As any homeowner knows, sometimes the need to “housekeep” grows too overbearing to ignore. In other words, when dust overruns one’s bedroom, kitchen and office, it must be addressed. As is the case with “horrible headlines” in the economic world; which globally speaking, are accumulating at an accelerating rate.
Under the Miles Franklin Blog’s new format, the day-to-day noise tends to be less focused on than in the past. However, the cumulative impact of such news – from East to West, North to South – must be considered in the overall mosaic one develops in orchestrating a financial strategy; and at times like this, we feel the need to discuss it.
It’s a snowy Sunday morning; and thus, the morose weather is the perfect setting for reporting the latest round of economic misery; though thankfully, it’s nothing like what the Packers and 49ers experienced in yesterday’s record-cold football game. In fact, in Miles Franklin’s home of Minneapolis, Minnesota, a fire truck tried to put out a fire yesterday – only to have the water from its hoses freeze upon contact with the air!
Anyhow, I digress – probably because it’s a weekend. But I am no less committed to the TRUTH, starting with the not so incredible news that Obama is calling for an extension of unemployment benefits, just six days after Congress allowed them to lapse for more than 1.3 million people. Sadly, it comes down to politics as usual; as the only reason this is being debated is for the votes such an extension could garner in November’s crucial mid-term elections. In the meantime, the BLS should report on Friday that the “unemployment rate” plunged below 6.5% in December, as a result of this unprecedented collapse of the Labor Participation Rate; which, I might add, could fall a lot lower in 2014, as another 3.6 million Americans’ unemployment benefits are scheduled to expire. This, of course, is why two weeks ago the Fed eliminated the 6.5% unemployment rate as a ‘ZIRP threshold’; instead, commencing what for all intents and purposes is a “ZIRP to Infinity” policy.
Anyhow, the thing that struck me most about Obama’s proposal was not that he was making it; but rather, its cost. If you recall what we wrote in “the budget deal is a total farce,” Congress was crowing of how it was saving an estimated $20 billion per year with the new Ryan/Murray agreement; unless, of course, one considers its “back-end weighting” – as most of the so-called cuts come after 2020. In fact, Congress actually approved a 5% spending increase for fiscal 2014; that is, for the “discretionary” portion of the budget, as 75% is not even subject to negotiation.
And take a guess how much a one-year extension of unemployment benefits will cost; conveniently proposed just after the ballyhooed “budget deal.” Yep, you guessed it – $26 billion! In other words, ALL of such “deficit cuts” would be more than wiped out just weeks after the “historic” budget deal was announced; except, as noted above, there weren’t any real cuts to start with. And for those that don’t work in the finance field, the present value of spending cuts in 2020-2022 is essentially ZERO.
Next up, the so-called “tapering” the Fed is purporting to have started this week. Last week, we highlighted the mirage that the Fed’s stated QE targets have been; as simple math shows that from May through December, it was clearly monetizing closer to $130 billion per month than the purported $85 billion. Heck, all one needs to do is watch how maniacally the Fed has been defending the key round number of 3.0% on the benchmark 10-year Treasury yield, to realize just how terrified they are. Remember, each 1% increase in rates adds roughly $200 billion to annual U.S. debt service costs; thus, making Congressional banter about a handful of spurious “spending cuts” inconsequential, at best. By the way, as you can see below, such attempts to support bonds have simply created a massively bullish “cup and handle” formation in the 10-year yield; which given how many technical chartists still exist, will likely require still greater amounts of QE in the coming weeks – much of it, covertly. To wit, Helicopter Ben gave the last speech of his Fed chairmanship on Friday afternoon; not surprisingly, claiming the Fed is as committed to highly accommodative monetary policy as ever.
And how can it not, having fostered perhaps the broadest, most dangerous asset bubble in U.S. history? Not only are stocks trading at historically high valuations – amidst negative year-over-year earnings comparisons – with unprecedented levels of leverage; but real estate has been turned into a casino by Wall Street vulture capital relying on ultra-low interest rates. Moreover, the surge in “covenant-light” loans and return of adjustable-rate mortgages – as rates rise, no less – demonstrates just how dire the situation has become; much less, as derivatives creation continues to grow unabated. In fact, the recent amendment to the toothless Dodd-Frank financial regulation laws – written by Citibank lobbyists, we might add – dramatically increases overall systemic risk, as so-called “TBTF” banks will no longer have their derivatives positions materially regulated.
As for the propagandized “recovery”; with each passing day, more and more people realize it’s nothing more than a mirage. The fact the Fed has printed unprecedented amounts of money, and subsequently injected them into financial markets, has not created real jobs, GDP growth, or financial improvement. To the contrary, the real unemployment rate is closer to depression-era levels above 20%; GDP growth is negative when incorporating any kind of realistic inflation rate and debt – of all kinds – is at all-time high levels, on the verge of going parabolic. And we assure you, it will; as not only is the fiat Ponzi scheme supporting it in its final stages, but long ago, the U.S. lost its high-paying manufacturing jobs to overseas environs, NEVER to return. To wit, this week’s news that Fiat (what an ironic name) will be acquiring the rest of Chrysler only highlights how rapidly America has fallen.
For that matter, not only were December vehicle sales at their lowest level in 14 months, but GM’s year-end “channel stuffing” was the worst in its history. Yes, much of GM’s “earnings” are the result of inventory building – and subsequently, “stuffing” defenseless dealers with unwanted cars; which, by the way, is exactly what spurred “better than expected” 3Q GDP growth – which will of course unwind when such inventory isn’t sold. And remember, an incredible 99% of consumer debt taken out in the past 12 months – fueling the above, near parabolic debt growth – was for unproductive student and car loans; in the former case, un-dischargeable for life, as the U.S. “college conspiracy” (MUST WATCH) guarantees millions of debt slaves for generations to come.
Worse yet, even including auto and student loans, U.S. loan growth has never been weaker; particularly when exiting a (so-called) “recovery.”
However, what’s even scarier is that U.S. loan creation is actually “strong” compared to Europe, which is in FREEFALL despite the same Central bank financial market support as the Fed provides in the States. The European economy has gotten so bad, France is considering a tax on YouTube and Facebook postings; while in the UK, millions are struggling to pay bills despite an historic, Bank of England created housing bubble. The 12.2% continent-wide unemployment rate is an all-time high; whilst youth unemployment is nearly 25%, including 55% rates in both Spain and Greece. It’s no wonder 75% of Spaniards believe Prime Minister Rajoy is lying about economic recovery; as is the case here, where more and more people realize it is but a figment of the government’s “Ministry of Truth.”
As for the Far East, we could write tomes of how dire the situation is in Japan. And actually, we just did last week – in “Japanese hyperinflation, coming right up.” Even China is experiencing severe economic stress – as highlighted by its second lowest services PMI reading on record – due to a combination of slowing global activity; monstrous, government-fostered debt accumulation; and of course, its ongoing pegging of the Yuan to the dollar, creating ever increasing inflation that eventually will be exported back to the States. Of course, by acquiring every ounce of available gold on Earth, China will one day be able to unpeg the Yuan, creating a new, gold-backed “reserve currency.”
Our recently published 2014 predictions assume the aforementioned “wide world of horrible headlines” will no longer be ignored; as at some point, the mirage of unfettered money printing, market manipulation, and propaganda will lose its ability to mask reality. The exported inflation such “policy” is creating – not to mention, unprecedented global debt levels – will collapse of its own weight; ironically, aided by the very derivatives created to support it. Until then, the rich will get richer, and the poor poorer. However, when this catastrophic game ends, the “rich” will be defined much differently; i.e., by how much “paper wealth” they traded for real items of value, such as PHYSICAL gold and silver. It’s only a matter of time, and the clock is ticking faster with each passing day.