major phases. "A global systemic crisis develops in a complex process that can be cut into four phases which may overlap:
. a first "trigger" phase that suddenly sees a whole series of factors, hitherto disconnected, start to converge and interact, and which mainly remain noticeable to alert watchers and the main players
. a second phase called "acceleration" which is characterized by the sudden realization by the vast majority of players and observers that the crisis is here because it starts affecting a rapidly growing number of the system’s elements
. a third "impact" phase which is formed by the radical transformation of the system itself (implosion and/or explosion) under the effect of accumulated factors and which simultaneously affects the entire system
. and finally, a fourth phase called "decanting" that sees the release of the new system’s characteristics resulting from the crisis. Source GEAB No. 5, 15/05/2006
. early 2009, in the GEAB No. 32, LEAP/E2020 identified a fifth phase of the crisis, called global geopolitical dislocation, which begins at the end of 2009, following the G20 failure to launch a credible process of establishing a new international system, particularly in the monetary field. This new phase has been, of course, integrated into the time-frame presented last year in GEAB No. 38.
(2) The ability of states to cope with social unrest that will multiply in the coming quarters and years is closely linked to their ability to contain the most traumatic social effects of the crisis; therefore, our team has introduced a tenth indicator correlated to the tax burden of the past twenty years, whilst an eleventh indicator has been added to assess the resilience to a global monetary war.
(3) Our team has analyzed indicators for 39 countries in addition to Euroland.
(4) These country- risk analyses may be particularly useful for those planning an investment in a given country, intending to settle there or wishing to make an investment in assets linked to that country.
(5) We chose to keep 2014 as an overview because we believe that the changes in political leadership occurring in many important countries (China, USA, Russia, France, ...) in 2012, and which are the principal potential positive factor looking at the next four years, will have no appreciable impact on these country-risks before 2014, the time that new policies are starting to yield results.
(6) France gives a striking example with the growing unpopularity of an executive which fails to prevent social unrest against its reforms and which risks turning into a general strike (France 24, 14/10/2010). Meanwhile, throughout Europe, there is a marked increase of extremist political forces. Source: Le Point, 20/09/2010
(7) All the lights are turning red. The road transport volume has started to decline again (Los Angeles Times, 13/10/2010). Foreclosures continued to grow last month, whilst the whole legal system on which they rest has now broken down (for the legal reasons mentioned in the GEAB a year ago) upsetting a real estate market on Fed and Federal Government life support even more (CNBC, 14/10/2010; USAToday, 14/10/2010; USAToday, 11/10/2010). Cities are sinking into vey deep deficits (such as their employee retirement funds estimated at over 500 billion USD, CNBC/FT, 12/10/2010) and are obliged to turn to the states to try and extricate themselves (CNBC/NYT, 05/10/2010), while the latter can no longer balance their budgets and are obliged to pay interest rates higher than developing countries (thus, Illinois must now pay more than Mexico to borrow, Bloomberg, 05/10/2010).
(8) See the GEAB N°43 particularly.
(9) History doesn’t repeat itself. If we pushed so hard (including at the cost of a full page advertisement in the global edition of the Financial Times) for world leaders to seize the opportunity at the G20 in Spring 2009, it was because we were aware that such a set-up would not happen again. Now the US is too weak to continue to steer the global game, no other player is able to take affairs in hand ... and therefore, the global financial system looks more and more like the "drunken boat; in Rimbaud's poem describing the drift towards unexplored beaches, a perfect description of the world’s course today.
(10) As for the negotiations on climate change, a "West" already clearly divided (here between the Dollar, Pound, Yen and Euro), tries to make the emerging countries (the Yuan in particular) pay the cost of adapting a system they invented and which no longer works. And it's not by ending the game as shown by US efforts to prevent any new Chinese rating agency from operating in the United States that will dissipate this feeling in the BRIC countries. One remembers the performance in Copenhagen. It will pale in comparison to what awaits us at the G20 meeting in Seoul. Besides, the soaring gold price is a very reliable indicator: even the European central banks have stopped their sales. Sources: New York Times, 21/09/2010; Vigile, 29/09/2010; PrisonPlanet/FT, 27/09/2010, Bloomberg, 10/10/2010; ChinaDaily, 27/09/2010
(11) The Telegraph summarized it admirably on 11/10/2010 in "Jobless America threatens to sweep us all away." Sign of the times, Bloomberg on 08/09/2010 announces the opening of a Ruble-Yuan currency exchange in Shanghai to finance Sino-Russian trade.
(12) There is a growing fear in the United Kingdom over the country’s social and political situation in the context of "super-austerity" planned by the government due to financial and budget crisis: the loss of nearly a million jobs, social crisis, unrest.... Sources: Independent, 02/10/2010; Telegraph, 13/10/2010; Guardian, 11/09/2010; MarketWatch, 21/09/2010.
(13) This was, moreover, the main reason for the “Greek crisis becoming the Euro crisis” in Spring 2010, in particular fed daily by articles in the Financial Times to divert attention from London and the Pound Sterling. See GEAB in the first half of 2010.
(14) Recent statements by Steve Schwarzman, head of the financial giant Blackstone, comparing Barack Obama's willingness to tax financial companies more heavily to Hitler’s invasion of Poland, illustrates the explosive atmosphere that rules at the core of the US elite. Source: NewYorkPost, 14/10/2010
(15) Because of the magnitude of existing deficits and political deadlock in Washington.
(16) In this regard, our team gives a timely reminder that there is no mystery about the simultaneous rise of different asset classes, like stocks or gold for example: operators are leaving the stock exchanges (as we showed in the last GEAB issue) and selling their financial and monetary assets for gold (or other less dangerous assets) and the Fed (and its partners) are injecting liquidity into the financial markets to prevent a widespread collapse. The only problem, when the music stops: it will be a tragedy for the stock exchanges. Source: CNBC, 08/10/2010
(17) The situation is so bad that a reading of the New York Times of 13/10/2010 started to look like a cut and paste of the GEAB a year or two ago ... that’s saying something! The article by Michael Powell and Motoko Rich, which describes the "recovery" as merely a continuation of this recession shows the plight of the middle classes across the country in a harsh light, while the very same day Paul Reyes unveils a remarkable collection of photographs showing the ravages of the "Very Great US Depression" as LEAP/E2020 has called it since late 2006.
(18) Franck Biancheri offers a detailed presentation, with the two likely main scenarios for 2010-2020, in his book "The Global Crisis: The Path to the World after;
(19) Source: SeekingAlpha, 24/09/2010
(20) Singapore’s recent announcement that from now on its currency’s trading band against the U.S. dollar will be wider, is the latest example (each day brings a new one) of increasingly defensive positions taken by individual states. Each one tries to increase its room for maneuver to cope with the unexpected. Incidentally, it is interesting to note that Singapore suffered a 19% third quarter fall in GDP, evidence that the mood in Asia is becoming gloomy. Source: YahooFinances, 14/10/2010; MarketWatch, 13/10/2010
(21) For China, one solution will most probably be to inject the country's huge US Dollar reserves into the economy as already suggested by the new generation of Chinese bankers. This will not help the US Dollar. Source: Dallasnews, 19/09/2010
(22) The National Bureau of Economic Research (NBER is in charge of "holding a Mass" on this subject.
(23) As MSNBC aptly described on 06/10/2010, it’s once a month at midnight that America’s great depression is revealed in the supermarkets, when tens of millions of food voucher recipients go and do their shopping. According to the study by the Center for Economic and Policy Research published on 16/09/2010, in effect now one in three Americans can no longer make ends meet (one hundred million people ).
(24) Source: CNNMoney, 12/10/2010
Samedi 16 Octobre 2010
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