oftwominds

Theft By Other Means II: When the State Steals Property, Is It Not Theft

noreply@blogger.com (Charles Hugh Smith) — Tue, 10 Nov 2009 14:47:00 +0000

The Elites of the Savior State are making up their declining tax revenues via grabbing private property under the guise of "punishing criminals." Sounds good until the criminal is you and your crime was unpaid traffic fines.

One key feature of Third World Kleptocracies/Police States is illegal search and seizure. Read the story below for an example on American soil. The propaganda is that "rogue elements" are to blame (naturally) but the reality is that the State (central government) has increasingly extended its kleptocratic powers to seize private property essentially at whim.

As noted in my entries linked below, "unpaid traffic fines" can be grounds for seizure in some locales.

"Legalizing" search and seizure is a simulacrum of justice and democracy. The original justification for seizure-of-ill-gotten-assets was the Federal RICO statutes from the 1960s Racketeer Influenced and Corrupt Organizations Act (wikipedia).

Under RICO, a person who is a member of an enterprise that has committed any two of 35 crimes-- 27 federal crimes and 8 state crimes--within a 10-year period can be charged with racketeering. Those found guilty of racketeering can be fined up to $250,000 and/or sentenced to 20 years in prison per racketeering count. In addition, the racketeer must forfeit all ill-gotten gains and interest in any business gained through a pattern of "racketeering activity."
RICO also permits a private individual harmed by the actions of such an enterprise to file a civil suit; if successful, the individual can collect treble damages.

The entire concept was intended as a weapon against organized crime. With RICO, a criminal gang which had extorted millions of dollars and purchased property with the money would find the property seized, and those who had been extorted could file claims against the gangsters.

So far so good--the State steps in to protect "the little guy" from parasitic criminal gangs.

But that original intent has slipped the bounds of justice and democracy, and now local governments and authorities feel free to seize property for an absurd range of "crimes" which have nothing to do with large, secretive, extremely wealthy organized crime gangs.

Here is the context for the discussion:

Og my gosh, we're short of money here! Go stripmine some citizens with no power or political juice. And make it snappy!

Correspondent David C. reports on the outrageous abuse of search and seizure in Minnesota.

I read your two related articles on "debt prisons" "Upholding the Law" or Simply Theft by Other Means? (October 28, 2009) and When the Savior State Becomes the Enemy of the People (October 30, 2009) and "Criminalizing Poverty For Profit." They were an interesting way to look at driving fines.

On a related subject, here in Minnesota we've had some big problems with corrupt cops. The Metro Gang Strike Force was created to go after criminal gangs, but ironically this year we found out that they were a criminal gang! The police were taking property and cash for personal use or to fund the strikeforce after budget cuts.

Lawmakers hear how forfeiture laws work in theory, in reality:
After hearing hours of testimony Thursday about how state forfeiture laws are supposed to work, many legislators had vanished by the time two citizens spoke of their problems after police seized their property.
One of them was Terrance Frelix Sr., 34, of Minneapolis. He and a business partner owned some properties and were running behind on a mortgage in 2006, Frelix testified at a hearing. His partner borrowed $4,000 and had just given Frelix the money when a Metro Gang Strike Force officer took them in for questioning.
Police released them without charging them with a crime. The strike force later informed Frelix they were forfeiting the cash and Frelix's truck.
Frelix had been outside his vehicle when police swooped in and — unbeknownst to him, he said — a relative was smoking a marijuana joint inside. Police said the small amount of marijuana was the reason they were forfeiting the property.
Frelix went to court but hasn't gotten his property back. He said he's still out the $4,000, plus $3,500 in attorney's fees. His truck is gone, along with the property management equipment inside.
"Even to this day, I'm still frustrated," he said after Thursday's hearing.
Earlier in the hearing, legislators had been walked through flow charts and other documents explaining how the state's forfeiture laws work.
After hearing Frelix's account, Sen. Ron Latz, DFL-St. Louis Park, said the information about what was happening on the streets was"nowhere near what happens on the flow chart." Thursday marked the fourth joint legislative committee hearing held in the wake of the Metro Gang Strike Force's demise.
An independent review of the now-defunct strike force, released in August, found some officers seized money and property from people never accused of a crime, then took the property for personal use. The FBI is investigating.

David C. commentary continued:

A State law allows the police to seize property from suspects without getting a warrant and without charging them with a crime. This seems very unfair to me if not unconstitutional, what happened to the Fourth amendment?

Also, people challenging seizures in civil court waive protections against self-incrimination, exposing themselves to charges. One guy lost his house even though he wasn't charged with a crime! Gang Force seizures prompt look at law: A defense lawyer points to unfairness, potential for abuse at legislative hearing prompted by Metro Gang Strike Force actions

A state law allowing police acting on their own to seize property from suspects -- often without getting warrants -- is unfair and should be overhauled, defense attorneys told legislators Thursday.
"This creates a potential for abuse," said lawyer Howard Bass. "There's no checks and balances."
Bass said the government should have to prove the property was related to a crime and deserved to be seized. Currently, property can be forfeited in an administrative procedure unless the owner demands a court hearing within 60 days of its seizure.
And the court process is complicated. Property owners need to serve proper notice on the police agency and follow court rules of civil procedure and discovery.
Sometimes people who have not been charged with a crime don't challenge seizures because it would cost more in attorney fees than the property is worth, said Tom Plunkett, an attorney with the Minnesota Association of Criminal Defense Lawyers.
Also, people challenging seizures in civil court waive protections against self-incrimination, exposing themselves to charges.
Adrian Ramiraz testified that the Strike Force seized his house in Crystal in 2008, though he, too, wasn't charged. He said he hasn't been able to recover it.

David C. commentary continued:

Perhaps in the future you may want to write about declining tax base and how government uses seizures primarily to fund itself instead of fighting crime. It seems to me that the police shouldn't be allowed to seize things as this corrupts their mission of fighting crime to going after money. Allowing a judge to order seizures would be better, but then one could also argue that even this is unfair if there are two drug dealers and their cars are seized and one car is worth $50,000 and the other one worth $10,000, one could argue that they got unequal punishment.

Thank you, David, for bringing a critically important issue to our attention. We might ask how did seizure of property become construed as the State's right, justified under the broad justification of "punishment"? Since when did smoking a $4 marijuana cigarette become grounds for seizure of $4,000 of private property which is essential to one's livelihood (a truck)?

I have sympathy for working-class stiffs who typically bear the brunt of these "legal extortions" by Kleptocratic States Masquerading as Democracies. I have worked in everything from construction to plantations to quantitative stock market research in my 40+ years of labor, and many of the guys I hired in my building days had served time for absurd drug convictions. One very sweet-natured young man with Native American blood had served time for manslaughter because he happened to be on the premises where a buddy of his OD'ed on smack and Lord-know-what.

Unless you've been protected from streetside reality, you know how it works:the upper-middle class kid (son of an attorney, local business magnate, politico, etc.) gets busted for possession or maybe even low-level dealing. His Dad shows up with big legal firepower and springs him from jail. Charges are either dropped or downgraded to misdemeanor charges so they can be expunged from the record after a few months of probation. The rich kid's car is not seized because there would be Heck to pay.

The experience of the working-class kid is entirely different. For all intents and purposes, he resides in a Third World police state in which authorities have few limits. The non-"fortunate son" kid finds himself in jail and no one to spring for bail, and he's facing felony charges with a long prison sentence.

The D.A. smells an easy felony conviction which looks good on his/her record so a trumped-up plea bargain is presented--we'll cut your sentence to "only" X years if you rat out your pals, etc. The poor kid's cash and beater vehicle are seized, and he serves hard time for a "crime" which earned the rich kid a few uncomfortable hours in jail and court, and a wrist-slap probation.

If I sound bitter, it's because I am. I have plenty of cops in my family and circle of friends, and it's usually not the cops--it's the system. One young man who worked for me got busted on some trumped-up "dealing" charge and his response was to push his car up to 90 miles an hour on a deserted road and then drive off a cliff. He died rather than do long jail time for a trivial "crime" a rich kid would have skated past in one meeting with The Powers That Be.

Just as ominously, correspondent J.P.B. reports that private firms with State-approved authority are wielding Police State technology and tactics to pursue their "job" of repossessing vehicles.

Wanted to give you an update corollary. In today's Columbus DispatchBusiness section, page D6, is an article "Repossessions slowing down, but agents adapt." It is a wire article picked up from the Chicago Tribune, and it discusses repo men using optical character recogniton cameras to read license plates and store the info in a database. Very interesting.

Indeed. The State's strategy is clear: criminalize all sorts of behaviors like not paying traffic fines and then use that "criminality" as the phony justification for illegal search and seizure.

If you're not afraid of the State, you should be.

Permanent link: Theft By Other Means II: When the State Steals Property, Is It Not Theft?

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Healthcare "Reform": the State and Plutocracy Stripmine the Middle Class (Again)

noreply@blogger.com (Charles Hugh Smith) — Mon, 09 Nov 2009 14:32:00 +0000

Healthcare" a.k.a. sickcare is not about health at all, it's about profit and power. The State and the sickcare cartels have partnered to transfer more of the nation's wealth to their Power Elites.

One of the primary themes of Survival+ is that the State and the Plutocracy are partners, and their joint goal is to divert an ever-greater share of the nation's income into their own pockets.

From the Survival+ point of view, all the ideological positions on "healthcare" which are being sold like commodities are laughably detached from reality. "Healthcare reform" has nothing to do with either socialism or capitalism. Socialism is the Veterans Administration system (owned lock, stock and barrel by the government and run by the government) which offers remarkably cost-effective if basic care to millions of vets, and capitalism is cash-only clinics like those offered in Mexico, India and Thailand and in some Wal-Mart walk-in clinics.

The entire "healthcare reform" enterprise is not about providing care to all--that is the sales pitch. It is about milking the entire populace so more of the national income is transferred to the "healthcare" cartels and State (central government) Elites.

Here are the three key realities which are not addressed by "healthcare reform":

1. The "healthcare" cartel (and thus its partner the State) is not interested in health because health is horribly unprofitable. People who eat well and are mentally and physically fit have no need for costly procedures, treatments, tests and pharmaceuticals, hence they cannot generate revenues or profits.

Managing diseases is what's profitable, so the system is oriented not at prevention or nurturing health but at enabling chronic disease which is very profitably managed with pharmaceutcals, surgeries, etc.

2. Once the connection between service and customer is broken and the money to pay for all products and services is printed or borrowed in essentially unlimited quantities, ontologically (inherently) there are no possible price controls. This is why an elderly gent like my friend's father can enter the hospital with a non-life threating issue (gallstone), receive treatment which didn't really resolve his health issue and then Medicare is billed $120,000 for one week of "care" regardless of the efficacy.

When the service is "free" (that is, payment is borrowed/printed in unlimited quantities), then the cost of care will necessarily push up to the ultimate limit of the system's ability to pay. Medicare and Medicaid already exceed the Pentagon's budget, and they are growing three times faster than the long-term trend rate of the U.S. economy.

3. There is no "fair" way to ration care; the U.S. simply rations it by essentially random "legal lottery" payouts/jackpots/penalties and other regulatory means. The bottom line is "healthcare for all" without limits is unaffordable everywhere--it is simply more unaffordable in the U.S. system. The wealthy in rationed-care systems simply opt out and go buy "unrationed care" elsewhere, cash on the barrelhead.

The dirty little secret of supposedly "model" State healthcare plans in Europe and Japan is that they are running up against the limits of what those economies can afford. If you disagree, go ask the State finance ministries of France, the U.K., Germany and Japan for their 10 and 20-year projections of national healthcare costs.

No nation can increase healthcare spending 6% while its underlying economy grows 2%. In a mere 8 years, healthcare costs will rise over 50% while the GDP will rise (at best) 15-20%. That is the essence of unsustainability.

Medical Care Prices Are Rising Faster Than Overall Inflation (BusinessWeek)

The U.S. spent an estimated $2.4 trillion on health care in 2008, about 16.5% of gross domestic product and a 6% increase from a year earlier. Medical care prices are rising faster than overall inflation, and the burden on consumers continues to grow.

When everything is "free to all" then technologies and medications quickly reach marginal returns: yes, this drug is only effective in 15% of the case, and yes, it costs $10,000 a month, and might actually hurt some patients; but since the State is paying for everything, why not give it to everyone who might be helped? And if it's restricted, then isn't that rationed?

The "healthcare" cartels' goal is to carve off a greater share of national income for themselves. This isn't capitalism; it's monopoly capital-crony capitalism, the very opposite of free-market capitalism. The State's political class is a willing partner in this transfer of wealth to Elites because it welcomes the hundreds of millions of dollars in donations offered up by tort attorneys, Big Pharma, and all the other players milking the "healthcare" system for billions.

So who ultimately pays for "free" "sickcare"? The productive middle class and working poor. Healthcare which doesn't actually improve health but simply profitably manages chronic illnesses is in essence a stupendous tax on the productive class of the nation. The healthcare cartels are delighted that "healthcare" has climbed from 6% of GDP to 17%, and they will be delighted to see it rise to 20%, then 25% and 30%, until at some point it bankrupts the nation, as it most certainly will for the above reasons.

Until the State collapses in insolvency, "healthcare" acts as a giant machine which diverts money from the middle class and working poor into the coffers of the sickcare cartels and their State-Elites partners.

You want a system that works? Then depoliticize and de-cartel the system entirely. Jettison the entire sickcare system and revert to cash-only for every product and service, and offer a voluntary VA-type system which people can opt into if they choose to pay the insurance and co-payments (which VA does not have) and live with the defacto rationing of long waits and basic care which is limited by the budget alloted. There is no "entitlement," only whatever care which can be distributed for a given amount of money. Thus it's not the budget which can rise but the efficiency of the system in doing the most possible with a set sum of money.

This is the only sustainable way to provide care without bankrupting the nation.

These two systems--"pure socialism" and "pure free-market capitalism"--can co-exist quite amiably as long as people get to choose from a range of imperfect choices. If health were more profitable (to providers and to consumers) than managing disease, then entirely different choices and incentives would arise.

Permanent link: Healthcare "Reform": the State and Plutocracy Stripmine the Middle Class (Again)

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When Things Fall Apart

noreply@blogger.com (Charles Hugh Smith) — Sat, 07 Nov 2009 17:15:00 +0000

Two new books authored within the circle of oftwominds.com address the coming unraveling: one speculative fiction, the other an analysis of devolution and prosperity.

Let's start When Things Fall Apart by referencing the source:
(tip o' the tam to Nina)

THE SECOND COMING
by William Butler Yeats (1865-1939)

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

Though the poem was penned in 1919, doesn't it speak presciently to our era, too? The falconer circling ever farther away from the voice of its master could be interpreted as a spiritual metaphor for a culture lost in self-absorption, self-medication, greed and resentful entitlement, or politically as a metaphor for a populace slipping away from the voices of the Founding Fathers' principles.

In a nation increasingly diverging into hackneyed, hardened ideological camps, clearly the center (common ground, common sense) is not holding.

Author Chris Sullins' book, Operation SERF, a strategic action thriller serialized here earlier this year, imagines a future U.S.A. which has split into warring factions, and a blood-dimmed tide is loosed.

Here is Chris's summary of the scenario/plot:

Operation SERF is a Strategic Action Thriller set in the Unites States of America in the year 2023. After many years of economic depression, a terrorist act fractures the country. The stage is set for another Civil War as three factions battle for control of the pieces. The story takes place in many areas across the country, but centers on one extended family caught between the struggles of the rival factions. The reader will glimpse into the minds of both the leaders of the factions as well as the common person and travel along with them. "Operation SERF" is Part 1 of a forthcoming 3 part series.

You can read the first sample chapters on the Operation SERF home page.

A few readers objected to the violence depicted in the book, and I sympathize with the general view that we as a culture are drenched in endless depictions of violence as "the answer" to whatever problem is at hand.

Yet the terrible reality is civil wars are often horrifically violent events, and we should understand that is one outcome of many should things truly fall apart.

I think Operation SERF is unique in a number of ways, all of which stem from Chris's deep knowledge of history, his unconventional skepticism of the status quo understanding of our situation and his experience in the U.S. Army on the ground in Iraq.

While on one level the book is entertaining, on another level it is a serious exploration of human nature, patterns of history and the political culture of our nation.

Chris has a deft descriptive touch, and the book reads like a multi-threaded mystery. If you start Chapter 1, I think you'll be hooked.

My own book Survival+: Structuring Prosperity for Yourself and the Nation, explains why devolution of the status quo is predictable and irreversible, and how we can create a new prosperity for ourselves and the nation.

While I am enthusiastic about the ideas presented in the book, I'll let others supply a bit of praise (ahem):

"I've been a big fan of Charles Hugh Smith's insights since the day I first stumbled across his Of Two Minds blog. InSurvival+, he sets out a thoughtful and provocative vision of our future that should not be missed." Michael J. Panzner, author of When Giants Fall and Financial Armageddon

"Charles Hugh Smith is the savviest blogger in the USA these strange days. Nobody puts out a consistently wiser, truer, better-written message, day after day, than CHS. His views on surviving the hardships we face in economy and society are of the highest value and could not be more timely or astute." James Howard Kunstler, author of The Long Emergency and World Made by Hand

"Charles Smith provides a balanced, thoughtful, and prescient view regarding the dilemmas facing our fragile economy. From the collapse in the housing market to the growing power of the banking sector, our economic landscape is changing. Mr. Smith’s credibility comes from years of work and unlike other prognosticators, he has been right. His illuminating arguments and insights provide readers a glimpse into the challenging world we will now enter." Dr. Housing Bubble

"Your book is truly a revolutionary act." Kenneth Robertson

OK, now that we got that over with--let's talk money. The exchange value of theSurvival+ book ($19.95) is approximately one meal for a family at a fast-food restaurant or two tickets to a first-run movie. The price of the ebook (downloadable) versions is $11.95 or about one standard cheese takeout pizza.

The exchange value of the Operation SERF book ($13.99) is equivalent to a single pizza with one topping, or a sandwich and drink at a downtown restaurant. The Kindle version ($7.99) is equivalent to two coffee drinks at Starbucks or a single matinee ticket to a movie.

Oddly enough, people seem to have no problem spending $10 or $20 on coffee or a fast-food meal or a 90-minute movie, but a $20 book is "too expensive." Say what? Is something that might change your understanding of our society and economy "too expensive" at a mere $20?

You don't need to wonder if the books are any good or if they're your cup of tea: you can read huge swaths of them for free right now on the Operation SERF home pageand the Survival+ home page. It doesn't get any easier than this.

Chris has a family to support; he's not rich. I am self-employed; neither of us are "fortunate son" trust-funders. We get a few bucks from the sale of each book. If you buy the books, you can pass them on to other readers when you're done with them. Heck, read them carefully (don't bend the spine) and you can wrap them up and give them as a gift come Christmas.

My buddy G.F.B. reckons my book will be perfect for swatting cockroaches in his kitchen. Talk about multi-purpose! What are you waiting for?

Permanent link: When Things Fall Apart

Get Survival+: Structuring Prosperity for Yourself and the Nation on amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

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We Are What We Do Every Day

noreply@blogger.com (Charles Hugh Smith) — Fri, 06 Nov 2009 16:18:00 +0000

Thoughts on the passing of my stock market mentor, Stewart Pillette.

My stock market mentor and former boss, Stewart J. Pillette, passed away late last month at the age of 71. I worked for Stew for only a year and a half, Spring 1997 to Autumn 1998, but in that brief period I learned a lot from him about the market and quantitative analysis and about being a good boss.

I titled this entry We Are What We Do Every Day because it is a simple but profound statement. Stew was positive every day, even when things were going badly. Being positive was what he did every day. He was enthusiastic about the market, his weekly golf and his family, and lived his mission credo: "Get it early, get it right and make a difference."

We had a complex technology-dependent system to maintain, and snafus were constant. Market data came in via a satellite feed into a Linux box, and various processing steps required DOS and Linux line commands. When it all worked, Stew would exclaim, "I love technology!" And when it fizzled, he would exclaim with equal force, "I hate technology!"

His family recounted that Stew had been drawn to the priesthood as a young man, but ended up choosing to be a stockbroker. He worked at Drexel and other big houses until he struck out on his own in his 50s.

His system was based on plotting the second derivative of the rate of change in stocks' price movements rather than massaging the prices themselves. This created charts similar to MACD (moving average convergence/divergence) in appearance.

One of my jobs was to assemble the data to backtest the system, which had never been done. (It was basically a two-person office at this time.) The system identified the change in trend correctly about 80% of the time-- about the best that any system can manage over the long-term. The other 20% of the signals failed, often because of some unexpected news which sank the stock.

Stew was the sort of boss who would surprise you with a bonus check for a $170 on a Friday after a long hard week, shake your hand and thank you for your work. That is how I discovered the power of gratitude and unpredictable bonuses.

As his son Justin noted at Stew's memorial service, Stew would disagree and defend his view, but in ways which always respected others.

I think Stew could have become a millionaire many times over with his system but by his own account he was an impulsive trader who was drawn to the goal of "hitting one out of the ballpark." We learn not just from others' best traits but also from their weaknesses, and since I share these traits with Stew--perhaps that was part of our bond--then becoming a disciplined trader is what I am striving to "do every day."

Stew loved the market and golf, and though I don't play golf it is my observation that the market and golf share the characteristic of being fundamentally impossible in the sense that there is no perfect golf game and no perfect trade. A good game and a good trade are satisfying; aiming for perfection in either guarantees disappointment.

Justin told a story at Stew's memorial service which encapsulated his daily approach to life. When it was storming outside and heavy rain pelted down, Stew would bundle his young son and daughter into rain slickers and take them outside to splash around in the puddles and glory in the rain and wind.

The typical parental approach, of course, would be to prevent the kids from going outside in such foul weather. Stew was an exceptional parent and Justin observed that many of his friends were jealous of his relationship with his Dad.

That is high praise indeed, and not something accomplished by occasional effort. It was what Stew did every day.

We miss you, Stew. You were a good man.

In memoriam: Stewart J. Pillette, 1938-2009.

Permanent link: We Are What We Do Every Day

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Is Oil "Cheap" When Priced in Euros or Gold?

noreply@blogger.com (Charles Hugh Smith) — Thu, 05 Nov 2009 14:06:00 +0000

Since fossil fuels are the essential commodity for modern civilization, reckoning their "cost" is critical.

At long last Survival+: Structuring Prosperity for Yourself and the Nation is now available on amazon.com and in ebook and Kindle formats.

Fossil fuels can be regarded as "cheap" or costly, depending on the context.How much energy does it require to extract and process the oil and gas, and then clean up the toxic mess created by the extraction, processing and transport?

Yes, hydrocarbons are toxic. Perhaps that should be the initial context of calculating the "cost" of fossil fuels.

Frequent contributor Gene M. submitted this important article from Counterpunch.com: The Inflated Promise of Natural Gas (Counterpunch.com is asking readers for donations now lest they shrivel. I kicked in a few dollars, as we need an independent media so very desperately.)

It turns out the "happy story" presented in the mainstream media/propaganda stories listed here yesterday left out all the toxic bits of the "abundant cheap natural gas" bonanza. Here's a taste of what was not covered in the MSM:

Meanwhile, major fracturing-fluid manufacturers refuse to reveal their products’ ingredients. (Industry leader Halliburton maintains that to compel it to list the chemicals in its products would be an “unconstitutional taking” of its intellectual property.) Investigators have managed to identify many of compounds used in fluids, and many are toxic. Some, including benzene, formaldehyde, 1,4-dioxane, ethylene dioxide and nickel sulfate, are confirmed carcinogens.

The "happy story" is that the wells are miles deep and thus beyond ground water. But much of the water and chemicals pumped down a mile is returned to the surface and must be dealt with as industrial waste. So much for being "cheap."

Correspondent Daniel D. checked in with this eye-opening account:

Just read your post about oil and frac technology and thought I'd chime in with my two cents. In summer 2008 I was a student working for a woman in a McMansion neighborhood in the Dallas/Ft. Worth area. Ft. Worth (and much of Texas) is under the influence of natural gas co's who have recently developed a technique for drilling beneath urban areas. (We mounted a campaign to stop them from putting a well on the neighborhood's golf course and in the course of events discovered evidence indicating that some of the Homeowners' Association board members were probably on the take... But that's another story)
Back to your post: This stuff is anything but cheap OR safe. They have to buy mineral rights from every land-owner in an urban area or pay residents royalties -- not the same as dropping a pipe in a supergiant Saudi reserve. Neighborhoods caught on and learned that if they cooperated they could jack up their prices.
And the environmental damage is severe -- Parker County's water comes out of the tap ready to burn... videos on Youtube show news stories where the anchor lights a glass of tapwater on fire. As for the fraccing chemicals, they are conveniently labeled "proprietary" and so do not need to be disclosed to authorities. This stuff is not the way for us to go in the future, just an unnecessary extension of our energy past ...

Thank you, Gene and Daniel. The entire "natural gas is abundant, cheap and clean" story which is being hyped and propagated by the MSM is the purest propaganda, as it leaves out all the practical obstacles and the punishing costs of dealing with the toxins pumped out with the gas.

Just in straight money terms,let's extend our inquiry into the cost of oil by pricing it in non-U.S. dollar contexts: euros and gold. Frequent contributor B.C. generously provided this chart of oil priced in euros, adjusted for consumer price fluctuations (year 2000=100), plotted against the GDP of the Eurozone:

click on chart for a larger version in a new browser window

Strikingly, even when priced in euros, oil is rising in cost even as the Eurozone GDP languishes at recessionary levels. Many commentators believe that spikes in the cost of oil are the defining factors which trigger recessions. If this has any merit, we might ponder what effect the sharp rise in oil prices even in euros portends for the global economy.

I asked frequent contributor Harun I. for a chart of the oil/gold ratio, and he graciously submitted this chart:

click on chart for a larger version in a new browser window

Oil priced in dollars is in black, and the gold/oil ratio is in red. Many analysts state this ratio in terms of "one ounce of gold buys X barrels of oil."

When gold was around $300 an ounce and oil was about $15/barrel in the late 1990s, then one ounce of gold bought 20 barrels of oil. When oil spiked to $147/barrel and gold was approximately $900/oz, then one ounce of gold bought a mere 6 barrels of oil.

Now that gold is $1,090/oz and oil is about $80/barrel, then one ounce of gold buys about 13.5 barrels of oil--not much more than when oil was "cheap" in the 1990s.

In other words: as all currencies depreciate against gold, then the cost of oil priced in those currencies rises even as it remains constant when priced in gold. But like all commodities, gold and oil fluctuate in relative value as well.

So are oil and natural gas "cheap" or "expensive"? That depends on what they're priced in and who's paying the hidden costs of the vast industry which extracts, processes and transports these fossil fuels.

Lastly, we might place the value of gas and oil in this context: how much will we be willing to pay if and when they become scarce?

"Just remember... the 5th of November." Have a pleasant Guy Fawkes Day.

Permanent link: Is Oil "Cheap" When Priced in Euros or Gold?

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Buy the complete Survival+ in print, ebook or Kindle ebook formats.
Expanded free eBook now available: HTML: Survival+: Structuring Prosperity for Yourself and the Nation PDF version (85,300 words, 136 pages): Survival+)

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Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

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Oil to $20/barrel or $200/barrel?

noreply@blogger.com (Charles Hugh Smith) — Wed, 04 Nov 2009 16:20:00 +0000

If the U.S. dollar strengthens and the global economy weakens as government stimulus runs dry, oil could plummet in a massive "head-fake" to $20/barrel.
Survival+ is now available on amazon.com.
Any discussion of the price of oil must factor in the relative value of the petro-dollar, a.k.a. the U.S. dollar. If the dollar plummets in value against other major currencies and gold, then oil could double in nominal price even as it remained constant when priced in other currencies or gold.
Setting aside speculative positions, the other major factor in pricing oil is supply and demand. Recently, a spate of mainstream media article have heralded massive increases in supply in natural gas and oil.
America's Natural Gas Revolution (WSJ.com)
Betting Big on a Boom in Natural Gas (BusinessWeek)
In summer 2008 the U.S. and much of the rest of the world were consumed by talk of peak oil and natural gas and fears that high fuel prices would persist forever. Today analysts still worry about the oil supply but far less about natural gas. U.S. gas producers, capitalizing on a technological breakthrough, have in recent years unlocked an enormous volume of natural gas in the shale rock under Colorado, Oklahoma, Pennsylvania, Texas, and other states.
According to a July report by the Colorado School of Mines, the U.S. now holds 1,800 trillion cubic feet of natural gas, one third of it in shale, the equivalent of some 320 billion barrels of oil. That's more than Saudi Arabia's 264 billion barrels.
Whew--now that we have more fossil fuel than Saudi Arabia, I guess we have nothing more to worry about. Uh, count me skeptical. The technological breakthough is calling "fraccing" for hydraulic fracturing, a technique which has been around for decades.
Basically, water is used to fracture rock or shale, enabling the gas to seep to extraction wells. Chemicals pumped down the wells can also enhance recovery.
All this sounds fabulous--except for the practicalities which are glossed over.How do you collect gas flowing into hundreds of widely spaced wells? With a network of pipes. That isn't quite as easy or cheap as dropping a pipe into a supergiant Saudi reserve. So how much will it cost to tap these giant reserves of gas and feed the gas into existing networks of transport?
Exactly what chemicals are used? How much do they cost to pump down and extract? How do you get the water to the hundreds of wellheads?
And perhaps most remarkably absent from the happy news--how much of this new natural gas production will simply be offsetting declines in other mature fields?
Similar advances in oil recovery technologies promise another 100 years of oil--or so we are told here: Another Century of Oil? Getting More from Current Reserves (Scientific American October 2009; subscription required to read entire article online; visit your local library to read it for free)
Forecasts that global oil production will soon start to decline and that most oil will be gone within a few decades may be overly pessimistic.
The author predicts that by 2030, thanks to advanced technologies, wells will be able to extract half of the oil known to be underground, up from the current average of 35 percent.
Together with new discoveries, the increased productivity could make oil last at least another century.
Once again, the article (written by a global oil company executive) is heavy on promise and glowing hype and short on costs. Is all this fancy recovery technology free? If not, then how much does it add to the extraction cost of each barrel?
All this seems to suggest something which these articles avoid mentioning: there may be more fossil fuel that is recoverable, but it will no longer be cheap. None of these articles addressed the possibility that all this "new" production will simply offset declining production elsewhere, which means global production would simply stay constant rather than increase to match rising demand.
Also left unsaid is the trivial amounts of oil and gas being recovered from aging fields by the costly new technologies. The example cited in the article is a large field in California that was expected to be depleted year ago which still produces 80,000 barrels a day. That is good news, to be sure, but the extraction only makes sense if oil is over $50 a barrel, and 80,000 barrels is a drop in the bucket of the 20 million barrels the U.S. uses each day.
It would take dozens of such vast fields to replace the sagging production from supergiant fields in Mexico, the North Sea and the Mideast.
With prices elevated to the $80/barrel level, constant supply (at high prices) has created a global glut in oil and natural gas--there are literally no storage facilities available to store more gas and oil. This suggests that if the global economy resumes its deflationary spiral down next year, then a grand imbalance between supply and dwindling demand might cause oil to crash in price--unless the U.S. dollar declined concurrently.
As readers know, I am expecting the dollar to actually rise, which would exert downward pressure on the price of oil (in dollars, of course).
Correspondent B.C. was kind enough to submit this chart and commentary.The chart displays the price of oil adjusted to the CPI (consumer price index) in which 1974=100. In other words, the price is in constant dollars, not nominal dollars; the chart removes inflation from the picture. Thus if today's dollar is worth 33 cents in 1974 dollars, then today's $3 a gallon gasoline would be $1 in 1974 dollars.

click on chart for a larger version in a new browser window
Adjusted for inflation, we see oil at its recent nadir in 1999 had returned to the price levels of the late 1960s. The cost spike created by the 1980 Iraq-Iran war was actually higher in real terms than the spike last year to $147/brl.
Here is B.C.'s commentary on how the dollar's rise or fall could drastically alter the price of oil.
US dollar (USD) and CPI constant, the nominal price of oil would need to fall back to the $40s to reach the CPI- and USD-adjusted level where recessions bottomed and new reflationary growth cycles commenced since the '90s.
However, were the USD to rally back to the earlier cyclical high or to par, for example, coincident with another deflationary episode, the nominal price of oil would have to fall to the low to mid-$30s, to as low as the low to mid-$20s, to reach the adjusted recession low since the '90s and before the early to mid-'70s.
That the nominal price of oil has generally tracked nominal trend GDP growth adjusted for the USD, all else equal, oil in the $20s would not surprise me over the next 1-5 years, especially if we see another deflationary scare and stock market crash and economic collapse in China-Asia.
Thank you, B.C. If the dollar strengthens substantially, as many of us expect in the short-term, then oil would drop in nominal price for U.S. residents and increase for those paying for oil in other currencies.
If deflation and global recession were to take hold--that is, if all the quantitiative easing and borrw-and-spend pump-priming fails to ignite "organic" (real) growth, then the price of oil could be hit with two deflators: the rise of the petro-dollar (USD) and a supply which greatly exceeds falling demand.
I illustrated this "head-fake" drop in prices before the final arrival of Peak Cheap Oil in 2008:
Many other observers are similarly alive to the possibility that oil could drop in nominal dollars to $20/barrel in a deflationary "head-fake" and then rise to $200/barrel once supply fell below demand and the dollar resumed its decline in purchasing power.
Frequent contributor Cheryl A. submitted an excellent interview with oil analyst Stoneleigh on the Automatic Earth blog. Stoneleigh suggested that oil could fall to $20 and then subsequently rise to $500 per barrel once demand exceeds supply.
What we need to keep in mind is the relative value in nominal dollars. If the dollar were to suddenly lose 2/3 of its value against gold and other currencies, oil would suddenly cost $200/barrel to U.S. residents even as it remained constant to those buying oil with other curencies.
Inversely, if the dollar were to strengthen, oil could fall in half when priced in U.S. dollars and skyrocket when priced in other currencies.
The main point is simple: tracking the price of oil in constant (adjusted) dollars illuminates the real cost of oil in purchasing power.

Permanent link: Oil to $20/barrel or $200/barrel?

Apple iPod and iPhone owners: There is an Amazon Kindle app for iPhone which enables you to view the Kindle ebook on your iPod or iPhone--I will try to post links to the app once I locate them.
Survival+ is now available on amazon.com.
Buy the complete Survival+ in print or ebook formats.
Expanded free eBook now available: HTML: Survival+: Structuring Prosperity for Yourself and the Nation PDF version (85,300 words, 136 pages): Survival+)
You can also find my work on AOL's Daily Finance and Seeking Alpha.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Susan M. ($5/month), for your exceedingly generous subscription to this site. I am greatly honored by your support and readership.

Oil to $20/barrel or $200/barrel?

noreply@blogger.com (Charles Hugh Smith) — Wed, 04 Nov 2009 16:20:00 +0000

If the U.S. dollar strengthens and the global economy weakens as government stimulus runs dry, oil could plummet in a massive "head-fake" to $20/barrel.

Survival+ is now available on amazon.com.

Any discussion of the price of oil must factor in the relative value of the petro-dollar, a.k.a. the U.S. dollar. If the dollar plummets in value against other major currencies and gold, then oil could double in nominal price even as it remained constant when priced in other currencies or gold.

Setting aside speculative positions, the other major factor in pricing oil is supply and demand. Recently, a spate of mainstream media article have heralded massive increases in supply in natural gas and oil.

America's Natural Gas Revolution (WSJ.com)

Betting Big on a Boom in Natural Gas (BusinessWeek)

In summer 2008 the U.S. and much of the rest of the world were consumed by talk of peak oil and natural gas and fears that high fuel prices would persist forever. Today analysts still worry about the oil supply but far less about natural gas. U.S. gas producers, capitalizing on a technological breakthrough, have in recent years unlocked an enormous volume of natural gas in the shale rock under Colorado, Oklahoma, Pennsylvania, Texas, and other states.
According to a July report by the Colorado School of Mines, the U.S. now holds 1,800 trillion cubic feet of natural gas, one third of it in shale, the equivalent of some 320 billion barrels of oil. That's more than Saudi Arabia's 264 billion barrels.

Whew--now that we have more fossil fuel than Saudi Arabia, I guess we have nothing more to worry about. Uh, count me skeptical. The technological breakthough is calling "fraccing" for hydraulic fracturing, a technique which has been around for decades.

Basically, water is used to fracture rock or shale, enabling the gas to seep to extraction wells. Chemicals pumped down the wells can also enhance recovery.

All this sounds fabulous--except for the practicalities which are glossed over.How do you collect gas flowing into hundreds of widely spaced wells? With a network of pipes. That isn't quite as easy or cheap as dropping a pipe into a supergiant Saudi reserve. So how much will it cost to tap these giant reserves of gas and feed the gas into existing networks of transport?

Exactly what chemicals are used? How much do they cost to pump down and extract? How do you get the water to the hundreds of wellheads?

And perhaps most remarkably absent from the happy news--how much of this new natural gas production will simply be offsetting declines in other mature fields?

Similar advances in oil recovery technologies promise another 100 years of oil--or so we are told here: Another Century of Oil? Getting More from Current Reserves (Scientific American October 2009; subscription required to read entire article online; visit your local library to read it for free)

Forecasts that global oil production will soon start to decline and that most oil will be gone within a few decades may be overly pessimistic.
The author predicts that by 2030, thanks to advanced technologies, wells will be able to extract half of the oil known to be underground, up from the current average of 35 percent.
Together with new discoveries, the increased productivity could make oil last at least another century.

Once again, the article (written by a global oil company executive) is heavy on promise and glowing hype and short on costs. Is all this fancy recovery technology free? If not, then how much does it add to the extraction cost of each barrel?

All this seems to suggest something which these articles avoid mentioning: there may be more fossil fuel that is recoverable, but it will no longer be cheap. None of these articles addressed the possibility that all this "new" production will simply offset declining production elsewhere, which means global production would simply stay constant rather than increase to match rising demand.

Also left unsaid is the trivial amounts of oil and gas being recovered from aging fields by the costly new technologies. The example cited in the article is a large field in California that was expected to be depleted year ago which still produces 80,000 barrels a day. That is good news, to be sure, but the extraction only makes sense if oil is over $50 a barrel, and 80,000 barrels is a drop in the bucket of the 20 million barrels the U.S. uses each day.

It would take dozens of such vast fields to replace the sagging production from supergiant fields in Mexico, the North Sea and the Mideast.

With prices elevated to the $80/barrel level, constant supply (at high prices) has created a global glut in oil and natural gas--there are literally no storage facilities available to store more gas and oil. This suggests that if the global economy resumes its deflationary spiral down next year, then a grand imbalance between supply and dwindling demand might cause oil to crash in price--unless the U.S. dollar declined concurrently.

As readers know, I am expecting the dollar to actually rise, which would exert downward pressure on the price of oil (in dollars, of course).

Correspondent B.C. was kind enough to submit this chart and commentary.The chart displays the price of oil adjusted to the CPI (consumer price index) in which 1974=100. In other words, the price is in constant dollars, not nominal dollars; the chart removes inflation from the picture. Thus if today's dollar is worth 33 cents in 1974 dollars, then today's $3 a gallon gasoline would be $1 in 1974 dollars.

click on chart for a larger version in a new browser window

Adjusted for inflation, we see oil at its recent nadir in 1999 had returned to the price levels of the late 1960s. The cost spike created by the 1980 Iraq-Iran war was actually higher in real terms than the spike last year to $147/brl.

Here is B.C.'s commentary on how the dollar's rise or fall could drastically alter the price of oil.

US dollar (USD) and CPI constant, the nominal price of oil would need to fall back to the $40s to reach the CPI- and USD-adjusted level where recessions bottomed and new reflationary growth cycles commenced since the '90s.
However, were the USD to rally back to the earlier cyclical high or to par, for example, coincident with another deflationary episode, the nominal price of oil would have to fall to the low to mid-$30s, to as low as the low to mid-$20s, to reach the adjusted recession low since the '90s and before the early to mid-'70s.
That the nominal price of oil has generally tracked nominal trend GDP growth adjusted for the USD, all else equal, oil in the $20s would not surprise me over the next 1-5 years, especially if we see another deflationary scare and stock market crash and economic collapse in China-Asia.

Thank you, B.C. If the dollar strengthens substantially, as many of us expect in the short-term, then oil would drop in nominal price for U.S. residents and increase for those paying for oil in other currencies.

If deflation and global recession were to take hold--that is, if all the quantitiative easing and borrw-and-spend pump-priming fails to ignite "organic" (real) growth, then the price of oil could be hit with two deflators: the rise of the petro-dollar (USD) and a supply which greatly exceeds falling demand.

I illustrated this "head-fake" drop in prices before the final arrival of Peak Cheap Oil in 2008:

Many other observers are similarly alive to the possibility that oil could drop in nominal dollars to $20/barrel in a deflationary "head-fake" and then rise to $200/barrel once supply fell below demand and the dollar resumed its decline in purchasing power.

Frequent contributor Cheryl A. submitted an excellent interview with oil analyst Stoneleigh at the Automatic Earth blog: Stoneleigh interview Stoneleigh suggested that oil could fall to $20 and then subsequently rise to $500 per barrel once demand exceeds supply.

What we need to keep in mind is the relative value in nominal dollars. If the dollar were to suddenly lose 2/3 of its value against gold and other currencies, oil would suddenly cost $200/barrel to U.S. residents even as it remained constant to those buying oil with other curencies.

Inversely, if the dollar were to strengthen, oil could fall in half when priced in U.S. dollars and skyrocket when priced in other currencies.

The main point is simple: tracking the price of oil in constant (adjusted) dollars illuminates the real cost of oil in purchasing power.

Permanent link: Oil to $20/barrel or $200/barrel?

Apple iPod and iPhone owners: There is an Amazon Kindle app for iPhone which enables you to view the Kindle ebook on your iPod or iPhone--I will try to post links to the app once I locate them.

Survival+ is now available on amazon.com.
Buy the complete Survival+ in print or ebook formats.
Expanded free eBook now available: HTML: Survival+: Structuring Prosperity for Yourself and the Nation PDF version (85,300 words, 136 pages): Survival+)

You can also find my work on AOL's Daily Finance and Seeking Alpha.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Susan M. ($5/month), for your exceedingly generous subscription to this site. I am greatly honored by your support and readership.

The Complete Survival+ is Now Available

noreply@blogger.com (Charles Hugh Smith) — Tue, 03 Nov 2009 17:31:00 +0000

After a year of work, the complete Survival+ book is finally available. The free abridged version has also been substantially expanded.

After a year of insane effort, the complete Survival+: Structuring Prosperity for Yourself and the Nation is available in print, Kindle and ebook formats.

But wait: there's more!

The greatly expanded (85,300 words, 141 pages) free eBook is also now available in HTML Survival+ or PDF version: Survival+ (PDF))

Although a respected small publisher wanted the book for Fall 2010, I could not wait an entire year to distribute the book, so I published it through amazon.com's publishing arm, createspace.com for $19.95 and have also made it available as a Kindle ebook or Mobipocket ebook for $11.95.

The book will be available through amazon.com by November 15; until then, I have arranged a $4 discount for anyone who wishes to order it through createspace.com.

Instructions to order the print edition or ebook are available on the main Survival+ page.

Writing such a comprehensive book is capitalism in the purest form: a substantial investment is risked with no guaranteed return. Over 30,000 copies of the free version have been downloaded, and I encourage everyone who glanced at the first free edition to download the new enlarged free edition, which at 85,000 words is a full book in itself. (The complete book with "solutions" is 140,000 words.)

In the HTML version I added a table of contents with links so you can navigate to each chapter, and I added a "further reading" list of over 60 referenced titles to both the HTML and PDF versions.

I would be honored if you sent a link or copy of the free version to others who might be interested in not just surviving but prospering during the next 20 years of turmoil and transition.

As I have discussed with Richard Metzger of Dangerous Minds, all media is now expected to be free. Alas, I am a self-employed creator who does not draw a paycheck from academia, a think tank, the government or a corporation, and the $6 royalty I receive from the print edition and the $4 royalty I receive from the Kindle or Mobipocket ebook editions are an important exchange of value and recognition of the time, effort and experience which was required to put such a comprehensive overview into "only" 140,000 words.

Thus I feel mixed emotions about this day that I have labored toward unceasingly for more than a year; the necessity to awaken at 5 a.m. to create the time needed, the email unanswered, the update to "What's for Dinner at Your House?" languishing undone and a hundred other tradeoffs made to complete the book.

I am honored by the 30,000 free copies which are perhaps winding their way into the collective awareness that the status quo is fundamentally doomed and we will have to come up with new understandings and new structures. Survival+ was written to further that discussion.

As I wrote in the introduction:

My goal is to provide an integrated understanding of why the devolution and insolvency of the U.S. economy is not just a possibility but an inevitability. But rather than feel the despair experienced by the status quo at this prospect, I am energized by a new understanding of prosperity and security based on the founding principles of our nation. This understanding is beyond the tired boundaries of "liberal" and "conservative" or indeed, of any ideological labels.
Much of this analysis might be familiar to you, or it might be entirely alien. In either case, I hope to change your understanding of our nation and our world's potential for sustainable prosperity.
I do not claim to provide solutions or answers per se, but I do present a framework which arises from this analysis like water from a spring. If this book furthers our collective discussion on the coming transformation, I will consider it a success

Thank you, readers, for teaching me so much that I was able to writeSurvival+. I am proud of the work and hope you find it valuable.

I have ordered my first shipment, and will send a signed copy to all subscribers and any readers who were kind enough to donate $40 or more to the site who would like a copy.

I want to write a bit about oil/fossil fuels the next few days so stay tuned....

Permanent link: The Complete Survival+ is Now Available

You can also find my work on AOL's Daily Finance and Seeking Alpha.

Expanded free eBook now available: HTML: Survival+: Structuring Prosperity for Yourself and the Nation PDF version (85,300 words, 136 pages): Survival+)

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Gene B. ($5/month), for your extremely generous subscription to this site. I am greatly honored by your support and readership.

The Empire Strikes Back

noreply@blogger.com (Charles Hugh Smith) — Mon, 02 Nov 2009 14:33:00 +0000

On Oct. 26 I called for a decline in the stock market and a rise in the U.S. dollar. By random happenstance, both occurred. Now I expect the Empire to Strike Back for at least a week or two.

By pure coincidence my call last Monday for a rise in the U.S. Dollar and a decline in the stock market corresponded with the reality of the week's market action.

Now I expect The Empire to Strike Back and stocks to recover--at least for awhile. As correspondent J.B. recently observed in a private email, this stock market rally from the March 6 lows is about the only accomplishment the Obama Administration can claim.

(Saving 640,239.67 jobs--Mertle G. in Houston got hired back at 2/3 time--is not much of an accomplishment when you've thrown hundreds of billions of dollars into every nook and cranny of the U.S. economy--an economy which still has almost 130 million jobs.)

Thus we can anticipate the Empire will defend its "accomplishment," as will all the other central banks and governments.

One key thread in Survival+ is an understanding of feedback loops. To expect the U.S. stock market to melt down in a semi-crash is to ignore the mighty feedbacks resisting such a collapse.

Sentiment should worry Bears (those anticipating a prolonged downturn).Suddenly even the cheerleading MSM and financial media is filled with stories of anxiety and caution--the settings not for decline but for a rally.

As we see below, the "fear index" VIX has skyrocketed. It's as if "everyone" now expects the long-awaited "correction/meltdown" to commence. So with everyone lurching to the short side of the boat, will the market reward all those punters with more decline? More likely it will rise up and severely punish those who bet against the Empire.

I continue to see last Monday's reversal as a harbinger of a trend change. I do suspect a bearish market is taking shape, and the VIX chart does suggest a slow trend change is taking place (rising indicators).

But short-term, the breach of the upper Bollinger band usually means the market reached a panic peak--a buy signal.

This suggests market players are skittish and ready to sell at the slightest whiff of a downturn--just the sort of market which sets up a massive short-covering rally once the panic subsides.

A trending Bear market reveals itself not in panic but in complacency, and a sharp spike in the VIX is anything but complacency. Hence my skepticism that Bears will be rewarded here with a crash, as many Bearish commentators are predicting. Maybe--but it's rarely that easy: just jump on the bandwagon and makes millions.

This rally continues to be the most hated rally in history, and thus we might ask what would thwart the greatest number of expectations: a widely expected drop or a sharp reversal to previous highs or even new highs?

I am also skeptical of a sudden plummet because markets rarely head up or down in straight lines. Thus probabilities favor a re-test of recent highs, a marginal new high or some approximation of a double top.

Just about every analyst typing out commentary has noted the strong technical pull of 10,300 for the Dow Jones Industrials (DJIA) and 1121 for the S&P 500. A good case can be made that the Dow should rise up to 10,700, as that is the 50% retrace of the entire Bull market from the 2002 lows.

In other words, it would be "normal" from a purely technical view for the Dow to climb another 1,000 points here and at least touch 10,700 before turning down. The fact that the number of voices calling this likely has fallen to near-zero is all the more reason to expect one more thrust higher to decimate the itchy-trigger finger Bears and sustain the illusion that the Empire has succeeded in restarting global growth.

Let's take a look at the Dow Jones Industrials:

Even as an amateur observer who sensed a trend change last Monday, I have to confess there is only one element of weakness in this chart: the declining MACD is divergent from the rising price trend. Eventually, this divergence will be resolved, but such resolutions can be leisurely indeed.

The rest of the chart remains bullish. For the chart to turn Bearish, price would have to close repeatedly under the 50-day MA, attempt to regain a bullish position above the line and fail conclusively. Until that occurs, punters should be wary of the Empire(s) defending their beloved global rally. For they have precious little else to feed the view that the global economy is actually on the mend rather than weakening beneath the phony facade created by unprecendented governmental borrow-and-spend stimulus.

THIS IS NOT INVESTMENT ADVICE, OR ADVICE ON ANYTHING. Please read the HUGE GIANT BIG FAT DISCLAIMER below. These are the freeely offered mumblings of a rank amateur, period. By way of disclosure, I sold my short positions and went long via DIA calls on Friday. My timing wasn't perfect but I don't aim for perfection, just an account that is in the green rather than in the red.

Permanent link: The Empire Strikes Back

You can also find my work on AOL's Daily Finance and Seeking Alpha.

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

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When the Savior State Becomes the Enemy of the People

noreply@blogger.com (Charles Hugh Smith) — Fri, 30 Oct 2009 16:17:00 +0000

People want the Savior State to pay for their healthcare, retirement, education, housing, etc., even as they fear the unlimited power and funding they have granted their government. You can't have it both ways.

Correspondent Mark A. sent in this report on the over-reach of government and the potential for abuse of power.

Caught your stories recently about extortionate fines and so on. Last night I ran into this story Police crush sex offender's car; warn of moreabout a Denver ordinance that permits the city to sue and confiscate property used in the commission of various crimes (modelled after heinous drug laws affirmed by the Supreme Court).
It struck me as outrageous on multiple levels, not least the entrapment aspect and sex-crime hysteria (others may disagree). Yourself and Jim Kunstler have pondered the devolution of society as money becomes scarcer, foreseeing a breakdown of enforcement ability.
Me, I think we underestimate the potential for the development of an increasingly rigid authoritarian (if nominally "democratic") regime as the government increases its relative share of resources and aims to preserve "order" as well as income as people become more stressed. Certainly all the instruments are in place - legal, technological, etc. Usurping revenue is one aspect of this progression, but arrogating authority is another more frightening one. Never trust the State (isn't that what the Founders advised?) Just a thought.

Here is an excerpt from the story:

The unit was created by an ordinance in 1994 and targets things described as: "Any parcel of real property, personal property, or motor vehicle on or in which any of the following illegal activity occurs, or which is used to commit, conduct, promote, facilitate, or aid the commission of or flight from any of the following activities."
Those activities include 22 offenses, which range from drug or weapons possession, to repeat traffic offenders and sex offenders. (CHS: you guys with mutilple traffic tickets: you are dangerous beyond belief! We're targeting you for complete destruction of your assets!)
Anyone charged with those crimes could have their cars crushed or property seized, as part of the law.
Sometimes the seized property is a building or a business.

The danger of political activities being lumped in with criminal activity is higher than most complacent Americans believe. Nobody will defend a sex offender's rights, of course--but how about when tax resistance becomes a "crime"? (It already is, of course.) It's also a "crime" to resist an illegal war, too.

It's easy to be naive about the essentially unlimited powers of the State. Most people believe that only "bad people" get caught by the government trawler, but it isn't quite that simple. If you or those who agree with you threaten the State's Imperial ambitions, tax collection or Power-Elite supported agenda, then you may be targeted. I can say that it "can happen here" because it's already happened here.

I was with a friend when the FBI swooped in to arrest him for political crimes against the State, i.e. refusing to support an illegal (undeclared) war. At the time, the FBI has some 10,000 agents tasked with suppressing or disrupting the antiwar movement by whatever means were deemed necessary. Meanwhile, the agency's anti-Mob (organized crime) unit was reduced to minimal staffing. When the State feels its Imperial agenda threatened, then run-of-the-mill criminality gets ignored and the full resources of the State are turned on political threats to the status quo.

Having been called into the FBI office myself for grilling (after being threatened along the "we know where you live" line), I can say from experience that the boundaries which are supposed to protect our rights only exist if you can afford high-powered legal representation and if you are powerful enough to raise a stink in the "right circles."

Citizens with nothing to lose and no stake in maintaining the status quo are dangerous to the State (and thus to the Power Elite which has captured the State's lawmaking and enforcement arms), and so the State's first line of defense is to become a Savior State which showers entitlements as a way of providing voters with a stake in the system.

The second line of defense is to become a repressive Police State with an active secret intelligence program against domestic protest (as occurred in the late 1960s-early 1970s with domestic C.I.A. spying and COINTELPRO, the FBI's secret campaign to infiltrate, undermine, marginalize and/or subvert the antiwar movement).

These programs employed illegal entry ("black bag jobs") and surveillance, extralegal force and violence (creating and funding extremist front groups to commit the violence at arms distance from the Federal government), and psychological warfare ("dirty tricks," harassment, misinformation, setting up pseudo-movements run by government agents, threaten activists' parents landlords, employers, etc.)

The 1976 Church Committee formed to investigate the domestic intelligence campaigns concluded:

"Many of the techniques used would be intolerable in a democratic society even if all of the targets had been involved in violent activity, but COINTELPRO went far beyond that...the Bureau conducted a sophisticated vigilante operation aimed squarely at preventing the exercise of First Amendment rights of speech and association."

Anyone who doesn't believe their government is capable of Police State repression and subversion of First Amendment rights should research COINTELPRO more fully. While you might have disagreed with the groups subverted in 1969, the line between "those hippie radicals" in 1969 and "us Tea Party tax protesters" in 2009 is thin to vanishing.

Nothing will be more threatening to the State and status quo than tax resistance/rebellion and former insiders (those whose belief in the system has faded) turning into whistleblowers on the web.

Here is one source text: War at Home: Covert action against U.S. activists and what we can do about it.

Put simply: the State holds all the hammers, and you know what happens to raised nails.

Few seem to grasp the connection between an all-powerful Savior State and an all-powerful repressive State. In granting the power to become a Savior State then you also grant it the power to be a repressive regime or corrupt kleptocracy which openly serves an Elite and is accessible only via bribes/political donations (take your pick).

Correspondent Doug K. drew the line connecting the Savior State and control very succinctly:

It has become glaringly evident that local "law enforcement" targets those forced to endure visible embarrassment of hardship. Our repeated "contributions to the public good", made to atone for such grievous offenses as economic misfortune, only serves to perpetuate this relationship.
Yet, even more outrageous (to me) than such abuses of authority, is the quiet public acceptance. The pervasive public attitude being; "As long as they hassle you they'll leave me alone", or " As long as you have to pay I get to keep my money". If such self absorption isn't proof of successful public psychological manipulation through propaganda (did you watch "Century of the Self"?), then what is? Deeply entrenched disregard, occasionally including open displays of contempt, for those forced to endure hardship, sure seems far more manufactured than natural.
Beyond the "social proof" type of encouragement to disregard the less fortunate, the propaganda pushes happy pills. No less than a third of the people in this area have been willingly chemically lobotomized, in part because that has become a de-facto prerequisite for acceptance into the "social safety net". An overlapping fourth of the neighbors frequently "advertise" they're well equipped with high powered automatic weapons.
Both groups "get a pass" from local law enforcement on any misdemeanor, unless it's related to "prosecutorial money making" (war on drugs), or something that excites the prosecutor's prurient interests (seriously!). Having endured multiple instances of vandalism and animal mutilation for the amusement of the happy pill crowd, this is quite dispiriting.
Speaking of the social safety net: What a sham! I've seen plenty of people who admittedly(!) cause most of their own problems showered with assistance while those who recognize the causeof their hardship is no fault of their own don't ever qualify for anywhere near the same level of help, if any at all.
I don't know how the social safety net truly operates in other places (each county is this state has their own semi autonomous office), but most of the rural areas in this state function/ practice the same way as the local office. Anybody in this area not stressed out enough to demand a prescription for chemical lobotomy isn't stressed enough to need assistance. Money (need) has nothing to do with it.
The people I know who have "given in" to the demands of "safety net" inclusion appear to be doing better than they were when gainfully employed. A significant fraction seem to have more time and more money to burn now that their obligations are being taken care of. One person I know has leveraged their officially sanctioned "misfortune" into what appeared to be a legalized fraud, then bought an RV and is now out touring the country!
Taken together, all this (4 preceding paragraphs) appears to be evidence of a deliberate intentional effort to make sure that if (when?) the villagers ever do pick up torches and pitchforks they'll turn on each other instead of marching toward the castle.
Local PTB aren't just extracting funds from the peons. It was recently revealed that the bread and butter of one local "economic success story" (as reported in a number of local and regional publications) was profits from illegal drugs (pot growing operation). I've heard from several members of law enforcement --after they turn off their pocket recorders-- that several other well-to-do "pillars of the community" are involved in worse (meth).
The only difference being that the pot grower didn't share his good fortune with the right people, while the other names always show up on published lists of contributors to the local elected officials. If you're doing well in this community, and you're not making some sort of "contributions to the public good", local authorities will be scrutinizing your every move.
What is required to qualify as "economic success" appears to be entirely dependant on at least one of two things, either dumb luck (opportunity) or some sort of "crookedness". I clearly don't have the former and the "right people" aren't in any way obligated to permit the latter. Money really is like rain, and for a lot of people this is a severe drought. Doesn't matter what kind of rain dance you do, let alone how hard or long you keep dancing. All you can really do is keep your buckets handy. Unfortunately there hasn't been a cloud in the sky for several years.

Correspondent J.P.B. submitted this comment on the use of surveillance for, um, "upholding the law"--or is it just another violation of our rights for the purposes of extortion? Welcome to a State kleptocracy armed with high-tech gadgetry:

RE: "Upholding the Law" or Simply Theft by Other Means?:
I have been warning folks to be on the lookout for this for the past two years. Now I find out that the Franklin county Sheriffs have been testing, for 2 years, cameras that read license plates as they drive by. They then run a search on the plate to see if there are any outstanding warrants, etc. Funny how they rolled this out and did not really publicize it. I find it creepy.
I wondered how I got pulled over for an expired registration (I had the new one on my seat as I was heading to the store to get new screws for the license plate. I received no ticket) It puzzled me for the past two years how an officer parked on the side of the road was able to see my plate sticker as I drove past at 45 - 50 mph. Now I know how! Sneaky. They are desperate and will stop at nothing. Nothing! Rules, rule of law, pfffft. I have been saying that for the past few years also. They keep changing the rules as they go along to suit themsleves and their oligarchs.

You can't grant the Central State powers to be a Savior State without also granting it the power to become a repressive regime that is nominally "democratic" even as the levers of actual power are operated by various Power Elites.

I would rather jettison the Savior State and be poor rather than live in a kleptocracy run for the benefit of the State and Power Elites partnership.

Since the Savior State is doomed to insolvency, other arrangements will have to be made in any event.

Thank you, Mark A., Doug K. and J.P.B. for your commentaries.

Notes: Yesterday's entry Crazymaker: Journal of American Media and Lifestyle(October 29, 2009) was a spoof--sorry I did not make that clear.

As I type the stock market is down handsomely for the week, but I see the potential for a retrace back to the highs (and lows in the dollar) so it behooves us to be careful and book profits whenever possible.

Permanent link: When the Savior State Becomes the Enemy of the People

You can also find my work on AOL's Daily Finance and Seeking Alpha.

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

"Your book is truly a revolutionary act." Kenneth R.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

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Crazymaker: Journal of American Media and Lifestyle

noreply@blogger.com (Charles Hugh Smith) — Thu, 29 Oct 2009 16:12:00 +0000

If you wonder why our society is so schizophrenic--look no further than Crazymaker Journal.

I happened upon a fascinating new online publication: Crazymaker, the Journal of American Media and Lifestyle. I have to say the content set me back on my heels; rarely do I see such an honest portrayal of the carefully mixed messages dished out as "news" and "entertainment".

Gregory Bateson addressed how a cognitive "double bind" could create a schizophrenic state of anxiety and dysfunction.

Their findings indicated that the tangles in communication often diagnosed as schizophrenia are not necessarily result of an organic brain dysfunction. Instead, they found that destructive double binds were a frequent pattern of communication among families of patients, and they proposed that growing up amidst perpetual double binds could lead to learned patterns of confusion in thinking and communication.
Human communication is complex; 90% of it is nonverbal (see also Albert Mehrabian) and context is an essential part of it. Communication consists of the words said, tone of voice, and body language. It also includes how these relate to what has been said in the past; what is not said, but is implied; how these are modified by other nonverbal cues, such as the environment in which it is said, and so forth.
For example, if someone says "I love you", one takes into account who is saying it, their tone of voice and body language, and the context in which it is said. It may be a declaration of passion or a serene reaffirmation, insincere and/or manipulative, an implied demand for a response, a joke, its public or private context may affect its meaning, and so forth.

This is an apt description of the craziness created by media/marketing messages every minute of every hour of every day in the USA. Bake a super-rich cake, and oh my, why are you so fat? Now you have to torture yourself with diets which don't work.

Girls: want to look hot and sexy? if you don't, you're a loathesome loser.

Guys: not ripped with bulging muscles? Too bad--you're a loathesome loser, too. Image and exteriors are everything!

The media profits from selling marketing/adverts. Marketing causes people to become schizophrenic. Adverts' meta-messages often contain mplicit sexual content or domination/submission themes, or the promise of "cures" for everyday living--or for the results of the very behaviors being prompted and encouraged.

Some of the conflicting messages are so painfully obvious, yet consumers are seemingly blind tot he paradox of a magazine thick of with adverts for more products being titled Real Simple:

Sadly, as a result we all have quatro-polar disease. Fortunately, there's a medication cure: zombiestra.

Yes, I am alive to the irony that this site runs adverts selected to match the content of the topic being addressed. Sometimes the "contextualization" is delayed or mismatched, and the irony is heightened.

So I cannot claim some blameless role; I too am part of the machine, accepting money to fund the operation of this site. Should advertising be banned? That might be an ideal for some, but the more realistic solution might be to work on teaching a healthy skepticism based on cui bono--to whose benefit is this advert running? Once that has been established, then the "consumer" is at least grounded in this reality: we are the target/mark of the con.

The other solution is to minimize exposure to the mostpowerful adverts, which are on TV. Thus minimizing exposure to commercial and cable TV is an excellent start to minimizing the impact of media/marketing crazymaking.

Permanent link: Crazymaker: Journal of American Media and Lifestyle

You can also find my work on AOL's Daily Finance and Seeking Alpha.

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

"Your book is truly a revolutionary act." Kenneth R.

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"Upholding the Law" or Simply Theft by Other Means?

noreply@blogger.com (Charles Hugh Smith) — Wed, 28 Oct 2009 14:38:00 +0000

Terrified of openly asking the citizenry to pay higher taxes for their services, local government has sought to boost revenue by raising junk fees and what amounts to "theft by other means"--absurdly costly traffic fines.

Correspondent J.D.G. provides us a detailed window into the tawdry world of local government's abuse of authority and unspoken collusion of law enforcement and judiciary to raise revenues without actually presenting the citizens a choice in the matter.

If we actually lived in a nation with "taxation with representation" rather than a multilayered kleptocracy (the Power Elite and State partnership), the local government would come hat in hand to the taxpayers and lay it all out: here is why we need X millions of dollars to provide the services you want, and all costs are presented in detail.

In the real world, newspapers have to sue to obtain the pension records of public employees. Now some pensioners object to the release of the information as a violation of privacy, and I agree: but the size of the pension and their position should be in the public record (their name need not be listed). To deny the taxpayers access to records of where their taxes have gone based on privacy is a red herring.

Access to pension payments on trial:

In other court papers, Olson pointed out that a public safety employee who retires at 50 could draw as much as $3 million in pension payments during the next 35 years.
In Contra Costa County, Moraga-Orinda Fire Chief Peter Nowicki, draws an annual pension of $241,000 yearly although his top salary was roughly $185,000. The fire district hired Nowicki back as interim chief with a $174,000 contract while drawing the pension.

Let's also dispense with the illusion that a furlough is an actual pay cut. Working 20% less and receiving 20% less pay is not a reduction in pay per hour--it is a reduction in hours worked.

A reduction in pay is working the same number of hours for 20% less salary.

As for pensions--well, the battle has yet to be joined: generational battle brews over gilded-baby boom pensions.

The "raising revenue via the back door" of skyrocketing traffic fines and junk fees is widespread: Speeding, Parking Tickets on Rise as Government Revenue Source.

Let me be clear: this is not a critique of government employees but of the systemic abuse of authority and underhanded methods being used to raise local government revenues without having to seek the approval of the taxpayers. If you read this account, you will see how the charge of "theft by other means" is justified.

On 2-15-2008, as I was traveling north on Lincoln Ave in San Rafael I came to an intersection that was controlled by a traffic light. My speed of travel was between 15-18MPH, I had the green light and three cars including me proceeded to cross the intersection of Lincoln Ave & Paloma Ave.
Important is to note that Lincoln Ave. on the southern side of Paloma Ave. is a four lane road, albeit cars are parked alongside the curb at certain hours of the day.
As I was traversing said junction, a school bus traveling south pulled close to the curb at Paloma & Lincoln and as it came to a stop, flipped on his red flashing lights. Just a few moments after I had crossed the intersection, one Motorcycle Police Officer passed me, at great speed, his red & blue lights lit, and pulled over the car and driver who drove through the intersection five yards ahead of me.
Within moments, I noticed another Motorcycle Police Officer right behind me, blue & red lights flashing, waving me to the side of the street. Having gone without a traffic ticket or any kind of incident for more than ten years, I was surprised.
After the Motorcycle Officer pointed out the school bus with his flashing red lights and a minimum of exchanged words, he gave me a traffic ticket. The officer was very polite and businesslike, little did I know then… this same officer gives tickets for that very offense almost on a daily basis. Passing a school bus with his flashing lights on, according to CA Vehicle Code 22454A, is highly illegal and carries a penalty of $561.00.
Things dragged out, it took about 9 weeks before the motorcycle officer finally entered the violation into the County Clerk’s computer, and shortly after I received my ‘Courtesy Notice’, (Copy enclosed). The Police Officer assured me initially that I would hear from him within 14 days!
After thinking about this ordeal at length, I decided I will contest this infraction. To my great surprise and dismay, I found out, that before receiving a court date I had to stand in long lines at the Court House on two different days, a period of time that not many people can afford to be away from their jobs! Most people resign to the fact that they are wrong; they must pay the fine, and let the county get away with it. Easy money for the County!! My court date was set for 27 August 2008.
As I was waiting at the Civic Center for the court date, I was approached by a woman who apparently overheard my getting a ticket for passing a school bus. After a brief exchange of words, we realized that we suffered the same fate, but on different days. Her infraction occurred after my date, yet her court date was set for 14 July 2008. Her name was Diana, residing in San Rafael, studying to become a court reporter.
The facts:
Both infractions occurred at the intersection of Lincoln & Paloma Ave., Vehicle Code VC 22454A, and both times the citations were given by Motorcycle Officer P., passing a school-bus with flashing signals!
On both occasions, we had a ‘green’ traffic light driving on Lincoln Ave, which definitely is a four-lane road, when you enter Lincoln Ave. at Mission Ave.
On both occasions, Diana and I stood before Judge H. in Dept. #N, my trial was at 10:30 AM, and Diana’s trial I believe started at 2 PM.
On both occasions, traffic was flowing and the school bus driver should not turn on his flashing red lights as long as the traffic signal shows the green light.
Even though the circumstances were identical, and the trials took place just 43 days apart, the outcomes were opposite!
Also note, neither Police Office was visible to me before I crossed the intersection. By law, the Officer needs to be visible!
I have enclosed copies of both ‘Courtesy Notices’ as well as Diana’s trial brief. In it, she explains in great detail why the traffic ticket was given in error! Diana, so she told me, argued in front of Judge H. the reasons why a car may pass by a school bus if the intersection in question is controlled by either a ‘traffic signal’ or a ‘police officer’! Both supersede the authority over any flashing red school bus lights, which should not have been turned on in the first place, at least not as long as traffic was flowing through the intersection while a green traffic light was signaling to do so!
During Diana’s argument Judge H. waved his copy of the vehicle code and stated that he realized Diana had done a lot of research, she knew her stuff and consequently declared her “Not Guilty”! To everybody’s surprise, 43 days later, in front of the same Judge, flanked by Police Officer P., under the exact same circumstances, naming the identical vehicle code, I was found “guilty”!
I have copies of the trials from Judge H.’s court in CD form.
My anger is not about the fact I received a traffic citation, but it bothers me tremendously that a ‘Government Agency’ fleeces its constituents under color of law and color of authority without shame. Most persons in that situation do not have time to return to Marin County Court over several days' time in order to contest the citation; they rather pay the fee and forget about it. That is exactly what Marin County is counting on, thereby extracting and extorting thousands of dollars from unsuspecting and innocent citizens.
I have surveyed and watched the intersection in question over time and on several occasions and have come to learn, that the San Rafael Police Department, with the help of a ‘friendly Judge’, purloin monies from citizens on a regular basis. It would not surprise me, if the amount pocketed by Marin County, using this very technique, surpassed several hundred thousand, if not in excess of a million dollars.
I strongly feel that this Marin County Caper should be investigated, exposed and the County be held accountable!
As I was meeting with Diana before her court date in July, we ran into another woman who had gotten an identical ticket from officer P., went to court and was found guilty by Judge H. She paid the $561 fine.
That is exactly, Ladies & Gentlemen, which proves what Charles writes in his Blog!
Under the flag of Law, under the flag of authority, we are all being fleeced, sometimes very simply, other times more sneaky scams are being used.
I have watched the intersection in question, again and again and have come to the conclusion that the citizens of San Rafael must have paid tremendous amounts to the fine Marin County workers in order to keep their pensions funded.

Thank you, J.D.G., for providing us with a detailed account of how "justice" has been undermined by a rapacious search for higher revenues.

We can conclude that if you have the skills and knowledge of an attorney, you might--might-- escape the collusion of the Judiciary. Or maybe not.

This is by no means the sole story I have received about this perversion of law enforcment and "justice." Please read Criminalizing Poverty For Profit: Local Government's New Debtors Prisons (October 20, 2009) and Readers Comment on "Driving While Poor" (October 23, 2009).

I will end with a story recounted by a friend who was nailed in a speed trap a few years ago while driving across the open spaces of the West (Montana, Wyoming, South Dakota). It was on the weekend, and thus the front office of local law enforcement was closed; no credit card payments for the $400 fine could be accepted. It was cash or jail.

Nowadays, that fine is probably $600--revenue enhancement, heh.

Why do I feel like we're living in a Third World kleptocracy where bribes have to be paid in cash?

My friend happened to be the sort who actually carries a large amount of cash and he barely raised the fine by emptying his pockets.

Now put a person driving an old car who does not carry $400 because they're living on unemployment and they don't even have $400. Now add a couple hundred bucks fine for the defective tailight and another couple hundred dollars for driving without insurance (either keep the electricity on or keep the auto insurance, which would you pay?), and you get a $1,000 total the poor person cannot possibly pay. Indeed, that sum is larger than the value of the vehicle and the cost of a year's insurance combined.

So the fine goes unpaid (adding another $500 fine) and the citizen will get arrested next time an officer notes the broken tailight, and said citizen will effectively be hauled off to debtors' prison by the local government.

If this version of "law enforcement" qualifies as "justice" then we truly have slipped into a Orwellian nightmare of abuse of authority, extortion and theft by other means.

Permanent link: "Upholding the Law" or Simply Theft by Other Means?

You can also find my work on AOL's Daily Finance and Seeking Alpha.

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

"Your book is truly a revolutionary act." Kenneth R.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Linda L. ($20.44), for your kind words and warmly generous donation to this site. I am greatly honored by your support and readership.

Housing: Round Trip to Pre-Bubble Prices Underway

noreply@blogger.com (Charles Hugh Smith) — Tue, 27 Oct 2009 16:06:00 +0000

Popped speculative bubbles tend to retrace to their pre-bubble prices. Housing has already retraced 75% of the bubble--only 25% still to go.

When it comes to post-bubble retraces, the fundamental reasons may not matter as much as the technical case for a full reversion to pre-bubble prices.We all know the fundamental reasons why housing shot up--a credit bubble of epic proportions plus securitization, fraud and low interest rates, to name but a few factors--and why housing has plummeted: foreclosures and inventory are rising, tightening of credit standards by private lenders, etc.

But the ultimate predictor of price is technical: speculative bubbles retrace to their pre-bubble prices, or in many cases even crash below those levels.

Those arguing the fundamentals are always grasping at various straws to support the case that prices won't drop all the way back to pre-bubble levels, and they're always wrong.

Thus when the NASDAQ dot-com bubble topped above 5,000 in 2000 and then sank to 3,000, the fundamental analysts piled on reasons why 3,000 was "the bottom." Indeed, the market did recover the 4,000 level briefly--at which point it reversed and drifted all the way down to 1,100, it's pre-bubble level.

In other words, regardless of the fundamental reasons offered (they're not making any more land, inventory is drying up, foreclosure rates are dropping, etc.), markets tend to fully revert to pre-bubble prices.

Here is a chart of the national median prices which have already reverted to 2002 levels. The future full retrace has been added as a projection:

While there is no absolute way to project the final bottom, many bubbles exhibit a symmetry in their rise and fall. Thus if a bubble took eight years to reach its apex, there is some history to suggest that it will bottom out in roughly the same time span.

That would put the final bottom in the 2013-2014 time frame.

The truly bubblicious markets have already reverted fully 75% of the bubble.Take a look at this chart of median prices in California. Median rices have already dropped to 2001 levels--a staggering 55% decline and a 76% retrace of the entire bubble rise from $180,000 to $600,000.

"Only" $100,000 more to drop for a full reversion to the starting point of $180,000.

There is no law which states that prices have to stop at 1998 levels. Given that this is median price, then high-priced homes tend to keep the median price above the average price. If high-priced homes fall precipitously in value then that would drop the median price substantially.

What is not visible in purely nominal median home prices is the catastrophic retrace of homeowners' equity to levels not seen since the 1970s. What is noteworthy in this chart is that homeowners' equity has already fallen below pre-bubble levels. In other words, the average American homeowner has less equity than before the bubble tripled prices in "hot" areas.

We can surmise that equity extraction via HELOCs (home equity lines of credit) and re-financing might be the cause of this horrific loss of equity: when values shot up, American extracted some $5 trillion in equity. Now that values have dropped, equity for about one-third of homeowners has essentially vanished, along with the ability to borrow money against their homes.

The consequences of a further retrace in valuations to 1998 levels are clearly dire for household wealth. If the median price of housing nationally falls another $40 -$50,000, as will occur in a full reversion, then all that decline will come straight out of remaining equity. In California, the same can be said of the expected $100,000 decline in median valuations.

Some analysts have already gone on record that they expect fully 50% of all homeowners with mortgages to be underwater by 2011--that is, owing more than their equity. Half Of All U.S. Mortgages 'Underwater' By 2011: Deutsche Bank.

As household equity (wealth) declines, the "reverse wealth effect" kicks in with a vengeance. Once we feel poorer, we start acting poorer--even if we don't count on our equity for living expenses.

What does the reverse wealth effect mean in an economy of which 70% is private consumption/consumer spending? It means people do not feel wealthy enough to spend money they don't have, and it means people will not be able or willing to tap whatever equity does remain in their homes.

If we ponder these charts, it's difficult to conclude the consumer can recover his/her free-spending ways and thus difficult to expect the economy to grow on the backs of renewed consumer spending.

Permanent link: Housing: Round Trip to Pre-Bubble Prices Underway

You can also find my work on AOL's Daily Finance and Seeking Alpha.

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

"Your book is truly a revolutionary act." Kenneth R.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Edmund D. ($35), for your extremely generous donation to this site. I am greatly honored by your support and readership.

A Trader's Intuition (with Charts)

noreply@blogger.com (Charles Hugh Smith) — Mon, 26 Oct 2009 13:40:00 +0000

My trader's intuition is flashing warnings that the stock market might drop off a waterfall starting this week.

Let's start by stipulating if I was actually smart then I'd be rich, and I'm not.Second, let's re-read the HUGE GIANT BIG FAT DISCLAIMER below to refresh our awareness that these are the rantings of an amateur observer, nothing more, posted here for free (Yes, you get what you pay for).

A trader's intuition, eh? Fa, fa, fa. That and $2 will get you a cup of coffee.True. So let's run through some charts.

The MSM is pounding us 24/7 with the "fact" that the GDP will print a rise in the third quarter and hence "the recession is over." Uh, do these charts reflect a growing economy?

Here's the good news: this is the sharpest stock market rally on record:

Nice--but how about jobs?

(Both charts courtesy of The Big Picture blog)

How about the household balance sheet?

How about homeowners' equity?

Gee, is negative equity rising? (homeowners "underwater" on their mortgages)

How about credit card delinquencies?

Don't tax receipts reflect the real economy?

But the American consumer never stops spending, right?

And home prices are rising, right? (Use a magnifying glass as necessary to locate rise)

But all those subprimers are out of the system, right? Their houses have been foreclosed and sold to investors euphoric over "catching the bottom in real estate," right?

Well, sort of, except that the "upper crust" market of prime and jumbo loans is deteriorating faster than an ice cube in the Arabian Sea. (See chart.) Foreclosures in the top tier of homes--those in the highest price range--have almost tripled since 2005 as a percentage of all foreclosures.

And which households were the big spenders? Most likely the ones with the biggest, priciest houses.

This chart alone blows the crowded "recession is over" boat right out of the water. If the households with the biggest mortgages and priciest houses are slipping into foreclosure at a rising clip, then precisely who will be spending at a high enough rate to trigger a sustainable rise in private consumption? (Recall that private consumption is 70% of the U.S. economy.)

So what are households doing with whatever cash comes their way? Paying down debt and saving cold, hard cash (See chart.)

Add these charts up and do you get a solid exit from recession based on growth in employment, household assets, household equity and household spending? No, you do not.

Let's face reality: the Federal government borrowed $1.4 trillion in the 2009 fiscal year (fully 10% of the U.S. GDP) and basically blew it supporting the economy in various ways. The Federal Reserve also funneled hundreds of billions of dollars into the banks and financial sector, creating unprecedented liquidity at near-zero rates.

That hasn't done much for lending (which is falling) or Main Street American business but it sure has handed investment banks plenty of free money for various speculations. (See chart 1.)

So where does this leave us? With a stupendous disconnect between the real economy and the high-flying, euphoric stock market. My intuition is the disconnect is about to resolved in favor of reality.

Take a look at a chart of the VIX--the so-called Fear Index. It is reflecting confidence and complacency--the perfect set-up for a market about to fall screaming off a waterfall. Recall that the VIX moves inverse to the market: if the market is rising, then the VIX is low, and if the market is falling, the VIX is rising.

This is a chart of supreme complacency--except for the indecision of those tall candles of the past few days. The VIX has shot up and fallen back in wild gyrations-- just the sort of action which typically marks tops.

How can we square this swaggering confidence in the stock market's relative safety with the rapidly crumbling real economy?

We can't.

When I worked in the back office of a small quant shop our clients were mutual fund managers--smart guys and gals. Does anyone actually think the smart players believe the Fox news-CNBC shills that the economy is fine now, so buy buy buy? Of course not. They're watching for any weakness to dump. The really smart ones have already hedged or fanned out of their longs. But many are waiting until the party ends, confident that there will be some warning bell that only they will hear.

But it might not work out that way. Perhaps the crowded room which will rise in unison and rush for the exit when the alarm sounds. This feels like the week the crowd rises and suddenly realizes there are thousands of traders and managers all heading for the same little exit. This is intuition, not analysis.

So by way of disclosure: I own calls on inverse ETFs which rise if the market falls, and I advised my sister to sell Monday morning--sell hard, sell fast, and go to cash. Sell the gold funds, the stock funds, sell it all. That is not advice for you, of course, it is only a disclosure. As I write this at 10 p.m. Sunday evening, the Nikkei index is up and the global markets seem poised to continue their giddy eight-month long party.

Time will tell if that long, deep gash left by reality below the waterline has doomed the ship or not. I'm sensing that it's time to grab a lifeboat and leave the milling crowd of party-goers with the unenviable risk of sinking.

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Simplified Investing (guest essay)

noreply@blogger.com (Charles Hugh Smith) — Sun, 25 Oct 2009 16:28:00 +0000

In response to my suggestion of a rather demanding investment approach, correspondent BOC suggests a simplifed strategy that takes a few hours a year to manage.

Correspondent BOC recently submitted this informed view on simplifying our investment strategy to save time, money and anxiety and earn a consistent return.

After wending my way through Deflation or Inflation: Who Cares?(October 9, 2009) (nice piece of writing as usual), I finished with a distinct sense of ennui. I believe this derived not so much from your distinctly honest style as much as from the destination at which you arrived:
"We all want a simple investment strategy that works in all time frames and all eras-- but no such strategy exists once you understand purchasing power and relative performance/ratios/ pairings."
I am afraid that, for most of your readers (bright as they are), your conclusion might well be summarized as "The situation is not just serious but hopeless as well." Your point on "pairings" is insightful, and well taken by a very few.
However, most people just do not have the time, conceptual framework, and/or analytical skills necessary to assess disparities between the members of such pairs. Indeed, the assessment of the relative merits of just four entities in relative pairings will cause an extension of analysis to 6 ratios, not counting the reciprocals. Beyond that - - well, "the more the messier".
There is indeed a way to simplify a lot of this to where most folks can handle their investments with less stress and limited time. For a base model, I would direct you to the work of the late Harry Browne. There is a title (Fail Safe Investing) at his website (run by his widow, I believe) which presents a greatly simplified, and very helpful view on the matter. It’s $9.75 for an ebook that takes maybe 2 hours max to read. (Disclosure – I get nothing - - zip, zilch, nada, de rien - - for this endorsement.)
I am delighted to do it because his work has saved me untold wasted hours, major anxiety, and untold thousands of hard earned income. I’m the patient in the old Yiddish joke... Doctor: "Are you comfortable?" Patient: "I make a living.") This book must date back to ’89 or so since that is when I discovered it under another title. The link is here:
Fail-Safe Investing
So... I discovered it in ’89 -- a fair question is whether I have used it. "Yes!" From the moment I picked it up... on my portfolio, as well as on my parents’ and in-laws’ for over ten years. Next question - - "Did it perform as advertised?" Affirmative, again. Last question - - "Do you still use it?"
As a basic platform to guide my thinking, yes. As "the" model for detail – no. Browne’s model has afforded me the time and his insights have allowed me the ability to ask the right questions to develop my own model which -- for the last 10 years -- has provided greater comfort and quite reasonable returns though at the cost of weekly involvement. Most people would not want to get involved in my method -- too much math. [I could probably simplify to a 50–page ebook and an Excel sheet ‘robot’ if there was interest though.]
The next set of questions will the expected ones from a sophisticated and skeptical reader base such as yours.
a) "Is this just about budgeting, etc. ?" – No. I (well, we) have not budgeted in years. I set an expectation of how much our growth in net worth is going to be for one year out. Almost magically, spending comes in line to a "sustainable future" orientation. (I think this is because we’re working toward a visible goal rather than just taking what we can get.)
b) "Does this take a lot of time?" – I don’t know… is an hour a year (around January 1) a lot of time to you? (Yep – an hour a year. Maybe three, if a person is not well organized -- or hung over from New Year’s Eve.)
c) "Must be a lot of esoteric stuff I need to study up on, right?" – Ummm, no, that’s a concept that Wall Street has been using an excuse to pick everybody’s pockets all this time. There are only four (4) asset classes that matter for a “passive” investment portfolio – stocks, bonds, cash and gold. If you want to get fancier than that, well...it’s just a lot of wasted effort -- and a whole lot more risk.
d) "What about my real estate as an investment class?" – Real estate is an active business, not the "passive" investment that folks envision for a retirement savings vehicle. For that you will have to get involved in budgeting, cash flows, balance sheets, etc. Specifically, your house is your home – while an asset, you have to live somewhere; it is not part of a retirement portfolio. Same thing is true of your business, if you have one.
And then, of course, the same sophisticated and skeptical readers will inquire as to the downside of such an approach. Well -- here they are as bullet points:
The approach is boring. It just doesn’t have that 'Las Vegas' feel of "action".
It makes you an outcast since it does not allow for following the "next BIG thing." (Well, it does actually, but that is part of a Variable Portfolio – sized to max 10% of the Permanent Portfolio.)
"It’s so easy everybody will be doing it!" – Well, they haven’t for twenty year... and considering the first two bullet points, they’re not likely to start anytime soon. Please remember that the populace (investing public included) "loses their mind quickly as a herd and regains it on an individual basis very slowly." (Wasn’t it Blaise Pascal who noted that mankind’s miseries derived from the inability to sit quietly alone in a room?)
"The approach won’t make me rich." Correct...and neither will any other passive investing approach. But it can keep you more than even and that is significant. There are very few investment approaches out there that allow one to take more out than they put in... including any dividend and/or interest returns.
In the immortal words of the Mogambo Guru, "If you want a hamburger in the future, you need to save the cost of a hamburger today." Earnings come from our occupation and our earnings are being rationalized to the equivalent of a global workforce -- in short, on a purchasing power basis they are headed down. This approach allows one to take advantage of major trends in motion without a lot of taxable events, minimal downside risk and a laughably low time investment.
"I need to see XX% annual return." Understood, and there’s the problem. Most folks do not have an appropriate idea of "expectation" when it comes to their investments. What has Buffet (Warren, not Jimmy) done in terms of performance? I seem to remember about 22% or so on an annualized basis over time -- and let’s remember that he is spending most of his time on company selection, he’s deeply assimilated Graham/Dodd’s work, he has a staff and that he owns a commanding share of most of his holdings over the last 20 years or so. Heck -- if us mere mortals can eke out an even 8% (that your pension manager can’t) - - then we’re stars. And, based upon experience, I believe one will find returns of better than 10% per year over time.
The ultimate in sophistication is the ultimate in simplicity. Be a human being (have a life), not a human "doing" (spend lots of time to make lots of money for what purpose?).
Expect that the ongoing crisis will force a "de-financialization" of the economy – in short, towards a simpler set of investment vehicles for savings that you can accrue.
The defining question for the next 10 years will be "What IS money?" Get ahead of the curve: simplify your thinking, save what you can, and spread your bets. There are no real "gurus" out there who know "what’s best".
I’m in the business of financial forecasting and experienced in the maxim that those " who make a living with a crystal ball often wind up eating ground glass".

Thank you, BOC, for sharing your experience with a simplified "spread your bets" investment strategy.

Permanent link: Simplified Investing (guest essay)

You can also find my work on AOL's Daily Finance and Seeking Alpha.

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

"Your book is truly a revolutionary act." Kenneth R.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Readers Comment on "Driving While Poor"

noreply@blogger.com (Charles Hugh Smith) — Fri, 23 Oct 2009 16:23:00 +0000

The rapacious exploitation of those caught "driving while poor" drew these comments.

Readers responded to Criminalizing Poverty For Profit: Local Government's New Debtors Prisons (October 20, 2009) with insightful experiences and comments. First, correspondent Jeff Ray who submitted the original story, sent in this data point:

Cost of speeding 20 mph over post without a license in Tennessee? $827.00 and a free lunch at lock up if you can’t make bail.

Note from the Peanut Gallery (CHS): Is this fine posted on every speed limit sign, or is it kept a little secret until you get busted? If so, then what disincentive is it? And who came up with $827? Why not $897.23, or $19,783.11? If you're flat broke, $827 and $19,000 are more or less equivalent.

Next up: correspondent A.R. illuminates the fine art of small town speed traps with an example or two from the state of Washington:

Having spent several weeks with friends in the South Puget Sound area and heard numerous stories about rapacious law enforcement agencies in Washington, I was actually relieved to see that the article in the Atlantic Monthly about the new debtor's prison was reported from Seattle. I was certainly outraged and scared to learn that motorists were being treated so aggressively over minor traffic violations in order to replenish state coffers, but I was relieved because it was happening in a state long notorious for rapacious traffic enforcement.
When I was staying in the South Sound, I was told that two municipal police departments in the area were notorious for existing as little more than highway robbery outfits. One was in the city of Roy, a glorified village east of Fort Lewis, and the other was in the city of Steilacoom. Although by some accounts Roy had a more rapacious police force than Steilacoom, my friends and I were much more familiar with Steilacoom because we visited it frequently and because it was hard not to run into people who had been cited by the Steilacoom Police Department.
Steilacoom is a beautiful, charming city perched on a hillside leading down to a ferry dock on the Sound. It was Washington's first territorial capital and is the oldest incorporated city in the state. However, there is no justification for its continued existence as a political entity at its present size. It is too small to expect any efficiencies from a paid police force or from any other paid municipal agency. In a state heavily reliant on sales taxes, Steilacoom has a very small retail base, even relative to its population, so its tax base is constrained.
Common sense about administrative costs or internal discipline would dictate the disbanding of the Steilacoom Police Department in favor of a larger agency with some economies of scale and credible internal affairs protocols. Merging its municipal force with Dupont's would be a start; better yet would be a merger with the Lakewood or Tacoma Police Departments or ceding patrol responsibilities to the Pierce County Sheriff's Office. Steilacoom is not a high-crime area in need of its own dedicated force.
This is especially true because currently the Steilacoom Police Department exists not to keep Steilacoom safe, but to collect revenue from hapless motorists. A friend who was ticketed there said that Steilacoom Traffic Court is a zoo, dedicated less to due process than to expediting the processing of defendants for revenue collection, one whose judges are glad to summarily plead down citations and fine amounts in order to proceed to the next victim. He said that the waiting room was full of defendants.
Bear in mind that this was in a city the size of a large village, off the main state highways, with fairly light traffic on its main streets! But it's not so hard to reel in a full catch when unusually low speed limits are zealously enforced in safe areas and the cops have nothing better to do with their time. The same friend who described the traffic court met a man who was ticketed in Steilacoom for driving too SLOWLY in a 25 mph zone!
This friend posited that the city of Steilacoom and its police force will be left intact out of a sense of historical duty and reverence because no one will dare mess with the first territorial capital of Washington. Such a line of thinking, which many officials in the area probably believe in earnest, is stupid and disastrous. It's stupid because no one need lay a hand on the city's historical buildings, markers and archives in order to disband its current police force pursuant to RICO; based on what I've heard, the Steilacoom Police Department is as worthy as any organization for prosecution as a racket or a corrupt organization.
It's disastrous because sworn police officers and judges are being directed to violate and pervert their oaths of office by engaging in activity tantamount to highway robbery, and because a municipality is potentially being given extra latitude to operate as a criminal racket with the force of law because it is the heir to a venerable political history.
Obviously, the debtor's prison described in the Atlantic Monthly article is a lot worse than anything I've heard of from Steilacoom, but they're both part of an ongoing and apparently worsening problem that Washington's elected officials and voters are not doing enough to resolve. Police officers and judges entrusted with the enforcement of traffic laws are taking highway robbery in the name of public safety to extremes. If Washington state's voters and elected officials are too apathetic or greedy to force reforms, perhaps officials answerable to the other Washington should be engaged. From what I've read about recent federal consent decrees and receiverships governing local police agencies, they're better for the public than the alternative of inaction, and the Steilacoom Police Department may well be corrupt enough to be placed under one.
I'm sure that many people will worry about interference by cumbersome federal officials, and they have valid points, but this is far from the only case where local and state authorities are unwilling to stop making a dangerous mockery of law enforcement. I'm not familiar enough with case law to say for sure, and I hope that there are viable local or state options, but federal intervention may be the only way to compel meaningful reform.

Note from the Peanut Gallery (CHS): So how is this any different from countries like Mexico where underpaid (or unpaid) police extort money via bogus traffic fines and trumped up charges? I see no difference whatsoever, lending more credence to the current Web meme that the U.S. is in essence a banana republic/Third World country riddled with corruption and fraud from the highest levels to the lowest depths of local bureacracy.

Everyone seems to fear the Federal government, mostly with good reason, but as someone who had run-ins with the F.B.I. for nonviolent political "crimes" in the 70s ( i.e. resisting illegal wars that would have revolted the Founding Fathers), I would rather have a Federal court and authority to deal with than a rogue local police department. At least the F.B.I. won't drag you from your car, beat the crap out of you and then charge you with assaulting a police officer.

(As noted below, the Federal agency approach is to hire thugs to do the dirty work.)

I have many sworn officers in my circle of family and friends, and while most officers and PDs are doing their very best in a troubled time with wilding meth freaks and heavily armed drug gangs, rogue PDs get away with a lot because they're protected by the ideal of giving police departments some slack and the "closing of the ranks."

At some point, you need a higher authority to clean out the rogue PDs because the local Powers That Be are incestuous.

That said, the F.B.I. itself went rogue in the 1960s and 70s, completely trampling the Constitutional rights of the citizens via COINTELPRO, the FBI's secret campaign to infiltrate, undermine, marginalize and/or subvert the antiwar movement. (Regardless of whether you supported the war or its supposed goals, the war was illegal from the get-go. And remember what Washington said about "foreign entanglements"?)

"Many of the techniques used would be intolerable in a democratic society even if all of the targets had been involved in violent activity, but COINTELPRO went far beyond that... the Bureau conducted a sophisticated vigilante operation aimed squarely at preventing the exercise of First Amendment rights of speech and association."

Anyone who doesn't believe their government is capable of Police State repression and subversion of First Amendment rights should research COINTELPRO more fully. While you might have disagreed with the groups subverted in 1969, the line between "those radicals" in 1969 and "us tax protesters" in 2009 is thin to vanishing.

Nothing will be more threatening to the State and status quo than tax resistance/rebellion and former insiders (those whose belief in the system has faded) turning into whistleblowers. (End comment from the peanut gallery.)

Correspondent Bruce S. offered a completely different perspective on the entry, noting the car-centric nature of the fines.

I've been familiar with your blog for a couple years. I usually approve of what you say. However, I disagree vehemently with your most recent entry. Of course local government is doing everything it can to increase revenue, by hook or by crook, and will not contemplate reducing payouts, for the reasons you describe. Old news, seen it coming for years.
The thing I OBJECT to is the particular items you chose: everything was associated with automobiles. and seemed to operate on the base assumption that it is every American's god-given right to own and operate an automobile. I think you're missing the forest for the trees here: the very nature of the change sweeping north america, driven as it is by greed, corruption, and falling net energy extraction from fossil fuels, will eliminate the ability of poor people, and then middle class people, to use automobiles.
I am well aware that this country is entirely auto centric. Specifically, we spend our energy resources in this way (approximately):
40% - transportation, which means semi trucks and personal automobiles
40% - everything industrial, corporate, and government
20% - food production and distribution

Now, the evidence is VERY clear that, unless the USA is able to militarily maintain its hegemony, which seems very unlikely, the energy resources available to the USA will decline at a substantial rate each year: perhaps 5% to 15% per year, starting pretty much immediately, depending more on politics and the outcome of brush wars than on Geophysics. When you look at the numbers and figure out WHAT HAS TO GIVE, and IN WHAT ORDER, it becomes VERY clear that the easiest place to trim our energy use is to cut it from (automotive) transportation. One need not be a rocket scientist to conclude that the FIRST group that will lose access to automobile ownership is the poor and homeless, followed by the (vanishing) middle class. This is inevitable.
So, your I found your rant about how local governments are overcharging for driving-related issues to be somewhat disingenius. of COURSE poor people are losing the ability to drive: not only is this inevitable, but it's actually FOR THE BEST. The sooner people experience the pain of having to use non-automotive transport, the sooner they will get angry and demand change. Some people might even start to recognize the foolishness and futility of trying to maintain a 'happy motoring' economic system in a time of declining fossil fuel production.
So, please quit whining about barriers to owning and operating a car for poor people. The sooner they STOP TRYING to operate a car and figure out other ways to do things, the better off they, and all the rest of us, will be. Our auto-centric transport system is clearly GOING TO FAIL - please don't try propping it up, instead encourage it to fail more swiftly, so we can move on to whatever comes next.

Note from the Peanut Gallery (CHS): Bruce's missive made me realize that I'd done a poor job of staking out my objections to the rapacious "driving while poor" fines, and so I emailed him this response:

While I understand your primary point about the problems created by a car-centric economy, I realize I should have been more clear about my main objection to the car-centric fees.
1. These do not relate to the metrics used to levy other taxes such as consumption and income
2. They are arbitrary I.e. unrelated to anything but the greed of local govt
3. They bypass the democratic process by which local govt. should approach the voters/taxpayers with proposals which raise taxes, I.e. taxation with representation.
Having recently visited L.A., I can certainly agree that everyone would be better off without a car, poor and middle-class alike. I happen to live in the S.F. Bay Area where doing without a car is actually do-able due to the subway/bus/trolley system. However the poor person in LA has a much more difficult time without a car.
Is this the policy makers fault or the poor person's? Clearly, it is the policy makers fault. Therefore we have to direct our energies to modify the car-centric urban landscape at the planners and policy makers.
Thank you for writing and contesting my rant. A good solid debate and sharing of ideas is always helpful.

Thank you, Jeff, A.R. and Bruce, for your comments. Given the declining tax revenues at the local level, I expect the issues raised here to only grow in importance and impact. It seems obvious that the exploitation of those caught "driving while poor" is unconscionable and a corrosive example of abuse by local government powers.

Permanent link: Readers Comment on "Driving While Poor"

Check out my article in American Conservative Magazine No Easy Money: The case for raising interest rates.

You can also find my work on AOL's Daily Finance and Seeking Alpha.

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

"Your book is truly a revolutionary act." Kenneth R.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Lee B. ($20), for your longstanding readership and generous donations to this site. I am greatly honored by your support and readership.

Stocks, Inflation, Speculation, Desperation

noreply@blogger.com (Charles Hugh Smith) — Thu, 22 Oct 2009 16:31:00 +0000

The nominal rise in the stock market masks a brutal depreciation of purchasing power.

Frequent contributor Harun I. submitted a chart of the Dow Jones Industrial Average from 1897 to the present. This is of course priced in nominal (not adjusted for inflation) dollars. Curious about what the chart would look like adjusted for inflation, I asked Harun if he could conjure up such a chart, and he kindly produced an inflation-adjusted Dow.

Now before we look at the charts, we should note the many ways both the Dow and the rate of inflation have been massaged (or manipulated); weak stocks are pulled from the Dow 30 and replaced with stronger companies, and inflation has generally been under-reported by tricks such as overweighting "owner's equivalent rent" (some 40% of of the CPI calculation) and other suspect methods of calculation.

Be that as it may, the charts paint an unambiguous picture of a tremendous loss of purchasing power in the stock market as reflected by the Dow 30. We start with the nominal Dow, with a 200-month simple moving average line.

Click on chart for a larger version in a new browser window.

Next up, the Dow adjusted for inflation.

Click on chart for a larger version in a new browser window.

Notice how the inflation-adjusted price actually touched the 1966 high.

Even though stocks traded sideways during the 1967-1982 Bear market, adjusted for inflation the Dow lost a tremendous amount of purchasing power.

The recent nominal high in 2007 is revealed as no more than a double top when adjusted for inflation.

Next, the Dow -gold ratio (the Dow priced in gold).

Click on chart for a larger version in a new browser window.

Priced in gold, the Dow returned to 1987 levels of valuation.

These charts make me wonder if the rampant speculation we see in every layer of the economy isn't just a reflection of (normal) human greed but a reflection of a desperation to catch up/not fall behind. In other words, investing "for the long run" hasn't increased purchasing power as much as nominal prices suggest. Perhaps people sense they're falling behind in actual purchasing value of their money and assets, and as wages have actually dropped for most workers since 1973, then the loss of purchasing power is in effect doubled.

Sensing that they are falling behind, perhaps people are stepping up to the roulette wheel in a desperate bid to catch up and restore the purchasing power of their money and assets.

There is no gambler more desperate than the one who has lost a number of bets. It is not greed driving his betting so much as a desperation to recover what has been lost. Perhaps that is the underlying zeitgeist of the U.S. real estate and financial markets alike.

Permanent link: Stocks, Inflation, Speculation, Desperation

Check out my article in American Conservative Magazine No Easy Money: The case for raising interest rates.

"Your book is truly a revolutionary act." Kenneth R.

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The Gathering Storm in Commercial Real Estate (CRE)

noreply@blogger.com (Charles Hugh Smith) — Wed, 21 Oct 2009 14:04:00 +0000

Commercial real estate is a house a cards about to collapse on multiple fronts for deeply structural reasons.

Correspondent Thomas H.submitted this fascinating story: 'Pop-up' stores are becoming an overnight sensation. (Los Angeles Times) The basic idea is that retailers are not signing 5-year leases anymore--they're signing 20-day leases for 'pop-up' stores which have the lifespan of an insect and low costs for retailers seeking to unload discounted inventory in a hurry.

The model has been well-established with "holiday theme stores"--retail operations which sell goods aimed at a specific holiday such as Halloween for a few weeks prior to the holiday. (Never mind that the Halloween frippery is massively overpriced--doesn't anyone make their own costumes any more?)

The real surprise is major retailers such as The Gap and Toys R Us are using the "pop-up" model:

These quickie retail operations -- known as pop-ups -- are showing up throughout Southern California and around the nation, filling in the gaps at recession-battered shopping centers for a fraction of the regular rents.
Once limited to seasonal shops and dusty liquidation centers, pop-up stores are now being opened by some of the nation's biggest retailers.
It's a trend that could reshape the nation's retail landscape if it continues, diminishing the power of commercial landlords and making it easier for merchants to test new locations and products with little commitment.
Gap Inc. recently opened a pop-up shop on trendy Robertson Boulevard to promote its new premium denim line; celebrities including Halle Berry and Ashlee Simpson-Wentz turned out to the shop's launch party. Toys R Us Inc. is setting up about 80 temporary toy shops nationwide, including several at upscale malls previously unavailable to the chain. J.C. Penney Co. touted its back-to-school offerings through interactive pop-up displays in half a dozen Southern California malls.
The end of the recession, he predicted, would not necessarily bring an end to the model.

Uh, what "end of the recession"? Just in case retailers didn't get the message:Mad as hell, consumers dump credit cards; Balances tumble as fury toward issuers swells.

Credit-card debt dropped the most, falling 13.1%, or $9.91 billion, to $899.41 billion. It was the 11th uninterrupted month of declines, the longest on record. See full story.
With unemployment at a 26-year high of 9.8%, many consumers have no choice but to tighten their belts. But more and more, consumers are closing their own accounts and choosing not to use credit cards because they're just plain angry.
"There's an enormous amount of backlash against the banks," said Dennis Moroney, research director at Tower Group. "It's like in the movie 'Network,' people are saying, 'I'm mad as hell and I'm not going to take it anymore.'"
Credit-card holders are so irritated that 32% of them told Consumer Reports in a recent survey that they have paid off or closed a card in the last 18 months. Half of those who canceled did so because they were peeved by recent actions credit-card issuers took, such as cutting limits, hiking interest rates, jacking up fees or imposing new charges.

At the risk of being tiresome, let's go over the foundation of the U.S. economy once more:

1. Consumer spending is 70% of GDP.

2. Expanding credit and borrowing are the lifeblood of consumer spending.

3. Consumer collateral (housing, income, stock portfolios, etc.) has been gutted, greatly diminishing the foundation of future borrowing.

4. Banks are functionally insolvent and are not lending as they did during the bubble boom.

5. Millions of Baby Boomers have realized that their current assets and savings enable a retirement in:
A. a sturdy cardboard box
B. a camper/20-year old RV on "The Slabs" (or equivalent)
C. Aunt Matilda's house if Auntie has the good grace to croak off fairly soon.

Thus this is no "dip in consumer spending"--it is a generational sea change with no end in sight.

Not only are consumers increasingly unable to borrow or unwilling to do so, but much of the overbuilt retail sector sells items which are superfluous (and that's the polite description). I have prepared a grpahic depiction of the earthier truth:

It's not just retail that is doomed, of course; the hotel/hospitality sector is massively overbuilt and overleveraged. Everyone, it seemed, was chasing the "luxury" and business traveler. Now that the cold wind of reality is rising, owners are discovering that the hotel they bought for $250 million with a $230 million mortgage is worth about half that amount--at best: Hawaii Hotels Face Fewer Visitors, More Debt.

As for commercial office space--ponder this data point. It was recently announced that Internet darling Twitter leased more space in San Francisco as it was expanding its 30-person staff to maybe as high as--gasp!--100.

Let's follow that to its conclusion: the "hot headline" tech companies have vanishingly few employees, and a significant majority of them can work partly from home or from some other remote location. They don't need a cubicle or a conference room or an office at all.

Even mighty Google employees about 16,000 people globally--perhaps a tenth of a major industrial company like GE and not much more than the student populace of a moderate-sized state university.

And many of these people can work remotely as well. The truth is you don't need huge office towers for the new economy.

As for smaller space--please see End of Work, End of Affluence III: The Rise of Informal Businesses (December 10, 2008) and Trends for 2009: The Rise of Informal Work (December 30, 2008). Thousands of small businesses can be operated out of home offices and garages, and the work done at clients/customers' homes.

We can summarize the commercial real estate market graphically:

Permanent link: The Gathering Storm in Commercial Real Estate (CRE)

Check out my article in American Conservative Magazine No Easy Money: The case for raising interest rates.

"Your book is truly a revolutionary act." Kenneth R.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Mary S. ($20), for your exceedingly generous donation to this site. I am greatly honored by your support and readership.

Criminalizing Poverty For Profit: Local Government's New Debtors Prisons

noreply@blogger.com (Charles Hugh Smith) — Tue, 20 Oct 2009 15:15:00 +0000

Local government is desperate for new funding but doesn't dare tap the wealthy. So they're busily criminalizing poverty and filling new Debtor's prisons.

Correspondent Jeff Ray sent in this story Milking the Poor: One Family's Fall Into Homelessness (The Atlantic) which is representative of the trend in local government to criminalize poverty for its own enrichment.

Here's the deal. Local government has grown fat in a decade of gargantuan capital gains and real rising real estate taxes. Employees pulling down over $100,000 each are legion, as are public retirees pulling down over $100,000 a year in pension payments. Local government has added 15% more employees even as population grew by a meager 3%. (The numbers may vary in your area but the percentages won't.)

Now the seven fat years are over and local government is not liking the seven lean years. Now that housing has plummeted, so have the tax rolls; capital gains have dried up and even sales tax revenues are crashing. Despite the usual bleatings of hope, the chances of tax revenues recovering are slightly lower than the proverbial snowball's chance of remaining frozen in Heck.

Foreclosures: 'Worst three months of all time' Despite signs of broader economic recovery, number of foreclosure filings hit a record high in the third quarter - a sign the plague is still spreading.

Meanwhile, a perfect storm is gutting public pension funds. More Pain for State's Taxpayers, Cities: CALPERS losses $50B. In order for the State amd local governments of California to meet their future pension obligations (paid by CALPERS, the massive public pension fund), they need to kick in hundreds of millions of dollars more in coming years, even as their revenues are falling.

The conclusion that the medical and pension benefits which were promised in the fat years are no longer payable is anathema to public unions and managerial staff alike, and so the machinery of local government has geared up to stripmine the citizens like a giant trawler stripmines the sea: parking tickets have been jacked up to $60 or more, traffic violations are in the hundreds of dollars, speed traps abound, and as noted in the top story, fees for "crimes" like driving without auto insurance now cost more than the insurance itself.

And gosh forbid if you don't pay on time--the penalties double the original fine and then go up from there.

Is there anything more pernicious, malicious and immoral that this criminalization of poverty to engorge the coffers of local government? If John Q. Citizen defaults on his credit card, he might have to endure harrassing phone calls from bill collectors. But worst case, he can unplug his phone or cancel that number and get another phone number. Fortunately, the bank cannot have him imprisoned (yet).

But local government isn't quite as kind and gentle as the bankers. Mess with their revenues (i.e. don't pay the hefty fines they levy) and they'll haul your carcass into court and then into jail (can't make bail? Too bad. You're a full-blown criminal now.)

Exactly what is the difference between racking up $1,000 in fines off an innocuous violation and being imprisoned for lack of payment and a 19th century-era Debtors prison?

Isn't this part of the reason why the Parisian mobs tore down the Bastille?

Does this make any sense at all, arresting people who can't pay their nonsensically stupendous fines and penalties just so government employees don't have to take a cut in pay and benefits? When did a ticket go from $50 to $300 and up? And why? Does anyone think the cost leaped up "for the public good"?

Is getting nailed for a ticket you can't pay really a deterrent to being too poor to keep your auto insurance current?

Let's follow this all the way to the end. Now that John Q. Citizen is in jail because he was nabbed driving without insurance and a big fat fine is outstanding, aren't the taxpayers throwing away $50,000 to $100,000 a year to process his tortured journey through the Kafkaesque court and jail system with those other "dangerous criminals"?

Hey, the war-on-drugs/prison/gulag pays very well, thank you, and filling cells with Mr. Citizen is just grist for the mill.

Now when Mr. Citizen is released (darn it, we can't get blood from a turnip!), his car has been impounded and he owes the towing yard $1,000 which he doesn't have. So he no longer has a car to get to work, or even drive to an interview.

OK, so maybe he was irresponsible in not setting aside enough money for the car insurance. Is that now a criminal offense? Is this the best use of police officers, judges, jails and the "justice" system? Is anyone being deterred by the ruthless criminalization of poverty? Please make the case for that, local politicos and bureaucrats.

Great work, local government. You've not only stolen the citizen's last few dollars, you've also deprived him of his employment opportunities and livelihood.

Here's a thought: you need more tax revenue? Then make the case to the citizens at the ballot box to pay more. Prove you're not squandering the tax money you're already getting by the boatload. Show us how you're going to spend our money as carefully as we do.

If you really want to stripmine somebody's cash assets, why not start with your local Wal-Mart? I can guarantee you they won't leave town when you enact a new ordinance taxing all retail establishments of 50,000 square feet or more.

Or impose a tax on all homes worth more than triple the median price in your zip code. You want to nail somebody with higher taxes? Then go after the top 5% who still have assets. Don't trawl the streets for the folks who can least afford your rapacious imposition of authority.

Bankers aren't the only rapacious greedheads in this nation. Look no farther than city hall, the county building and the State capitol. Just hope it isn't you who runs low on cash and gets nailed with that $395 ticket which soon morphs into $695 and an arrest warrant.

You can't blame local government avarice on Washington or the bankers. All this greed is homegrown, local and entirely unnecessary. As it stands now, 10% or maybe even 20% of the citizenry will soon have outstanding arrest warrants for what amounts to local government Debtors Prison.

Come November 2010, we can only pray that the citizenry "takes care of business" at the ballot box, and all the incumbent politicos who approved this evil criminalization of poverty get tossed out en masse, regardless of party affiliation.

Permanent link: Criminalizing Poverty For Profit: Local Government's New Debtors Prisons

Check out my article in American Conservative Magazine No Easy Money: The case for raising interest rates.

"Your book is truly a revolutionary act." Kenneth R.

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When Giants Fall: the Erosion of U.S. Wealth and Influence

noreply@blogger.com (Charles Hugh Smith) — Mon, 19 Oct 2009 13:51:00 +0000

Unlimited borrowing and falling assets do not make for a robust global empire.

Analyst/author Michael Panzner effectively predicted the financial implosion which occurred in September 2008 in his prescient March 2007 book Financial Armageddon: Protecting Your Future from Four Impending Catastrophes.

His latest work, When Giants Fall: An Economic Roadmap for the End of the American Era, ties together many of the themes I have covered recently: the structural imbalances in the U.S. economy and Federal spending, the devaluation of the dollar and other fiat currencies (when priced in gold), and the financial burdens and questionable benefits of the American Empire (maintaining bases in dozens of nations, executing two hot wars thousands of miles away from the homeland, etc.)

Given Panzner's track record and the care with which he has sourced his reporting, we would do well to study When Giants Fall with care.

The basic premise--Imperial over-reach--will be familiar to readers of The Rise and Fall of the Great Powers by Paul Kennedy and Nemesis: The Last Days of the American Republic by Chalmers Johnson. But Panzner brings a financial perspective and present-day media sourcing to the topic which is of special interest to those of us who believe geopolitics and Imperial decline can both be best understood by "following the money."

Oftwominds.com readers know that I am short-term bullish on the U.S. dollar--that it is due for a reversal due to near-universal belief in its imminent collapse. While its long-term prospects are indeed poor (please see The Dollar Crisis: Causes, Consequences, Cures), we should also note that same can be said of all other fiat currencies, all of which have lost value in the past decade when priced in gold.

All of which is to say that we have to careful not to place too much of the causal weight of America's decline from global preeminence on the dollar's long slide.

Panzner makes a comprehensive case for U.S. decline across multiple fronts.He notes the supreme complacency of the American populace (always a perfect setup for terminal decline) and the rise of great competitors in east Asia. In other words, in today's world, treading water results in relative loss of prestige and power as other nations earn a larger share of global growth, wealth and income.

Perhaps most telling, Panzner documents the U.S. as a "nation bereft of fiscal discipline," having borrowed 340% of the U.S. GDP, exceeding the Great Depression high of 265%. The causes of waning influence are many: a faltering currency, over-stretched military commitments, a perception of the U.S. as a source of instability rather than stability (President Obama's Peace Prize notwithstanding) and the aforementioned financial profligacy and consequent dependence on foreign funding of our rising debt.

He also touches on some of the over-arching global trends I discussed in Survival+--the demographic consequences of an ageing populace, the end of cheap, abundant commodities, and the geopolitical tensions this mismatch of demand and supply creates.

Last but not least, When Giants Fall addresses the pernicious effects of globalization and the resulting backlash (protectionism, etc.) which is leading to what he terms "deglobalization."

These topics will be familiar to readers of Globalization and Its Discontents by Joseph Stiglitz, but Panzner discusses the tensions brought on by globalization within the context of waning U.S. power--"hard" (military and financial) and "soft" (culture and values).

While he grants the coming devolution of the present world order will diminish all players, Panzner makes a case for the U.S. to be the primary loser. As for where to put one's money, he suggests commodities will be the place to be, not as a daytrade but as the major trend to ride in a period of mismatched supply and demand. Given the rising demand and falling availability, that is hard to argue with, and I would only add the caveat that buying commodities at tops and selling them at bottoms can erode wealth just as quickly as buying stocks at the top (like now, for instance) and selling them at the low.

I have to confess that Mr. Panzner and I share a similar view of the best approach for individuals and households to cope with the coming disruption of the old order: cutting back on a reliance on (furiously outsourcing) corporate America for jobs in favor of self-reliance and a broader spectrum of income, community and sources of prosperity.

That is speculative, of course, and only time will tell. But whether you agree with this conclusion or not, you will find the book's 50-page bibliography of sources interesting.

It seems to me the drop in U.S. real wealth--that our debts are rising even as the value of our assets are falling--will inevitably detract from the nation's influence, power and prestige. While we can debate the consequences and speed of this decline, that there will be consequences is beyond debate.

As always when I post Amazon.com links to books: I find the reader reviews worth a look (though they are a mixed bag, like the entire Web itself). You may be able to borrow a copy from your local library as well.

Here are a few other related titles on empire and globalization which may be of interest:

The Prize: The Epic Quest for Oil, Money & Power by Daniel Yergin

Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships

The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities

End of the Line: The Rise and Coming Fall of the Global Corporation

Permanent link: When Giants Fall: the Erosion of U.S. Wealth and Influence

Check out my article in American Conservative Magazine No Easy Money: The case for raising interest rates.

"Your book is truly a revolutionary act." Kenneth R.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, David H. ($22.50), for your extremely generous donation to this site. I am greatly honored by your support and readership.

Why We'll See Stimulus 2.0, 3.0, 4.0, 5.0 (and so on, until The Great Implosion)

noreply@blogger.com (Charles Hugh Smith) — Fri, 16 Oct 2009 18:03:00 +0000

Funny things happen when the government borrows trillions and transfers a rising chunk of it to individuals: GDP goes up and so does the dependence on government borrowing.

Frequent contributor B.C. submitted a fascinating and deeply disturbing chart which depicts government transfers skyrocketing to 22% of personal consumption and 20% of personal income.

Click on chart for full-sized chart in a new browser window.

That means that one out of every five dollars in personal income now comes from the Federal government.

Note that this is fully triple the 7% rate at the end of the great postwar Bull market (1967). Also note that the percentage of income has leaped from 16% before the recession (2007) to 20% in 2009--a 25% increase in only two years.

The percentage of personal income received from the Federal government stayed within a fairly narrow band of 13% to 16% for roughly 30 years--from the 1975 recession to 2004.

Clearly, the government has countered the drop in personal incomes resulting from the current Great Recession by borrowing and transferring unprecedented amounts of cash to its citizenry.

The generally accepted idea, of course, is this is a temporary move to "tide us over until economic growth resumes." But what happens if organic (non-governmental borrowing) growth does not return? What if all GDP "growth" depends entirely on the Federal government borrowing and spending $2 trillion a year (or more) from now until Doomsday?

B.C. offered these comments about the chart's implications for future GDP "growth."

U.S. M1 (one measure of money supply) is up year-over-year (YoY) at a double-digit rate, whereas US gov't transfer payments (unemployment, Social Security, Medicare, Medicaid, etc., not counting veteran's benefits) are up 17-18% YoY or an equivalent amount of ~100% of the YoY growth of M1 and ~40% of M2 (broader measure of money supply).
Transfer payments make up ~15% of GDP and ~20-21% or more (and rising) of US personal income and spending.
Federal gov't spending is ~26-27% of GDP. A 17-18% growth of gov't spending implies ~4.5% net positive incremental YoY contribution to GDP. With the YoY contraction in investment, personal consumption, and exports contributing a net -6.4% to nominal GDP YoY, it is conceivable that the GDP will be reported to have grown at a 3.7% annualized quarterly rate, albeit down ~1.8% YoY.
Were the deflator to maintain, and the personal consumption trend from Mar.-May were to have held through Sept., real GDP annualized for Q3 could be up as much as 5-7%, as hard as it is to believe.
Mind you, the overwhelming majority of the incremental "growth" will have resulted from federal gov't borrowing and spending at a rate that is triple or more the trend nominal GDP rate.
If the growth gap from the negative wealth effect of asset deflation is as large as I suspect it is, the trend of federal gov't borrowing and deficit spending is for all practical purposes permanent in order to prevent nominal GDP from contracting. (emphasis added, CHS)
However, the large scale of low-multiplier deficit spending will likely mean falling money velocity, with money supply/loans/deposits growing at around (no faster than) the growth of gov't transfer spending, which is generally what the Japanese have experienced since the mid- to late '90s when persistent price deflation took hold.
As economic growth continues to slow and Boomers draw down on gov't programs en masse, low-multiplier transfer payments will continue to rise as a share of GDP, income, and spending with predictable results for retail sales, private investment, incomes, and employment hereafter.

Thank you, B.C. for an enlightening extrapolation of this data.

In effect, the government is creating a false-positive GDP growth number (e.g. "the recession is over, the GDP grew by 5% in the third quarter!") by borrowing and spending (via stimulus and transfers to individuals) stupendous sums of money.

Recall that the $2 trillion being borrowed this year amounts to roughly 15% of the entire U.S. GDP. The consequences of this are trule pernicious: the Federal government has to borrow (and pay interest on) $3 to generate $1 of GDP "growth."

As B.C. observed, transfer payments are low-multipliers. The government borrows $3 to generate $1 of GDP, but the money transferred does not generate much "multiplier" effect.

So the government (in conjunction with the Federal Reserve) ramps up money supply and government borrowing/spending at unprecendented rates, and what happens? Well, now it can't stop expanding money and deficit spending lest the true decline in GDP make itself visible.

THis is akin to the Red Queen's Race: (wikipedia)

The Red Queen's race is an incident that appears in Lewis Carroll'sThrough the Looking-Glass and involves the Red Queen, a representation of a Queen in chess, and Alice constantly running but remaining in the same spot.
"Well, in our country," said Alice, still panting a little, "you'd generally get to somewhere else — if you run very fast for a long time, as we've been doing."
"A slow sort of country!" said the Queen. "Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"

Interest on the rising national debt is already running at a staggering $470 billion a year. And this is at short-term interest rates which are essentially zero and log-term rates which are extraordinarily low by historic standards.

As "the Red Queen" Federal government runs faster to keep GDP from falling, it must create ever-greater sums of money and borrow ever-greater sums of money, which means interest paid rises every year. If rates were to double to a still-modest 6%, the Federal government would be paying $1 trillion in interest alone.

Which would require even greater borrowing the following year, and so on, until the Great Implosion occurs: a Federal default on obligations or the massive devaluation of the U.S. dollar, which would wipe out much of the wealth of the nation along with its unpayable debts.

This is what you get with an ad hoc continuation of bankrupt policies and Power Elite (financial-rentier-banking) gaming, collusion, embezzlement and fraud. "Stimulus 2.0" is already in the works, starting with a $250 freebie to all Social Security recipients, even if they make $100,000 a year in other income. (How fair to the taxpayers saddled with the interest on that additional debt forever.)

The housing credit giveaway is not just poised for renewal, but expansion--more giveaways funded by borrowing. No doubt unemployment will be extended indefinitely, as I suggested last year, as the alternatives--mass marches on Washington D.C. and food riots--don't appeal much to our overfed "leaders."

The U.S. consumer is still tapped out, and his/her assets are still declining in value, along with the purchasing power of their dollars. Housing is still in a long-term decline, and the number of owners with zero or negative equity is slated to rise to 50% within the next few years. Those who still have equity will no longer be able to borrow against it, so it is in effect trapped capital.

Banks are still D.O.A. if their assets and liabilities were marked to reality, so more financial bailouts are also in the cards, and with the two hot wars still plenty hot, the expenses of Empire aren't going down soon, either. Congressional pork and giveaways will soon see a massive expansion in "free money" being distributed to political cronies and special interests via the "sick-care" bill winding its way through the "pork for every supporter" process.

Meanwhile, the holiday retailers are gearing up for a "cash for clunker toys" giveaway, lest the all-important Christmas borrowing/buying orgy fail to meet expectations. (Who knows which industry will get the next giveaway/bailout? Why not the toy "industry"?)

All this will require $3 trillion in borrowing next year to keep nominal GDP from falling, and then $4 trillion the following year, and so on, until there is no money left to borrow and creating more further devalues the dollar.

When Alice finally tires, the game is over.

Permanent link: Why We'll See Stimulus 2.0, 3.0, 4.0, 5.0 (and so on, until The Great Implosion)

Check out my article in American Conservative Magazine No Easy Money: The case for raising interest rates.

"Your book is truly a revolutionary act." Kenneth R.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

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Three Models of Future Stock Market Moves

noreply@blogger.com (Charles Hugh Smith) — Thu, 15 Oct 2009 13:25:00 +0000

If we distill down various historical patterns, we end up with three likely models of future stock market gyrations.

No model predicts reality precisely, but since human psychology runs in certain patterns, we can make reasonably educated probabilities that future stock market moves will track one of three basic models.

History suggests the basic patterns of stock market activity going forward:

1. A return to a Bull Market

2. A Bear Market rally which leads to a decade or more of sideways action

3. A Bear Market rally which runs out of steam, leading to new lows

I've traced these likely options out on this chart:

Longtime readers know that I consider the Bull Market the least likely for the following reasons:

1. Bull markets don't run forever and the likelihood that a 26-year Bull Market (1982-2007) has resumed after a mere 18-month pause is low.

2. The foundation of middle class wealth--housing--is mortally wounded. Just because a fellow with 23 arrows sticking out of his back staggers to his feet is not evidence that he is now well.

3. Credit markets are mortally wounded. Lending is down, banks are structurally insolvent, consumers are desperately deleveraging, etc.

4. The foundation of the U.S. economy, the 70% of GDP private consumption, is mortally wounded. The consumers' asset bases are destroyed (housing and retirement accounts), costs are rising (healthcare and taxes, for those who still have income), the job base of the U.S. is in structural decline and the credit which enabled limitless consumer spending is impaired/crippled.

All of these are structural in nature and not reversable in a few months of "pump priming," regardless of the effort made to prime the pump of future consumer spending.

Nonetheless, we have to be alert to the possibility that an implosion of the U.S. dollar or inflation could drive the stock market to new highs even as the nation lost purchasing power. Many are now expecting the dollar to essentially collapse. If that were to transpire, the purchasing power of Americans would decline proportionately and the cost of oil and credit from abroad would rise commensurately.

Even as Americans were impoverished by this collapse in their currency, the stock market might respond with euphoric vigor.

Though I reckon hyperinflation unlikely from what I see right now, many do consider it likely (or inevitable), and such a bout of hyperinflation could easily drive stocks to new highs even as the nation was impoverished by rising commodity prices and plummeting purchasing power.

Since I don't rate any of these scenarios likely--a new "real" Bull Market based on skyrocketing real revenues and profits (i.e. not just based on a falling dollar), the implosion of the U.S. dollar or hyperinflation--I consider a raging Bull Market (nominal or real) to be the least likely scenario.

Since markets often re-test lows (double-bottom), I consider that scenario very likely. Many observers are claiming the March 2009 lows are the one and final bottom from the October 2007 highs.

Perhaps, but even as recently as the 2002-03 period, the market surge (euphoria) off the supposedly "final bottom" ended up retracing to that same level (more or less) before starting a sustained move up.

But 2009 is not 2002 or 1992 or 1982 or even 1975. The financial underpinnings of the entire U.S. economy are coming apart, and a few months (or years) of quantititive easing and manipulation cannot restore the shattered foundation.

When this reality hits, then the "crash to a new low" scenario becomes likely.

But we also have to be open to the possibility that essentially endless quantitative easing and Federal stimulus spending (deficit spending) could prop up the market, which would lead to the "blue" scenario in the chart--a decade or two of sideways action.

In this scenario, periodic rallies are sharp and so are the resultant declines. Japan's market in the 1990s and the U.S. market 1966-1981 offer historic maps for this sort of "going nowhere" markets.

If the Fed manages to sustain a whiff of inflation, say, 2% a year, then a stock market which goes nowhere for 10 years ends up losing 20+% in purchasing power even if the nominal price ends up unchanged.

Is "this time different"? Perhaps. The government and media propaganda has successfully masked the structural realities for the past seven months, but reality has a nasty way of intruding on fantasies at the most inopportune times. This "recovery" of "green shoots" is nothing but government-funded fantasy.

Permanent link: Three Models of Future Stock Market Moves

Check out my article in American Conservative Magazine No Easy Money: The case for raising interest rates.

"Your book is truly a revolutionary act." Kenneth R.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Bradley W. ($5), for your much-appreciated generous donation to this site. I am greatly honored by your support and readership.

The Pension Fund Managers Impossible Task

noreply@blogger.com (Charles Hugh Smith) — Wed, 14 Oct 2009 14:51:00 +0000

Pensions fund managers must seek above-average returns even as asset classes move together.

Pensions funds both public and private has suffered huge losses and are underfunded. Fund managers face an impossible task: finding long-term returns of 8% per year in a world in which most asset classes now move in tandem.

The plight of pension plans has been in the news recently; here is Mish's blunt appraisal: Five Major Pension Problems - One Simple Solution.

How did pension funds manage to over-promise benefits while losing a third of their value? The standard explanation is that the politicos in charge of awarding the benefits to public employees drank the "this time it's different" Kool-Aid in the late 1990s stock market bubble. Convinced that 10% per annum returns were "the new normal," authorities raised the benefits being promised to distribute all that endless "free money."

Alas, the 10% per year returns have slipped to -30% declines, and most observers think funds will be fortunate to book 3% returns on average, not the 8% they need to pay their promised benefits.

That shortfall dooms the plans to insolvency, as the only "bagholder" left to fill the gap is the local taxpayer, 10% of whom have lost their jobs, 8% of whom have seen their hours or wages cut and one-third of whom have seen their house equity vanish to zero or below. They will likely not be thrilled to face gigantic increases in local taxes to fund pension fund shortfalls.

In the good old days, fund managers could rotate out of one asset class into another to preserve absolute returns. When bonds weakened, stocks rose. When paper assets fell then real estate and commodities rose, and so on. Asset classes did not move in lockstep, enabling the canny manager to exit one class and move the money into some other asset class which would outperform.

That sort of rotation still works within equities, various types of commercial paper and commodities, but in the overall view all asset classes began moving in lockstep some time ago.

The Great Bull market in equities ran parallel with the Great Bull market in bonds, real estate, commodities, shipping and precious metals from about 1995 to 2000. Stocks dipped into recession, and money flowed into real estate in 2001-2003, and then it was off to the races in all asset classes once again. Oil rose, gold rose, real estate rose, bonds rose, U.S. stocks rose and international stocks rose.

Then in 2007 all asset classes except precious metals and bonds tanked together. (Bonds topped out at the peak of the 2008 financial panic, while gold and silver have suffered dizzying dips on their climb.)

One explanation of this parallel movement in asset classes is that with interest rates dropping (boosting bonds' value) and governments creating rivers of money, there was so much credit and leverage available that there was enough money to boost all assets, regardless of fundamentals such as earnings and return on investment.

While the world waited for inflation to kick in from this vast expansion of money supply, what happened instead was the money chased returns, inflating a bubble in all asset classes.

So where does a pension fund manager go for outperformance now? A reinflated global equity bubble totally dependent on governmental "quantitative easing"? A bond market which assumes near-zero interest rates forever? A precious metals market too small to absorb all the capital seeking long-term "safe" returns? An imploded, overbuilt global real estate market? A commodities market which soars and plummets by turns?

Going short may well be the "safest" bet around, but it's hard to buy large enough short positions to protect tens of billions of dollars in restless assets.

Yes, fund managers can buy U.S. Treasuries--since trillions of dollars of T-bills will be coming on the auction block for years to come--but the short-term returns are pathetic and the long-term returns only positive if deflation boosts the enemic coupon rate.

Meanwhile, the "clock" is ticking. Every year that the fund nets 4% instead of 8%, the gap between what was promised and what is funded widens.

Suppose some "unforseen event" occurs and global interest rates start rising. (After all, Australia just raised rates.) Then the value of all those bonds paying 1% and 2% plummet fast and plummet hard. So much for the "safety" of bonds.

Rising interest rates would also gut equities and gold, as investors would be attracted to the higher real returns and the lower risks.

Since pension funds have already lost 30%, what's to keep them from losing another 30%? Absolutely nothing, if all asset classes except cash earning interest fall together.

Can interest rates stay near-zero forever? Does anything stay the same forever? Here is my forecast for rising interest rates: No Easy Money: The case for raising interest rates.

We cannot know much of the future, but we can know that pension funds which over-promised benefits and expected 8% real returns forever will go broke.

Permanent link: The Pension Fund Managers Impossible Task

Check out my article in American Conservative Magazine No Easy Money: The case for raising interest rates.

"Your book is truly a revolutionary act." Kenneth R.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, S.O. ($30), for your monstrously generous donation to this site. I am greatly honored by your support and readership.

The Peace Prize in a Time of War: 10 Questions

noreply@blogger.com (Charles Hugh Smith) — Tue, 13 Oct 2009 14:56:00 +0000

In a time of war, the Nobel peace Prize is already old news. Perhaps that is more significant than the prize itself. Here are 10 questions.

The awarding of the Nobel Peace Prize has already been parsed by pundits of all stripes and is thus now "old news" as the hot war in Afghanistan fades to "background news."

The disconnect between the awarding of the Nobel peace Prize to a U.S. president leading two hot wars is painfully obvious, and so pundits of all political stripes have been scurrying for meaningful context.

For instance, here is Peggy Noonan's rather predictable take: A Wicked and Ignorant Award (Love your balanced polemic, Peg-baby!)

Dimitry Orlov checked in with a stimulating analysis suggesting the prize marks Obama as America's Gorbachev: Obama Wins Gorbachev's Peace Prize (courtesy of correspondent Craig M.)

It seems evident that the committee members were seeking a "big" political "message" with their prize--after all, what impact will a "big prestigious prize" have if it goes to a complete unknown?--and the global political establishment very badly wanted to disavow the Bush era's claim to the U.S. right to unilateral pre-emptive war.

Sadly for the committee, every high-profile candidate who worked diligently for years promoting some peace project has already received the prize, so the committee settled on President Obama as an excellent symbol of a new American resolve to pursue diplomacy.

Unfortunately, the committee forgot that war is merely diplomacy by other means. Or as Carl von Clausewitz so famously noted, "war is merely the continuation of politics (or policy) by other means."

On the same day that headlines blared the surprise Nobel Peace Prize, lesser headlines announced contingency plans to send 40,000 to 60,000 more U.S. troops to Afghanistan.

The irony of these headlines sharing the same page is nearly beyond measure.

So President Obama's campaign rhetoric about the value of diplomacy and working with our allies and enemies alike (blah blah blah) is rewarded by the global establishment even as the actual policies of the administration are a continuation of unilateral pre-emptive military action in Iraq and Afghanistan.

I don't fault the administration's "proceed cautiously" policy in pursuing both hot wars; caution is well warranted when situations are volatile and complex. But on the other hand, I certainly don't want to see our friend in the Marine Corps shipped to some dicey posting in Afganistan. If he were killed, his wife widowed and his two kids left fatherless, was the "global war on terror" being played out in Afganistan worth it?

Some will say yes, because the forces of terror might once again use Afghanistan as a base for a deadly strike on the U.S. mainland.

But let's stipulate that this sort of speculation is extremely easy as long as it's not your family member being shipped into harm's way.

I have a few questions to pose on the GWOT (global war on terrorism) premise for the U.S. engaging in a hot war for control of Afghanistan:

1. Is Afghanistan even a country by the usual definition, or it is a polyglot assembly of tribal areas arbitrarily labeled a "nation" for simplicity's sake?

2. Do "nation-building" and national elections make any sort of sense in Afghanistan from a cultural (anthropological/historical) perspective?

3. If we're spending $100 billion+ a year in intelligence collection and black-ops combatting global terror, then do we need a full-fledged hot war to do the same task?

4. Since the Taliban leadership is non-Afghan (i.e. Arab), exactly what is the nature of the Taliban's Afghan support (if any)?

5. Who funds the Taliban, and can the money sources be disrupted via asymmetric means?

6. Since Iran is burdened with 1+ million Afghan refugees, do they have a motivation to seek a stable Afghanistan? If so, what is their idea of achieving that goal?

7. What do the C.I.A. operatives who worked in Afghanistan throughout the late 1970s Soviet incursion see as the U.S. stake, and what strategy/tactics do they see as being most likely to protect U.S. interests (if any)?

8. What do the C.I.A. operatives and Special Forces leaders (the on-the-ground officers) who have served in Afghanistan for the past eight years see as the U.S. stake, and what strategy/tactics do they see as being most likely to protect U.S. interests (if any)?

9. Rather than attempt a Vietnam-like "clear and hold" strategy, are there effective asymmetric-warfare ways to disrupt the Taliban's command and control of its own "secure" regions using Afghan Resistance forces?

I am wary of Afghan-Vietnam parallels for many reasons--revisionist histories are remarkably easy to construct--but here is a good overview of one such parallel currently being drawn: The Real Afghan Lessons From Vietnam: The 'clear and hold' strategy of Gen. Creighton Abrams was working in South Vietnam. Then Congress pulled the plug on funding.

10. Since Russia, China, Pakistan and Iran all have "interests" in a stable or unstable Afghanistan, what are their motivations, incentives and views? Do they prefer an unstable Afghanistan? If so, why? If they prefer a stable Afghanistan, what skin are they willing to put in the geopolitical "game"?

If we collectively had some answers (even partial, incomplete ones riven by dissent from knowledgeable, experienced people) to these ten questions, we might be better placed to decide if we as a nation have any interests in maintaining a full Army in Afghanistan and if the lives of our soldiers are being risked for not just a good cause but an absolutely essential one.

"Peace" is a cheap word, easily tossed around. Global War on Terror is a phrase that covers threats real and imagined alike. "National interest" hides all sorts of hidden agendas behind the velvet cloak of patriotism.

As for the Nobel peace prize, perhaps it should have gone to Sir Paul McCartney for his contributions to the longstanding campaign to ban landmines. Yes, the International Campaign to Ban Landmines received the Nobel peace Prize in 1997, but if the committee wanted to award the prize to a celebrity then perhaps Sir Paul is as deserving as a newly minted U.S. President engaged in two hot wars.

But that wouldn't have accomplished the same "repudiating war without actually repudiating war" message, would it?

Here are some relevant books to consider:

7 Deadly Scenarios: A Military Futurist Explores War in the 21st Century

First In: An Insider's Account of How the CIA Spearheaded the War on Terror in Afghanistan

When Giants Fall: An Economic Roadmap for the End of the American Era

On Vietnam:

Big Story: How the American Press and Television Reported and Interpreted the Crisis of Tet 1968 in Vietnam and Washington

About Face/the Odyssey of an American Warrior

Dispatches

Prisoner of War: Six Years in Hanoi

On Iraq:

Among the Believers: An Islamic Journey by V.S. Naipaul

What Went Wrong?: The Clash Between Islam and Modernity in the Middle East by Bernard Lewis

A Peace to End All Peace: The Fall of the Ottoman Empire and the Creation of the Modern Middle East by David Fromkin

Through Our Enemies' Eyes: Osama bin Laden, Radical Islam, and the Future of America by Michael Scheuer

The Occupation of Iraq: Winning the War, Losing the Peace by Ali A. Allawi

Nemesis: The Last Days of the American Republic (American Empire Project) by Chalmers Johnson

Fiasco: The American Military Adventure in Iraq by Thomas E. Ricks

Hubris: The Inside Story of Spin, Scandal, and the Selling of the Iraq War by Michael Isikoff and David Corn

Imperial Life in the Emerald City: Inside Iraq's Green Zone by Rajiv Chandrasekaran

Licensed to Kill: Hired Guns in the War on Terror by Robert Young Pelton

The Looming Tower: Al-Qaeda and the Road to 9/11 by Lawrence Wright

Imperial Hubris: Why the West Is Losing the War on Terror by Michael Scheuer

State of Denial: Bush at War, Part III by Bob Woodward

On War:

The Rhythm of War by Terence Parker

Personal Memoirs of Ulysses S. Grant

The Pursuit of Victory: The Life and Achievement of Horatio Nelson

The Art Of War by Sun Tzu

Permanent link: The Peace Prize in a Time of War: 10 Questions

Check out my article in American Conservative Magazine No Easy Money: The case for raising interest rates.

"Your book is truly a revolutionary act." Kenneth R.

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The Forgotten Peg: Chinese Yuan and U.S. Dollar

noreply@blogger.com (Charles Hugh Smith) — Mon, 12 Oct 2009 14:40:00 +0000

Many observers seem to have forgotten a weak dollar benefits Chinese exports due to the yuan-dollar peg.

For those readers who tire of charts: enjoy!

As the "news" continues to trumpet the decline/collapse of the U.S. dollar, many observers seem to have forgotten that the U.S. dollar is the defacto "shared currency" of the world's largest economy and its biggest rising-star economy. Yes, the U.S. and the PRC--China. China's currency (officially the renminbi, a.k.a. yuan) is transparently pegged to the U.S. dollar at about 6.8 yuan to the dollar, down from 8+ a few years ago.

Given that Japan is the world's second-largest economy by most measures, and that the yen is informally pegged to the U.S. dollar (trading in a band of 90-110 yen for years on end), then it could be argued that the world's three largest economies all "share" the U.S. dollar.

Before we explore the consequences of this, let's look at a standard-issue "the dollar is weakening" piece: Dollar's Slide Poised to Continue U.S. Quietly Tolerates Drop, While Trade Partners Fret; a Long List of Negatives for the Currency.

Here's one which actually mentions the trade benefits to China of a weak dollar:Dollar weakness sends ripples across Asia: Scramble to preserve capital and the Hong Kong carry-trade redux

And just to remind everyone that China's leaders don't sit around tolerating circumstances which are negative for their economy: China Targets Commodity Prices by Stepping Into Futures Markets

And lastly, let's establish the primary context of China's leadership: 1 billion poor citizens seeking a better job/wage/life. Here is a puff piece by former U.K. prime Minister Tony Blair which makes one key point: most of China's citizens are still very poor, and thus the leadership is obsessed with "growth" and jobs above all else: China's New Cultural Revolution: The world's largest country has a long way to go, but there's no question it's changing for the better. (WSJ.com)

Superficial stories about China are accompanied by glitzy photos of Shanghai skyscrapers and other scenes from the wealthy urban coastal cities, but the fact is that the consumer buying power of China is roughly equivalent to that of England (51 million residents).

Thus those who believe the vast Chinese manufacturing-export sector can suddenly direct its staggering output to domestic consumers in China are simply mistaken: Chinese consumption is perhaps a mere 1/10th of that needed to absorb the mighty flood of goods being produced by China.

Put yourself in the shoes of China's leadership: what do you care about more: $2 trillion in U.S. bonds or creating jobs for 100 million people? It's the jobs that matter, and despite its very public complaints about the slipping dollar, perhaps China doth protest too much--or more accurately, for domestic public consumption.

The consequences of a weakening dollar are neutral for Chinese exports to the U.S. but positive for exports to Japan and the European Union. Chinese exports to the EU and Japan have risen sharply in the past nine years, and a weak dollar keeps Chinese goods cheaper than rival exports in these key global markets.

Since we have many friends in Japan and my brother has lived in France for 15 years, I can report anecdotally that where Chinese goods were not all that common 10 years ago in Japan and the EU, they are now as ubiquitous there as they are in the U.S.

In other words, the Chinese interest in expanding exports to Japan and the EU is more pressing than the paper loss of a few hundred billion dollars in their dollar holdings.

While Japan is importing huge quantities of Chinese goods (inexpensive due to the weak dollar), its leadership is undoubtedly working hard to maintain its own exports to China (its fastest growing export market) and the U.S.

The only way to do so is to maintain the informal peg of about 90 yen to the dollar. Below 85 yen to the dollar, few Japanese exporters can ship to the U.S. and maintain a profit. With Japanese exports cratering, the Japanese central bank is unlikely to sit idly by as exports to the U.S. implode even further.

From the point of view of Asian exporters pegged to the dollar, maintaining exports and jobs is more pressing than the value of their dollar holdings. Japan would be delighted with a 10%-20% appreciation in the dollar, as would EU exporters being decimated by the weak dollar, and China would tolerate a modest rise in the dollar as long as the rise didn't outprice its goods in Japan and the EU.

Those calling for a full-blown collapse in the U.S. dollar might profitably ask if the dollar's partners--China and Japan--would approve. To reckon them powerless to halt a dollar implosion would be a major mistake because the stakes are beyond high.

Yes, they could unpeg from the dollar, but in this 3-D chess game, radical actions can trigger radical (and unpredictable) consequences, and the basically conservative leaderships in Asia have too much at stake to gamble on abandoning the dollar and the U.S. market.

For the reasons stated here and the chart posted last week, I continue to foresee a significant dollar rally within the next month or two to a "Goldilocks" band--not too high but not too low, either.

Permanent link: The Forgotten Peg: Chinese Yuan and U.S. Dollar

Check out my article in American Conservative Magazine No Easy Money: The case for raising interest rates.

"Your book is truly a revolutionary act." Kenneth R.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

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