Power concedes nothing without a demand. It never has, and it never will.
– Frederick Douglass
Fairly quickly, Corzine accumulated a massive net long sovereign debt position that eventually totaled $6.3 billion, or five times the company’s tangible common equity as of the end of its fiscal second quarter. I’m told Corzine’s move was highly controversial within the firm. But no one overruled him, maybe because after all, he was Jon Corzine. In a mark of just how much Corzine mattered to the market, in early August, MF Global filed a preliminary prospectus for a bond deal, in which the firm promised to pay investors an extra 1 percent if Corzine was appointed to a “federal position by the President of the United States” and left MF Global.
– Did accounting help sink MF Global? http://in.reuters.com/article/2011/11/01/idINIndia-60255420111101?type=economicNews
It Takes 5 Minutes
Alright I am going to kick things off with Europe and get that out of the way as quickly as possible. Nothing has changed and absolutely nothing has been accomplished. There is no “solution” to the crisis that will not result in massive pain, confusion and wealth decimation. The reason is patently obvious. At least half the continent is completely and helplessly bankrupt. There are only two outcomes to the entire situation. Either the sovereign debts are written off aggressively and the banking system declared insolvent and restructured or the ECB decides to turn on those printing presses to the tune of trillions and destroys the purchasing power of the union in Zimbabwe-like fashion. People will read this and think I am exaggerating . The phrase “it takes 5 minutes” keeps running through my head because all it takes is a small amount of time to see the situation for what it is. I am not that smart. This is obvious. The scary thing is that it is abundantly clear that the vast majority of U.S. investors have not bothered to take the 5 minutes necessary to understand how extreme and binary the outcomes to all this is. Their clients will suffer massively in the months and years ahead as a result of their laziness and lack of macro curiosity.
Remember, there is a very good reason that no “definitive solution” has been announced. There is none. What the Eurocrats are trying to do is pretend that lifelines to bankrupt nations will be enough to tide them over until strong growth allows them to wiggle out of the problems. This has already been proven a failure after they tried it last year as Greece is now worse than ever. So there are two choices and no one can be totally certain which outcome it will be but either one will result in massive wealth destruction. The first choice is the one I prefer (hard defaults and a declaration of insolvency of the banking system followed by restructuring) because it will place the majority of the losses and pain on the elites that led us to this ruin and who own most of the financial assets in the world. The second option (massive inflation and loss of purchasing power) will kill the poor and middle classes as well as the wealthy but financially illiterate. The ruling oligarchs will be fine (until the masses come for their heads) as they understand what they are doing and will move to protect their assets. Since the same criminal, crooked and morally bankrupt financial oligarchy is still pulling the strings worldwide you have to assume they will opt for choice number two, although unforeseen social and political events could throw a wrench into their twisted plans. Gold is the only asset that should outperform in either scenario.
Before I leave Europe, there is a must read article posted this week on Zerohedge that everyone needs to read and understand.
The State of the Union (and Financial Markets)
The one thing I feel more confident in than anything else right now is that the U.S. consumer is about to roll over. The most interesting dichotomy lately has been the extremely depressed consumer confidence numbers (and falling) coupled with resilient consumer spending. I believe this is about to reconcile itself via much lower rates of consumption. Let’s start off with today’s Bloomberg Consumer Comfort reading.
Bloomberg Consumer Comfort Reading 10 Year Chart
This chart tells us two things. First the number was the second lowest on record. People aren’t lying on these surveys. They are being screwed and they know it. The second observation is that it is clear there is basically no bounce since the recession supposedly ended. Why? Because we are in a depression. Sadly, it is a depression in which Central Bankers are doing everything in their power to transfer more and more purchasing power to the elite financial oligarchs that already own everything via money printing.
Despite the horrific consumer confidence numbers and the recent stats showing a new food stamp participation record in the United States where we have about 15% of citizens needing government assistance to survive, spending has held up pretty well. How has this happened? Well, it seems the main reason is a decline in the savings rate.
U.S. Personal Savings as a % of Disposable Income 10 Year Chart
Ok, so what we see is that as confidence has dropped so has the savings rate as people scramble to maintain some semblance of a lifestyle that is gone forever. Many will point to this and say, well look at the 2005 period where savings went even further south and kept the economy afloat. Why can’t this happen again? There are two reasons I think it won’t. The main one is that in 2005 housing prices were still at their peaks and people thought they were much wealthier than they were due to these “assets.” As a result, they were willing to dip into their savings. That is not the case today and therefore I think people will only dip so far into their savings. I think people are right here right now about to cut back. The other reason relates to commodity prices. Although the important ones have all shown large year-over-year increases, they have been more or less flat sequentially as of late. I believe that is about to change and if the governments of the world continue to prop things up and sustain unsustainable consumption we will see oil and other commodities make another meaningful move higher in the months ahead. Since I think a large percentage of U.S. investors are totally clueless about the real state of inflation and the consumer, once spending starts to get cutback it will catch markets completely flatfooted. I think this is a near-term event. As always, we shall see.
Peace and wisdom,
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