Forecasting Has Its Pitfalls and 2012 Will Prove No Different

A bunch of hedge fund managers, most who probably don’t give a tinker’s damn for much beyond the bottom line anyway, has a lousy year, and the world is coming apart.

Politicians around the globe act like politicians, dawdling and fiddling in the face of stress, and the sky is descending post haste.  Hedge fund managers and politicians share at least one commonality; they both love excuses.

Somebody once pointed out that 80 percent of the work that gets done in the world everyday gets done by people who don’t feel all that good. Maybe that number is a bit high, but it illustrates an important point. Things are not always what they look like.

The Euroland mess has dominated the news for weeks now and just about anyone who claims to have the cure has had his or her say. Some argue it’s the cluck-headed Germans and their insistence on fiscal responsibility. Others suggest the restraint on the European Central Bank should be eased so they can print money much like the US Federal Reserve. Problem is someone forgot to ask the Brits and the Fins.

One scribe, Henry Blodget, the discredited former Merrill Lynch sell-side analysts who was publicly hawking tech stocks during the tech mania he privately believed were POS, recently penned a rambling piece trying to prove that the wealthy don’t create jobs. Now the CEO of a financial news outlet, Blodget cited a wealthy dude to buttress his case. It’s a screed all about taxing those filthy wealthy folks who never pay their fair share of anything.  Simple translation: we need higher taxes to offset higher spending Keynesians always love when the warm rubber begins to melt as it hits the freeway. When is the last time you were hired by someone or some company poorer than you?

The point here is there is no shortage of opinions and there never will be. Nor will there be a paucity of forecasting for 2012.

But there is certainly lots of uncertainty heading into 2012 and the European mess is only part of the story: A hard Chinese landing, gridlock in DC, sounds like a movie title if you close your eyes for a second and let your mind wonder; jobs, housing, consumer spending, corporate profits, to name a few of the more mundane. And of course there is usually a surprise or two waiting just around the corner of Wall and Broad Street. Don’t forget: 2012 is also an election year. The language debasers will be afoot in full force.

What about King Bernanke and his minions at the Fed ?  What will they do? Will bond yields go up or down or just sort of lay there, lame and limp, like our elected officials? Is there anyone still left who hasn’t refinanced his or her digs? Will the dollar gain more testosterone or is it about to succumb to a bad case of ED? And what about gold, the yellow stuff some think will trade in 2012 between 1,300 and 2,000? And then there are all those emerging markets that for the most part suddenly stopped emerging in 2011. And who will be the 2012 Bill Gross poster child? And what sector will lead the parade?

The Omaha Hypocrite, Warren Buffett, rolled into Californian a few years back and suggested the state’s property owners needed to pay higher property taxes. Buffett at the time had a place in La Jolla, a wealthy seaside town just north of San Diego and he claimed the taxes on his Omaha residence were higher than those he was paying for his swanky California place.

Now Buffett is supposed to be a smart guy.  Assuming Buffett and his secretary both live in Omaha, given their heavy tax burden, not to mention the lousy weather, perhaps both should consider moving; hopefully, however, not to California. We already have our fair share of kooks.

Still another point to Buffett’s hypocrisy, one recently noted by a fellow billionaire, Buffett’s whole strategy, buy and hold, is not only well known but calculated to avoid paying any taxes so that when he dies it all goes to a foundation and he won’t have paid taxes on any of it. Meanwhile, he certainly enjoyed the fruits of his labor, but like most people on the left apparently doesn’t want anyone else to enjoy theirs.

It’s still a few months before the ides of March, but that doesn’t mean investors shouldn’t be alert.  Forecasting is a lot like a good saloon brawl. Anything can happen and it often does.

Buffett-Obama Chart

RAIL DELIVERY OF CRUDE OIL AND PETROLEUM PRODUCTS RISING 

This is what we call our Warren Buffett-President Obama chart. You’ll recall Buffett gave Obama a boost in ratings early in 2011 when he made his statement, bogus though it was, about his secretary paying more taxes than he did. Most of Buffet’s income came via capital gains, taxed at the capital gains rate of 15%, not the earned income rate. That’s the only way his secretary paid more income tax and even then it’s a bogus claim.

Obama later repaid the favor this fall when he canceled the Canadian pipeline project until after the election in 2012. Recall, too, that Buffett owns Burlington Northern Railroad. Buffett had a 22 percent stake in BNR unitl Novemeber, 2009 when he bought out the rest for around $34 billlion.

The pipeline, Keystone XL from Canada, was going to create thousands of jobs in the lower 48. The Obama administration has pretty much been a jobless one including all those now defunct jobs in the solar industry that somehow went bankrupt after wasting tons of OPM. So Mr. Obama must have owed Mr. Buffett big time.

Source: U.S. Energy Information Administration, based on the Association of American Railroads.

Note: Data are weekly average originations for each month, are not seasonally adjusted, and exclude U.S. operations of Canadian National Railways and Canadian Pacific Railway; one carload holds 30,000 gallons.

More U.S. crude oil is being shipped by rail, especially from North Dakota where a lack of pipelines has companies relying on tank cars to bring the state's soaring oil production to market. Pipelines remain the most popular transport option, carrying about two-thirds of U.S. oil and petroleum products, but rail is on the rise.


The Association of American Railroads (AAR) tracks combined rail movements of oil and refined petroleum products. In the first ten months of 2011, nearly 300,000 tank cars transported U.S. oil and petroleum products, up 9.1% from the same period in 2010, according to AAR. The growth in petroleum-by-rail shipments is much stronger than the 1.8% increase for all railroad cargo combined during the same period.

While AAR does not issue separate data on crude oil and product shipments via rail, it notes that anecdotal evidence indicates most of the growth in the crude oil and petroleum products category is likely due to crude shipments. Based on different sources of rail traffic data, the trade group said shipments of crude oil and liquefied natural gas accounted for about 2% of all carloads in 2008, 3% in 2009, 7% in 2010, and about 11% so far in 2011. One carload holds 30,000 gallons of oil.

BNR is the second largest railroad in the U.S. and as the chart illustrates with the darker lines BNR has a neavy presence in the North Dakota-Montana oil basin. Map of the Bakken Formation oil and gas play. The Bakken is below parts of northwestern North Dakota, northeastern Montana, southern Saskatchewan and southwestern Manitoba.

 

Now hiring: North Dakota oil boom creates thousands of jobs

Thu Oct 27, 2011 1:43 AM EDT
By Catherine Kim
and Jessica Hopper
Rock Center
Those hurt hard by the ailing economy are flocking to Williston, N.D., where an oil boom has turned a sleepy prairie town into a place producing thousands of jobs.
"There's opportunity here and that's what we all need is opportunity," said Williston Mayor Ward Koeser. "It's kind of been an oasis for the country. You know, there's a lot of jobs here, good paying jobs in the oil industry."

Williston is situated on the Bakken formation, an oil field that some say will produce the biggest boom in North America since the 1960s. Koeser said that his town currently has 2,000 to 3000 jobs and they haven't been able to fill the openings fast enough.

"A lot of jobs get filled every day, but it's like for every job you fill, another job and a half opens up," Koeser said.

A job on an oil rig can pay as much as six figures. The starting salary for truck drivers is around $80,000. While the nation's unemployment rate is 9.1 percent, Williston's unemployment rate is less than 1 percent.

Locals say job seekers from all 50 states are heading to the North Dakota town, becoming modern-day pioneers. The town's population has nearly doubled from 12,600 people to 23,000 people. Patrick Parker hitchhiked from Yuba City, Calif., to Williston. When NBC News spoke to him, he had just $12 in his pocket. Parker, a paving stone layer by trade, has been out of work for two years.

"One of my goals is to make my daughters proud of me," said an emotional Parker. "I want to make them proud because I worked a good job for 10 years and then for it to go away it's just, it just gets to me a little bit." Parker is one of a dozen people NBC News saw setting up camp or living in their cars in the parking lot of the local Wal-Mart. Williston's housing construction hasn't caught up with its rapid growth.

Parker said the town feels "like the old gold rush town."Oil was discovered in the this part of North Dakota 60 years ago, but it was only recently that oil producers have found a way to get at it more effectively. After drilling about two miles down, they drill horizontally for another two miles through the bed of rock where the oil is trapped. Using a technique called fracking - water, sand and chemicals are shot into the rock formation from that horizontal pipe to create cracks and fractures. From those openings, comes the oil. Those in the oil industry say the tight rock that traps the oil, also prevents it from escaping into the water table during the fracking process.

North Dakota is currently the fourth largest producer of oil in the United States, but that is projected to change soon. A spokesperson for North Dakota’s Mineral Resources Department said that oil production in the state is expected to surpass Alaska and California by 2015 which means North Dakota will be the second largest oil producer in the country soon.Along with the bounty from the oil boom, come some stresses and strains. A sewage system that's running at full tilt, truck traffic congestion, an influx in 911 calls-those are just a few of the headaches that keep Mayor Koeser up at night.

There is such a large influx of people that thousands are staying in 'man camps'- shipping containers converted into housing units for the workers new to town. When more teachers were hired to deal with the rising number of students, an apartment building had to be built to house the new teachers, Koeser said.
"When we have as many people come here everyday looking for work, where are they going to live," Koeser asked. "How are we going to get water to them and sewer to them and a road to them and power to them and all those sorts of issues. Yeah, it's putting a tremendous amount of pressure on the infrastructure."

Of all the stresses, the biggest strain on the community is truck traffic, the mayor said.
"That's really stressing us, the traffic, a lot of accidents," said Koeser. "In a small community, you're used to getting from one side of town to the other in just a few minutes, that's no longer the case."
The number of accidents in September were double the amount the same time a year ago, the Williston Herald reported.

The surplus of people living in the town coupled with the traffic accidents has led to a drastic rise in calls to 911. Koeser said that the police receive at least 10,000 more calls a year than in pre oil boom times.
"Now keep in mind, you've got, you know, probably 9,000 men living in man camps around the city, not in the city limits, but living around the city and what do they do at night when they're done with work? They come to town and find a bar and want to have a good time, and sometimes get in trouble," Koeser said.
But that means more jobs: the town is adding six new policeman and three dispatchers this year, the mayor said.

Even with the headaches, Koeser said he and Williston's other residents are lucky that the town has become an oasis for job seekers.

What Does Buffett’s Purchase of Burlington Northern Say About Commodities and the Dollar?
Posted By admin On November 5, 2009 @ 11:00 am In Commentators,Commodities,Logistics |
Every story I have seen on Warren Buffet’s purchase of Burlington Northern for $26.3b earlier this week contains a different take on “why” Berkshire Hathaway did the deal. Of course we at MetalMiner have our own $.02 (which we have included), but thought you may appreciate glancing through all the possible reasons for “why this deal.”

Top 6 Reasons Warren Buffett (Berkshire Hathaway) Bought Burlington Northern:

1. Perhaps Mr. Buffett has forgotten his own rules of investing? This article discusses how he violates his own rules [1] for “buying cigar butts” and not splitting his own stock
2. A very popular argument [2] put forth as to the rationale behind the purchase goes like this: Buffett believes the US economy is poised to come roaring back fueling the need for the movement of goods across our vast country
3. Some believe he had too much cash on hand, $37b to be exact, something Buffett himself says limits his ability to make money [3]
4. Buffett believes that crumbling roads and failing infrastructure along with increased environmental pressures around carbon emissions represent a boon to rail [4]
5. Buffett is signaling where he thinks dollars [5] will get spent (e.g. on commodities), “Instead of turning to gold, Buffett sees Burlington Northern as a growth vehicle to earn more on the billions in cash Berkshire has on its books carrying coal, wheat and other resources across the nation.”
6. Or, my personal favorite, is Buffett buying the railroad because, “This is all happening because my father didn’t buy me a train set as a kid,” Mr. Buffett joked in an interview [6].
The Times article suggested that the deal made sense, even using Buffett’s own investing maxims: only buy what you understand, buy at bargain prices and move quickly. Unlike the Times article, though, we would argue the deal was not “a bargain” and subscribe to the Wall Street Journal point of view. Burlington Northern was no “cigar butt.”
What’s our take? The purchase likely involves several of these rationales. But when Warren Buffett does the biggest deal of his career and it happens to involve trains to carry commodities, do we have any doubt as to where the Sage from Omaha thinks metal markets will move?
Cornelius Vanderbilt must be chuckling in his grave.

Buffett for years has been known as the Omaha Scold, but given what we now know about the facts and his support of Obama, the Omaha Hypocrite might be more appropriate.

Holiday Greeting

A friend sent this to us recently. Going into a new year it seems an appropriate holiday greeting and a wish for a happier, more prosperous new year, a new beginning.  Peace on earth and good will to all.

Move and the way will open.



An ant on the move does more than a dozing ox.



US Retail Space and the European Mess

Thought about an old acquaintance today, we’ll call him Harry.

Harry unfortunately is no longer with us. I first met Harry years ago when he was an in-patient on a medical ward in a large, cold, indifferent hospital in an even larger, colder, more indifferent big city. Already in his 80s, his body was frail, but his mind laser-beam sharp.

One of Harry’s most prized possessions was a faded birthday card from his only surviving relative, a niece living in a distant city, whom he hadn’t seen in years. He kept the card sitting on the nightstand next to his bed like a trophy on display so he could show it to anyone and everyone who ventured into his room.

For most that passed in and out Harry was, understandably, just an old guy really late on the back nine of his life. To me he was a treasure trove of information, in some ways worthy of the status of a national monument.

 Harry spent his professional life trading commodities. He jokingly told me once that over his career he traded everything from cotton to soybeans to wives. Listening to him as the days passed pull streams of commodity prices out of his head, each with its fascinating own story, told me everything I wanted to hear, someone who had been there, seen it and survived.

 Back then I was early on the front nine of my life, trying to learn how to effectively practice some serious internal medicine. So time was a critical commodity for both of us. Whenever I could I dropped by his room, pulled up a chair and started firing questions. He never seemed to mind. If anything it seemed to take 10 or 15 years off his face. I found out Harry several times in his life had been up and he had been down. Up is always better he told me.

One day we were discussing high lumber prices when he suddenly stopped, paused for several seconds and said: “Listen, son, this is a point the politicians, the bureaucrats and all those regulators never seem to get; and probably never will. The cure for high prices is high prices.” It was a simple, declarative statement, probably too simple to be appreciated by many.

What brought Harry to mind after all these years is an article about US retail space that appeared in the Financial Times today. It’s funny how we choose to look at things. Who would associate retail space with high prices as in how many square feet are out there versus foot traffic. Harry would’ve.

The article, “Too many shops, too few shoppers,” quoting from a book by Robin Lewis and Michael Dart, The New Rules of Retail, about the economic downturn’s effect on store traffic and excessive retail space, points out: “To put the excess in a wider context, Mr Lewis and Mr Dart say the US has 22 sq .ft of retail space for every person in the country. The second highest figure is Sweden with 3 sq. ft. per capita.”

No doubt some will point out there is a big difference in population between Sweden and the US. And to be sure there is. But space and prices are synonymous; too much space equals too high prices. Just ask, as the article states, retailer Gap.

“The process of shedding space began this year at Gap…whose prolonged slump came because it opened too many stores….”  Gap isn’t, unlike some others, Borders and Circuit City, the once big electronic chain, going out of business; it’s simply cutting the number of its stores by 20 percent.

There are two ways to reduce excess; the harsher of the two is called bankruptcy.

The difference between Circuit City, Borders and the Gap is implied in Harry’s statement. You do it or the market will do it for you.

Think about it. Isn’t this what the bond investors are really saying to all those European bureaucrats and politicians? And that's why it's just as importnat to let the market process work.

Mood Pie Anyone?

There are many mood indicators and we'll only touch on a few here and in no particular order of importance. That's up to you to decide, how many and which.

Auctions as in bonds: The US just sold $13 billion 30-year Treasuries at the lowest yield ever, 2.925 percent. The sale reflects several things about investors' mood: fear or flight to safety; concern about further global economic slowdown and less inflation worries because of it. Auctions also tell you about how well an offering is received or how much of a market there is for it.

Not all auctions are received the same and that brings us to another mood indicator: comparative yields or spreads between offerings by different countries. Take a benchmark for each country, like the recent 10-year government notes yielding 6.5 percent of Italy versus similar notes sold by France yielding 3.04 percent and 10-year US Treasuries offering only 1.85 percent. The German 10-year bund also yields 1.85 percent, giving you a pretty good snapshot of how the market (investors) see risk, in this case default risk. Risk has many faces, interest rates, inflation, political, liquidity, correlation, to name a few. Correlation stated simply is the company you choose to hang out with, the old room full of measles.

Another mood indicator that's been on public display more lately than usual is rating agencies like Fitch, Moody's and Standard & Poor.  All have either issued downgrades or imposed warnings about certain sovereign debt and the financial state of those issuing countries' ability to service that debt. Sometimes these rating agencies are late to the chaos as was the case with the Asian tigers in the late 1990s, but their rating changes or warnings bear noting if for no other reason than getting a fix on general mood.

Gold prices, though not always direct, are another mood indicator. Because of its "safe haven" reputation gold prices often reflect fears or the lack thereof about inflation or loss of purchasing power. Gold can also be a proxy on the fate of the US dollar, though again not always linear, and even to a degree interest rates and bonds.

Copper prices are worth noting because of the metal's use in the housing and industrial markets, i.e., growth or economic pick-up versus pending slowdowns. Since gold and copper are commodities and commodities can be broken down into two groups, soft and hard, you probably want to look at currencies as yet another mood indicator.

Currencies can be roughly divided into two groups, commodity-based, like the the Aussie and Canadian dollars and the South African rand, and non-commodity based. In general, commodity-based currencies give some protection against inflation when prices are rising. Rising prices can be reflected in the CPI numbers, but they are not hard and fast because central bank bureaucrats don't like to use indicators in their indexes that are going to too broadly deviate from their agendas. Yes, central bankers world-wide have agendas; that should be one of your first mood indicators: What do central bankers want as opposed to want you want? Often they are not the same. Kick the can is a popular central bank game world-wide.

Energy prices matter. Recent headlines about solar panel prices falling and China glutting US markets with solar panels should indirectly tell you something about energy prices. Couple that with what's going on in the natural gas markets versus coal-powered electric utilities and you get a further snapshot, not to leave out what's rattling around with OPEC, Iranian and Syrian oil; and Libyan oil coming back on the market.

So energy prices can be a mood indicator for various reasons, but again just one of the many ingredients that go into to baking any good mood pie. Given the current holiday season, we wish you and all our readers happy, healthy, properous baking in 2012.

Bond auctions
Spreads
Currencies
CPI numbers
Gold and Copper
Rating Agencies
Energy

The Gloom and Doomers and The EU Drama

The new plan put forward today by Merkel and French President Sarkozy was more about austerity and less or nothing about helping, to the chagrin of the gloomsters.

Helping here should be recognized for what it is, a euphemism for bailing out. Critics say, as they nearly always do, setting and holding fast to strict rules won't help the peripheral countries pay off their bad debts. This in our opinion is more of the same linguistic currency debasers love to use to get their way. Many of them are just trying to protect and, in some cases, to save their carcases. Others are ones who helped create the mess and now pretend that they know the way out.


Meanwhile, the US Fed held rates steady as she goes causing as least one pundit to argue that the Fed needs to lend more help to resolve the Euro mess (Yea, we know; that word lend is troublesome, to say the least!) and the ECB needed to fire up its printing press. Don't be too surprised if the the current administration tries to figure out a surreptitious way to put American taxpayers on the rescue docket too, similar to the TARP deals. The US financiers who stand to lose big in any meltdown have friends in high places.


By the way, it appears that no one on the planet earth knows exactly where all that supposed-paid-back TARP money actually is. If you think we're kidding try to find out; call your representative in Congress and see if you can get not any answer but a straight answer.


The UK continues to ruffle egos and political feathers with it hard stand against joining any collusion designed to aide and abet more of the same financial recklessness. But the Germans, long the whipping objects for allegedly holding the line on fiscal and monetary austerity, recevied some support from an unlikely source, Muhtar Kent, the chief executive of Coke-Cola. In a story by Alan Rappeport in the Financial Times, "Coke chief lauds "sane" Germany," Rappeport quoted Kent: "The reason Germany is the only sane place in Europe today is because of what Gerhard Schroder did....back in 2004."


"He cleared the mist, changed labour laws, went against the unions...and created really good incentives for small and medium-sized enterprises." Kent went on, according to the story, to point out, Schroder lost his job doing it, but it "marked the most effective era in recent German history. Those small companies in Germany are making things that go into things and people want those things."

Sounds like really good advice. Now if some brave politicians here in America want to put the future of the nation above their jobs and be brave enough to possibly lose them, we're on to somehting big. But don't hold your breath.

And here's a little sidebar on Germany and those companies that make little things from another FT story published 12/13/11. "German employment hit another post-unification high in October...."
Are you listening, politicians?

Verbal Legerdemain and the EU Mess

RL Ellison

 A lot of people believe that God whipped up the heavens and earth in six days and on the seventh, exhausted, flopped into a lounge chair with his feet up.


But what if He didn't? What if He used that seventh day to create the concept of credit, investment banking and along with them the genesis of Wall Street and all their political allies?


In college certain courses require prerequisites. There's a reason. One could make a sound case that debasing a language is a prerequisite for debasing a currency. Those hard-headed, self-centered Germans most economic and political pundits are complaining about today understand that all too well. And that's the problem; they get it.


Debasing a language is not much different from debasing a currency; there are prices to be paid. And they both begin, as one of Hemingway's characters in The Sun Also Rises points out when asked how he went bankrupt: "Gradually, then suddenly."


In 1964 George Orwell published an essay, "Politics and the English Language." The first paragraph pretty much says it all.

Most people who bother with the matter at all would admit that the English language is in a bad way, but it's generally assumed that we cannot do anything about it.Our civilization is decadent and our language--so the argument goes--must inevitably share in the general collapse. It follows that any struggle against the abuse of language is sentimental archaism, like preferring candles to electric lights and hansom cabs to aerolplanes. Underneath lies the belief that language is a natural growth and not an instrument that we shape for our own purposes.


Orwell didn't stop there. He pointed out that the decline of a language inevitably has political and economic causes and those causes are not simply owing to the bad influence of a few individual writers. An effect, Orwell wrote, can become a cause "reinforcing the original cause and producing the same effect in an intensified form, and so on indefinitely."


He was particularly harsh when it comes to politicians. "Keeping out of politics" in today's
world is impossible. "All issues are political issues," he wrote, "and politics itself is a mass of lies, evasion, folly, hatred and schizophrenia. When the general atmosphere is bad, language must suffer."


The Germans and some others simply want to hold the mark on the language agreed to in the Maastrich Treaty. That language called for fiscal and monetary responsibility. Their critics obviously see it differently, taking the just-this-one-time-it-won't-happen-again path to justify their stance. Even Bill Gross, the Pimco bond guru whose performance this year has been anything but sterling, in his latest screed chimed in, taking his cue from a quote on a 12-year-old coffee mug he received as a gift: "You can always tell a German, but you just can't tell him much." Quite cute to be sure, but really just another round of verbal legerdemain.


"The whole tendency," Orwell noted, "of modern prose is away from concreteness." He included activities like public speaking and speech writing.  Germans admire the concrete, debasers the abstract. The Germans are trying to hold the line against abstraction, one of the main tools the bebasers of language and, apparently as it follows, a currency, love to use. Take a look at the so-called $1.2 trillion spending cuts our illustrious President recently claimed he would steadfastly veto any attempts to trim after the super-duper committee went snap, crackle and popped. On his part it appears to be an admirable stand against the economic philistines.


The key phrase is spending cuts. Anyone who thinks those are real cuts in real spending as in real deficit reductions should look again. It's obfuscation, a euphemism for lying, of the worst kind. Orwell no doubt would deplore the use of such a highly Latinate word like obfuscation. It's precisely what he wrote about, the dishonest use of dishonest words to deceive, the hallmark of politicians, bureaucrats, statesmen and other assorted species of the gas-inflated.


We've yet to hear anyone suggest that maybe the initial project was too ambitious to begin with. Even Jacques Delors, the man credited with creating the euro, is deflecting blame. In a recent interview in the UK scribe, The Telegraph, Delors states "surveillance" was a problem (An interesting choice of words for a European.), as bureaucrats, the Council of Ministers, failed to police member states to ensure they followed economic convergence criteria. Dont' know about you, but that sounds like they reneged on an agreement they signed.


Even the word science, Orwell pointed out, isn't immune. It's a word like many others--e.g., patriotic, democracy, justice, realistic, to name a few: "Words of this kind are often used in a consciously dishonest way. That is, the person who uses them has his own private definition, but allows his hearer to think he means something quite different."


Like a blanket of soft, fresh snow the doomsayers wallowing in their gloom fest are all over the problem. So what if a few countries opt out of the monetary union? It's happened before, more than 80 other times since the 1940s, and most ended so horribly that hardly anyone can remember. It isn't like the EU bureaucrats and politicians didn't know what they were getting, especially with Greece and Italy. So who are the naive here, bureaucrats and politicians who cooked up this scheme, expecting a quick religious conversion, or those of the so-called peripheral, weaker countries?


Perhaps this whole mess is a clear warning to the rest of us about international bureaucrats and politicians who keep pushing for globalization, one-world government and the end of local sovereignty, a clear signal just how dangerous these supposed know-it-alls are.


For many of Germany's critics the outcome of no bailout represents a kind of living Dante's Inferno. Worse still, a clutch of investment bankers and their ilk will likely take a big hit. The repercussions could provide another round of shock and awe. But maybe, just maybe that's what the entire system needs. Maybe then, just maybe words and meaning will carry some real meaning.

A Look Back

Sometimes it's fun to take a look back at something you wrote a while ago to see just how relevant it turned out given what you thought might happen. This article originally appeared on http://www.safehaven.com/ way back in 2006. It was actually a companion article with another one we wrote around that time about the local California real estate market that was beginning to show signs of a downturn. There's an old saying: Early is as early does.

---

Helicopter Commander

By: Ron Ellison | Sat, Jan 28, 2006                                      



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"Counterfeiters are generally reviled and for good reason." - Murray N. Rothbard, The Case Against the Fed

What economic fate Americans have. You could hardly conjure a more questionable one when it comes to monetary policy. We've had 18 years of the Maestro Man and now we're getting Helicopter Commander, Ben Bernanke, the new Fed chairman select.

It's a gray, dreary winter afternoon in the not too distant future. The stock market has plummeted and housing prices went south with the flock of migrating birds several months earlier. Unemployment is nearly as high as a spring stack of Kansas wheat and business activity is moving slower than an Alaskan glacier.

A lonely unmarked black helicopter hovers over the canyons of Gotham. Several miles above the helicopter a pair of jet fighters crisscrosses the bleak, wintry sky. Suddenly over the racket of the rotating blades the intercom crackles to life.


HC: What the hell are you guys doing back there?"
Crewmember (Obviously out of breath and somewhat startled): "We're doing our best, sir!"
HC: "Well, what's taking so long?"
CM: "We're dumping the stuff as fast as we can, sir."
HC: "All right. Just hurry it up. Drop the rest of that crap and let's get out of here. It's getting cold. I've got an FOMC meeting to chair tomorrow and a trip up to Capitol hill later in the week."
CM: "Yes, sir! We only have three bags of money left to go, sir."
HC: "How many is that for the day?"
CM: "I don't' know, sir. I lost count."
HC: "OK. Just close that damn door as soon as you can and let's get the hell out of here. I'm freezing."
CM: "Yes, sir."


On the streets below an icy wind wends its way between the tall buildings as thousands scramble to pick up the nearly worthless paper. Gotham City has seen its share of ticker tape parades in the past, confetti raining down on the cheering multitudes, but none to match this spectacle. The air is filled with dollar bills floating to earth. Suddenly a bullhorn appears at the slightly ajar door of the helicopter and a reverential, academic voice momentarily disrupts the commotion.

"Don't panic. We'll be back soon and dump some more!"

The bullhorn quickly disappears inside. The door slams shut and the intensity of the rotating blades increases. Then the helicopter makes a sharp u-turn and eerily fades into the overcast sky behind the huge buildings.

During the Greenspan years the monetary based increased at an annual rate of 6.8 percent from approximately $234 billion to roughly $783 billion. Money supply as measured by M3 during that time shot up 179 percent, going from $3.6 trillion to more than $10 trillion, given the most recent figures, a 5.8 percent annual increase in M3 during Greenspan's reign of monetary terror. That's a lot of liquidity sloshing around, looking for places it may not need to go since it could prove troublesome once it gets there.

The current account deficit, then at a record level of 3.5 percent of GDP, now hovers near 7 percent. Private sector debt has increased from 120 percent to 153 percent of GDP. U.S. personal saving rate during the Greenspan years has dropped from roughly 8 percent to -1 percent.




Though some argue this is not a problem, it remains to be told. Now along comes Ben Bernanke, a guy many feel, for whatever it's worth, is more of an inflation hawk than Sir Alan. In some ways that's a bit like saying he's the smartest kid in the dumbest row at school. And one wonders how long it will be before that becomes a sticker on the rear bumper of some proud parent: "My son is the smartest kid in the dumbest row at St. Stupid's."

When the hot money typhoon swamped those Southeast Asian Tiger economies in the late 1990s, one local leader blamed the currency boys. Greenspan over the years has conjured up his own villains, irrational exuberance being one of the most famous, since it was an indirect way of blaming investors. If the unthinkable becomes fact, it will be interesting if not downright amusing to see at just whom Bernanke wags the finger. In a sea of uncertainty one thing remains certain, it will not be the Federal Reserve Board in these United States of America.

The Naked Truth

                                        

In the old black-and-white days of television there was a hugely popular crime drama set in New York City about detectives in the 65^th precinct.

The show focused on real-life crime and ended each episode with perhaps one of the most famous lines in the history of television: “There are eight million stories in the Naked City. This has been one of them.”

Well, here in the Golden Bear State, we got around 34 million people; that’s the ones we know about. We don’t know how many of them know about this next story, but since next year is an election year, this is one they might want to know about.

California is the worst-run state in the nation.

50. California
> State debt per capita: $3,660 (21st highest)
> Pct. without health insurance: 18.5% (8th highest)
> Pct. below poverty line: 14.5% (tied for 21st highest)
> Unemployment: 11.9% (2nd highest)

California has moved down one slot on from last year to earn the title of the worst-run state in the country. In the fiscal year 2009, the state spent $430 billion, roughly 14% of all the money spent by states in that year. Compared to its revenue, the state spent too much — California had the 10th lowest revenue per person, and spent the 15th most per person. California is the only state in the country to be rated A-, the lowest rating ever given to a state by S&P. Despite the huge amount the state spends each year, conditions remain poor. California has the second-lowest percentage of adults with a high school diploma in the country, the second-highest foreclosure rate and is tied for the second highest unemployment rate in the U.S.

Read more: Best and Worst Run States in America — An Analysis Of All 50 - 24/7 Wall St. http://247wallst.com/2011/11/28/best-and-worst-run-states-in-america-an-analysis-of-all-50/#ixzz1fJiB0G6t

If you’d like to know more about the naked truth keep reading financialspuds.blogspot.com.

Credibility: Does It Matter?

RL Ellison

With the credibility of politicians around the world at record lows and that of bureaucrats and the media not far behind, pundits everywhere cough up all sorts of explanations when best-laid plans go south, pointing the fickle finger of certainty in every which direction.

Perhaps nowhere is this more apparent than in the debate whether the European Central Bank should suddenly become the monetary cavalry of last resort riding their trusty printing press to the rescue and forever clean up the critical, pitiful fiscal mess the European Union now finds itself wallowing in.

 The division is clear-cut. Hardliners say no, enablers, yes.

For the enablers it’s not so much: “Help us now and we won’t do it again.” It’s: “Help us now and we won’t ever have to do it again.” For the hardliners the problem with that is it relies to a certain extent on predicting the future, something no one can accurately accomplish.

Grabbing the headlines on the Internet recently was a story entitled: “Half of Hollywood Is Broke.” The article focuses on several celebrities who, for various reasons, have bitten the bankruptcy bullet. For many it’s an attention getter. A closer look reveals that several of them surprisingly have gone BK more than once. After the first time, like a lot of things in life, it apparently gets easier.

Buried somewhere in this debate is the valid question: Why make laws if you’re only going to break them when it’s to your convenience? And buried in that question is another, more important one: What about credibility?

That seems to be the message of Otto Issing, a former member of the Executive Board of the European Central Bank. Issing, a German, in a Financial Times article, “Bond Buying by the ECB Would Result in Moral Hazard,” writes: “…the situation in the euro area is fundamentally different from the US or the UK. No one would argue that the Fed should guarantee the debt of individual states. No need because there are strict limits for debt financing by US states. (Someone apparently forgot to inform our legislators here in California!) This is also a fundamental principle of the European Union…”

Issing goes on to point out that it was precisely this principle that every EU member signed, according to the provision in the Maastrictcht treaty, to ensure a stable currency. Simply put, you agreed, should the need ever arrive, to have your feet held to the furnace. Now that the need is here, you want others who have honored that pledge to hold their feet to the flame. We hate to digress, but this sounds eerily like some left-wing-Barney Frank hatched screen play for an upcoming left wing Hollywood movie starring Sean Penn and Susan Sarandon.

Issing goes on: “Pressing the ECB into the role of buying public debt of individual member states would create the biggest conceivable moral hazard.”

“On top of these alarming and monetary consequences,” Issing continues, “providing monetary financing would break the law—a constitution ratified by all governments and parliaments…..How credible is an announcement of ‘strict future rules’ if at present violation of law is so widely, not only accepted, but requested?  

In case you may not recognize it, Issing is posing the famous unintended-consequences question here:

“If the ECB goes in the direction of becoming the ultimate buyer of the public debt of member states detailed consequences are hard to predict. However, one thing seems to be certain. It would be a daunting challenge to restore credibility,” he concludes.

We don’t know if Issing would ever consider renouncing his German citizenship and running for Congress here, but we believe someone who truly understands the danger of creating moral hazards, i.e. credibility, would win by a landslide.

Congressional Insider Trading and the Media

RL Ellison

Someone once remarked Hollywood is all about money and Washington all about power.

Money and power, however, strangely enough, are five-letter words; and when it comes to Washington completely fungible. Money is power. Power is money.

Count the number of lobbyists slurping and slinking around our Capitol. Question: How do you spell money? Answer: Lobbyists. It’s a local joke with non-local consequences.

There is another joke about the golden rule: Whoever has the gold makes the rules. In Washington whoever makes the law has the power. Whoever has the power makes the lucre. Enter from stage crooked trading on insider information.

If you’re Martha Stewart about now you should be not only pissed off but outraged. If memory serves, mostly Martha went to jail for insider trading.  Now Martha is hardly alone, just more profile, more example prone. For those fortunate, elected chosen few who occasionally ambulate through the hallowed halls of our nation’s Capitol, claiming to do some of the public's bidding, insider trading is legal. Wonder how that happened? (Notice we purposely left out ethical. One of the things one learns early on is never bring up ethical and Congress in the same sentence.)

We’ll spare you all those sticky little, boring details, plowing back through decades to the 1950s when legislation defining what constituted insider trading violations somehow omitted Congress. It was, as they say, an accident I’m sure, a brief oversight or cerebral lacunae in attention. That brief oversight, lacunae in attention recently somehow celebrated its well-over-50th birthday. 

As exclusive as this exclusive club is, it’s hardly one of those things that doesn’t get passed around. Just ask the current and the former speakers of the House. What brought all this sleeping-dogs-should-hopefully-stay-left-alone-stuff up is a recent book by Stanford professor Peter Schweiger, Throw Them All Out.

Now the watchdog of the world, our illustrious media, has apparently treated this unseemly subject like a hot potato, taking their cue from a line in a famous Willy Nelson song, “Don’t hold on to nothing too long. Just take what you need and leave….”

Here’s how the Security and Exchange Commission defines insider trading:

Illegal insider trading refers generally to buying or selling a security in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include ‘tipping’ such information, securities traded by the person ‘tipped’ and securities traded by those who misappropriate such information.

Now we'll leave it up to you to decide if any of that at all is applicable to our august officials in Washington. We'd leave it up to the media, but they've already done what they do best, move on.

You Gotta Love It

November 27,2011

                                                

European lawmakers recently rejected Ireland’s nominee to the European Court of Auditors, according to an Associated Press report.

Reason:  He made a small miscalculation when he helped calculate Ireland’s national debt—3.6 billion Euros or $5 billion. The candidate, Kevin Cardiff, a senior servant in Ireland’s Finance Department, was endorsed by the Irish government for the $370,000 a year position. The Luxembourg-based court audits EU finances.

It seems Cardiff was deeply associated with Ireland’s ill-fated bank guarantee program that ended up costing 70 billion Euros to bail out six troubled Irish banks. The Budgetary Control Committee of the European Parliament in Brussels rejected Cardiff in a 12-11 vote, the first time a candidate has been turned away since the Court’s formation in 1975. Several lawmakers apparently informed Cardiff that they had received numerous emails from Ireland requesting that his nomination be blocked.

Switch quickly to the Obama administration. Though now, given the fallout from the MF Global meltdown, they will most probably try to deny it, the administration was highly considering appointing Jon Corzine as the next Treasury secretary of the US. But Corzine it appears will be spending at least part of his pre-Christmas holidays testifying before a senate subcommittee investigating MF Global’s sudden demise, Corzine’s abrupt resignation and what happened to $1.2 billion in customer funds.

tm hatter

Open Letter to Super-Duper Committee

LET THE CUTTING BEGIN

There is an old saying in medicine whenever one is dealing with an open wound or a contaminated laceration: "The solution to pollution is dilution."

In some cases the more dilution the better. And when it comes to pollution, you can forget about carbon dioxide and ozone layers. What we're talking about here is government pollution.

From the silly legislation that prevents start-up businesses from starting up to burdensome, complicated tax codes more mysterious than the Da Vinci Code to wasteful government spending that would make every drunken sailor who ever lived blush, it's as obvious as Barney Frank's sexual preference: Too many chits out, too many IOUs, the sum and substance of politics everywhere.

Now before all you epithet-hurlers get worked too tight, Mr. Frank has publicaly awowed his preference; that makes it a statement of fact, one of public record. If beauty is in the eye of the beholder, so too must be malice. No malice intended here, just fact.

Irrigating a wound helps remove the unwanted bacteria and debris. The wrong bacteria in the wrong place is just another name for debris. And that's what government waste has become, just so much debilitated, dead debris that will soon include, if something sensible isn't done, the U.S. dollar, DOA. And the answer sure isn't setting up a bunch of trade barriers, hello Chuck Schumer.

As is sometimes the case with wounds, irrigation often isn't enough. Unwanted waste must be excised. That usually means taking a scalpel and some scissors to cut away the unwanted so the remaining healthy tissue can florish. That's just about where we are today as a nation.

So forget all that political nonsense about bipartisanship; it never was and never will be. Just send your elected official a scalpel and a pair of scissors.

Drug Screens and Inventories

Inventories matter.

High inventories equal low demand or a bottleneck, meaning you can't get the stuff out faster than demand is building up or coming in. Think bathtub here. Low inventories are usually just the opposite, very little demand or can't keep up with what demand there is. If housing or energy, as in oil or natural gas, come to mind, you're onto to something. But you could just as easily toss in things like credit, money and jobs. Or Drug screening.

Drug screening is a huge part of employment these days. Companies routinely require it for many new hires. They also do random drug screening. Back when the economy was riping and roaring, a friend of mine who owns several industrial medical clinics used his own private economic indicator, pre-employment physicals. When the economy is good and firms are hiring, his daily numbers soared.

One day he called me, somewhat exasperated: "Man, I'm going to have to hire more staff.  It's so tight out there, a lot of firms are even hiring people whose tests are coming back positive. They don't care." They needed bodies. Supply wasn't keeping up. Anyone who really wanted a job back then could've had it. So much for the cry-babying-full employment crowd. They never get it. Not everyone wants a job.


A funny thing happened in late 2007. His numbers started to change. Like many things at first it was just a trickle. The rest of the story we already now know. With unemployment much higher than the government wants us to believe, an over-built housing market and a horde of tapped out consumers, an administration and a Congress that apparently haven't got a clue, the Ben Bernanke Printing Company, one could ask oneself: what's the nation's inventory?

Just for kicks, toss in the fact that the EU has a severe case of fiscal ptomaine poisoning and is looking for a place to conveniently upchuck; and you may get some idea that, as one of America's great metaphysical philosophers, Yogi Berra, said: "It ain't over until it's over."

How long is it going to take? As long as it takes. In the meantime, keep your eye on those inventories, especially your own.