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A September to remember? In Germany.

August 24, 2012

The German constitutional court is due to vote on the legality of the ESM (the successor to the EFSF) and the fiscal compact on September 12.

What in heck does that mean?

Well…the EFSF is the European Financial Stability Facility, of course. It’s one of those spivs…we mean SPVs…Special Purpose Vehicles…that financial engineers like to build for bureaucrats to hide all sorts of complex shenanigans (read…money printing). They figure that if it’s sophisticated enough, people will believe that it makes sense…or at least give up trying to figure it out. You can read more…if you dare…here:

http://en.wikipedia.org/wiki/European_Financial_Stability_Facility

So what is the ESM then? ESM stands for European Stability Mechanism.

Don’t you love how they come up with these solid sounding names, designed to invoke confidence and awe. We like to take the opposite definition and believe that anything deemed “stable” by bureaucrats is probably inherently “unstable” and anything that they describe as mechanical will probably break down.

But here’s a more erudite description:

http://en.wikipedia.org/wiki/European_Stability_Mechanism

Basically, from what our simple minds can gather, it’s a big bucket into which nations which are already technically bankrupt all agree to contribute funds that they don’t have, to support a cause that they don’t believe in.

The obvious stand out from the pauper crowd in Euroland is Germany, which must have its constitutional court opine on the constitutionality of contributing before it can ratify the agreement.

Germany’s ratification is critical to keep the ESM from sputtering off into the annals of bureaucratic ignomy.

What will the court rule? We don’t know much of anything about the German constitutional court but we do know that courts are not as impartial as they used to be. Obamacare anyone?

So we suspect that they will deem the ESM to be valid and legal because there is such prevailing political pressure to do so. But if they don’t, the EZ policy makers, who are already emotionally committed to spending the money (by purchasing sovereign debt in the primary markets), will have to do some mighty quick tap dancing.

So expect things to get interesting as the September 12 court decision draws near.

Victor VIX may even wake up for this one.

As an aside, things truly mechanical in Germany are slowing down as well and the German economy is borderline recessionary. If they slip across that dangerous border, the average Germans, being more astute and austere than many of their southern neighbors, will trim their spending immediately, if not sooner.

That means they will buy less olives from Greece and Spain, less wine from Italy and less cheese from France. This will not bode well for those economies that are already teetering on disaster.

Speaking of which….tomorrow…we’ll take a look at what’s coming up in September for that poster child of economic disasters…Greece.

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A September to remember…perhaps?

August 24, 2012

What a lovely August it has been in Europe. The London Olympics are being hailed as a great games…maybe the greatest (didn’t they say that about Sydney too?), the rioters in Greece have gone quiet, the French are at the beach, the Germans are in Majorca, the Spanish are in denial. All is well with the world.

But August is coming to a close and there is a busy schedule ahead for the Eurolanders.

Just for fun, let’s take a look and see what could possibly go astray. Starting alphabetically.we have…

France: The French government is scheduled to unveil its 2013 budget in September. This is an easy one to predict. Soak the rich, succor the poor.

But the rich can flee. The poor and the middle class cannot. So succor the poor and bludgeon the bourgeoisie. The markets will be disappointed if there are not large spending cuts and realistic austerity measures. But austerity is a dirty word, especially in southern Europe and the bare mention of it often results in unfortunate things like riots, burning tires, bruised gendarmes and such.

So like all good leftist politicians who have never had a real job in their technocratic lives, Monsieur Hollande will opt for the softer options while he would do well to remember what the Iron Lady (Maggie Thatcher) had to say about socialism and other people’s money. What…you don’t remember? Let us repeat it here because it’s worth repeating.

“The problem with socialism is that eventually, you run out of other peoples’ money”.

Watch out for France. It reminds us of can of paint perched precariously upon a wobbly ladder…a veritable accident waiting to happen. Maybe it will just take a burly German with one too many steins in hand to bump that ladder. And speaking of Germany…there’s lots going on there too. More on that to come.

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Are Victor Vix and Veronica Volume also telling us something?

August 22, 2012

What a lovely summer it has been for stock holders . Global stock markets (excluding the Chinese, at least) have been enjoying a remarkable rally since June.

Usually these summer flings are brief and flighty…which is what summer flings should be. They usually average about a 5% gain in the S&P 500. But this fling is positively steamy. After the market topped out in March and then slipped 10% in early June, it’s turned around. We are now in our third month and we are up 10% since that early June low. We’re back, in fact, to where we were in March but looking good indeed with the market way above its 50 day moving average.

But what really makes this rally so interesting is that it has completely ignored all the usual things that would send the summer fling spinning into a rancorous demise.

Why, just look around and just count the ways a fling could run asunder:

Accelerating global economic slowdowns
Tepid and declining earnings
Forecast warnings from major corporations
Eurozone dramatics
Looming fiscal cliff
Miniscule trading volume
Massive investor complacency

Let’s look at that last one, shall we?

Victor VIX is telling us something. And that is that investors are remarkably bullish, confident, and optimistic. That can be seen most clearly in the VIX Index, also known as the Fear Index.

Courtesy - Seekingalpha.com

The VIX got as low as 13.30 last Friday, its lowest level of fear (so, by inference, its highest level of bullishness) in the last five years, lower even than at any of the rally or market tops since 2007. Remember 2007 and how good everything seemed. We were all Goldilocks then.

But just in the last several trading sessions, Victor Vix has a new lease on life…roaring back to as high as 15.50, which is still pretty calm…all things considered.

But recall what happened when Victor went on a frightful bender after his last real slumber back in April 07. We prefer not to but it is emblazoned into our psyche like some ugly tattoo we’d wished we’d never let near our navel.

Before he was done breaking hearts and busting portfolios all over the globe, Victor VIX had hit 90.

So here we are again. We have complacent investors and to make matters worse, exceedingly low volume…the lowest in fact, since December 2007.

Where is Veronica Volume when we need her?

So back in the Goldilocks days of 2007, we had a slumbering Victor and a vanishing Veronica.

Guess what…once that low volume rally ended in late 2007, the Dow plummeted 12% over the next couple of months, while the Nasdaq clipped 20% during roughly the same period.

Ouch…there goes our psychic belly button again.

Once again, we have extremely low volatility and tepid volume. And just recently, we learned that Warren, George and John may be taking flight.

Should we be wary? We strongly suspect that we should.

Over the next few days, time permitting, we will take a look at a few things in Euroland that are likely to make for an interesting September. Stay tuned.

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Are Warren, George and John telling us something?

August 20, 2012

An SEC filing on Tuesday detailing Berkshire’s portfolio at the close of the second quarter revealed significant cuts to holdings in Johnson & Johnson, Procter & Gamble and Kraft Foods, all stalwarts of Warren Buffett’s portfolio.

Maybe that’s got something to do with the changing of the management guard at Berkshire as Warren eases out…after all, he’s no spring chicken anymore (was he ever?). But the reductions were big. J&J, P&G and Kraft were three of 14 equity positions worth more than a billion dollars at the end of 2011.

So, maybe it’s just trimming or maybe it’s more. We love companies like JNJ, PG and KFT but not at these prices. They are way too rich for our valuation metrics at Craven Capital. We prefer JNJ and PG under $60 and KFT way under $40 but we see them as bulwark companies that can and will stand the test of turbulent times.

Why is Warren taking profits? What is he going to do with that money? Maybe he’s raising cash to buy another railroad (great inflation hedges that they are) or cash to rescue Goldman Sachs (again).

Or maybe the 2nd richest man in America is thinking about buying that ultimate inflation hedge…the same thing he allegedly called a barbarous relic some years ago. After all, that’s what the 7th richest man in America, Golden George Soros is doing.

In a recent SEC filing for the quarter ending June 30, 2012, it was reported that Soros had sold all of his equity positions in major financial stocks, including Citi, JPM and Goldman Sucks (sic). All up, he dumped around $50 mill.

But what is really interesting is what he bought with that money.

Yep…Golden George is buying gold…in the form of shares of the preeminent gold ETF…GLD.

Hence, the man who broke the Bank of England is trading paper for gold. Personally, if we had that sort of money we’d buy bullion but that’s our opinion. It’s his money.

In the meantime, another very smart fellow, the 17th richest man in America, John Paulson has been loading up on more gold himself, at the expense of a significant amount of paper assets, mainly in tech stocks.

So what does all this mean?

When major players like Buffet and Soros, with their direct ties to the White House, Wall Street, and the banking system generally start dumping stocks (and stashing gold in the case of Soros and Paulson), it may suggest a very serious market move is set to happen.

Despite what they say to the contrary, if there’s anyone with an inside track of where things are headed next it’s Warren and George. And John is no slouch either.

For his part, Soros even wrote about it. In his book The Crash of 2008 and What It Means, he referred to the current economic and political model the “end of an era”. He even intimated that the financial and economic situation across the world is so serious that Europe could soon descend into chaos and conflict and that the world is entering “one of the most dangerous periods in modern history”. Worse still, he foresees violent riots in America and a brutal clamp-down by the government that will dramatically curtail civil liberties. You mean…even more than we’ve seen already.

Maybe that’s why the folks at Homeland Security felt a need to order 400,000 rounds of ammunition. Could we see shoot outs when checking in?

Soros publicly gave the governments a roadmap to follow but maybe he believes that Gentle Ben, Tiny Tim and Super Mario are off course, so he’s getting out of those companies which are most at risk in another 2008-type meltdown, this time with sovereign nations also being squeezed like over-ripe tomatoes in a Safeway store.

So George and John…and maybe Warren…are moving from paper to something a bit more solid. When three of the world’s richest men are doing similar things, it pays to pay attention.

Got gold?

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Racing to financial oblivion…at 120k per second!

August 18, 2012

We know the national debt is approaching 16 Trillion (with a capital “T”) and we know that the Federal government continues to print and spend like drunken sailors on extended shore leave but please take a moment to review this excellent piece of writing which puts all this spending in some context that we might be able to appreciate.

Fact of the matter is that the government is spending our money (remember, the government has NO money of its own) at the rate of $120,000 per (wait for it) second. Yes…you read correctly…per second.

So in the time it took us to prepare and type these two paragraphs…roughly 2 minutes…the government spent $14,400,000. Woops…by the time we typed that number, another million just slipped away. There goes another…and another. This is lunacy.

Check it out, if you dare.

http://thestrangestbrew.com/?p=377

If this link does not work perfectly, go to thestrangestbrew.com and look for $120,000 under featured articles. It will be worth your while.

So let’s think about this for a moment and try to figure out how we can continue to race along at $120,000 per second.

According to the IRS, the number of people with adjusted gross incomes exceeding $1,000,000 in 2009 was around 350,000 out of a total of 140,000,000 tax filers (0.08%).

Let’s say we taxed all those horrible millionaires at say….100%…yes, we’ll show those rich fat cats who’s the boss. Of course, some will make more than $1mill but for the sake of argument, we’ll collect $1mill from each of them…you know…as a one time, public spirited act of charity to eliminate the debt. They all have plenty of money..they’ll barely miss it.

Examining the math, it looks like:

350,000 fat cats x $1,000,000 = $350,000,000,000 (a nice tidy sum)
$350,000,000,000 / 120,000 = 2,916,667 seconds
2,916,667 seconds / 60 = 48,611 minutes
48,611 minutes / 60 = 810 hours
810 hours / 24 = 33.75 days

So, even if we taxed all those dastardly millionaires a million bucks each, we would only raise enough stolen funds to keep the government going for just over one month.

OK…let’s go after the corporations as well…they have lots and lots of money and we know how greedy they are.

We’ll take a look at one of our Craven Capital Fortress Portfolio favorites, Exxon Mobil, for example.

In 2011, ExxonMobil’s total tax bill was an $104.52 billion. Breaking that down in reverse, that works out to $286 million in taxes every day, $11.9 million in taxes every hour and $200,000 every minute. A lot of money to you and us but chicken feed when you need more than half of that every second. Ouch.

The point of this story is that the spending…and therefore the debt…is unsustainable.

Check out this link for one retired accountant’s view of our debt dilemma. Unlike politicians, numbers don’t lie.

Remember, the government has no money of its own. It can only take from others. As Margaret Thatcher once famously stated…

“The problem with socialism is that eventually, you run out of other people’s money!”

We suspect that we may well run out sooner than we think. Invest accordingly.

Category: Uncategorized /

Stock market…fish market…what’s the difference?

August 8, 2012

What is the stock market anyway? 

In it’s pure essence, without all the associated mystery, it’s a mechanism for valuing stuff and a place to buy and sell that same stuff. 

Just like a fish market, except less honest, less healthy, less efficient and less fun…but maybe just as odorous much of the time.

The only difference is that the stuff being valued, bought and sold on the stock market are the shares of the companies which choose to publicly list on the various exchanges.  Substitute paper for tuna et voila…  the stock market, in all its smelly and sardonic splendor!

So what is something worth?

Well, whether it’s flounder or Facebook, it’s whatever we think it’s worth and are prepared to pay for it. 

Think about it for a moment.  Sometimes we are in a great and generous mood and a $17 glass of wine sounds like a fine idea. 

Other times we are feeling not so flush, our biorhythms are out of kilter, the morning coffee has worn off and we are quibbling over whether we should buy the $8 bottle of yellowtail, which is now on sale for $5.95. 

The market is the same.  Some days, Mr. Market is overly generous in his assessments, while on other days, he is tight as a drum. 

Either way, we don’t care.  We recognize Mr. Market and his mood swings for what they are.  We like him when he is wildly exuberant.  We adore him when he is morbidly depressed.  It’s his wishy-washy , indecisive side we can do without…so we ignore him on those days.  

So, it’s the times when he is at his manic best, that we like him the most…because he gives us opportunities to do what we like to do…make money.

You see….at Craven Capital, we like businesses.  We like good management.  We like free cash flows.  We like solid and consistent earnings. We like capital efficiency.  We like deep and broad moats.  We like dominant market positions.  We like steady and secure dividends.

In other words, we like companies that we believe will pay us for investing in them. 

The fact that they are listed on the major exchanges and are therefore at the mercy of Mr. Market’s capricious personality, invariably gives us the chance to buy the companies we like at prices that are not necessarily reflective of their true value.   This can be a very good thing.  And once we own the companies we like, Mr. Market’s moods help us to make more money by selling him call options when he is wildly excited and  put options when he is morbid and fearful. 

So let’s raise a toast (Stags Leap or Yellowtail…your choice) to Mr. Market.  May he never discover the benefits of deep sleep, meditation or yoga. 

Category: Uncategorized /

A wee bit more on the BOGUS numbers…

August 7, 2012

Maybe Mr. Market is having a spot of irrational exuberance after Friday and Monday.  Why, you might ask…well…because a lot of his enthusiasm is based on Friday’s unemployment numbers and because a large portion of the 163,000 new non-farm jobs reported are temporary  and likely to disappear as quickly as they appeared.

There was a surge in food service and other hospitality positions, which have a propensity to be temporary because many of these jobs come from industries that generally benefit from summer vacation season.

Food and drinking establishments boosted hiring by 29,000, while temp services jobs increased by 14,000, which some see as a good sign.   Education and health care added 38,000 but one can argue that the health care jobs anticipate Obamacare and its future is surely dependent upon the outcome of the elections and therefore certainly not a lock.  And finally, information services jobs related to motion picture and sound studios grew 11,000, presumably related to the billions being spent on said upcoming elections.  Those jobs will likely disappear too.

In the meantime, consumer spending is flat while savings seem to be growing.  I guess not everyone believes in adding more debt to their balance sheets.  Shame on them!

But who cares, the market loves it and that’s all that matters.  Or is it.  Let’s take a look at what the market really is…tomorrow!

 

Category: Uncategorized /

More BOGUS numbers?

August 6, 2012

On Friday, the market positively rejoiced over the latest numbers from our friends at BOGUS, but are they all they’re cracked up to be?

The pundits were hoping for 100,000 or so but the number came in at 163,000…causing the HFT (those pesky high frequency trading) computers to shift into overdrive and force the Dow up past the elusive 13,000 and propel the S&P towards the equally elusive 1,400.

How much of this was general enthusiasm….the so-called “risk on” trade…and how much was the shorts ducking for cover, we don’t know…or care.  All we know is that the market is and will continue to be in a manic mood as we meander through the second half of the secular bull market we now find ourselves in.

So the July employment report showed nonfarm payrolls weighing in with 163,000 additions, up from the previous month’s 64,000.  This was a big surprise, especially given the recent run of bad news, like the Institute for Supply Management’s index of business activity dipping  below 50 (the dividing line between expansion and contraction), for the second month in a row in July.  That had not happened since mid-2009 when everyone thought the world was coming to an end (now, of course, we know that the world officially ends on 12/21/12).

But here’s what we can figure out.  The index of business activity drops to lows not seen for 3 years yet the folks at BOGUS (remember…that stands for the Bureau of Goosed-Up Statistics) saw it differently.   By the way, BOGUS used to be called the Bureau of Ginnied-Up Statistics….but all the Ginnys of the world became upset that their lovely name was being associated with such frivolity.  And the folks at Bombay and Gilberts were not impressed either.  Hopefully the geese will be less sensitive.

In any event, the BLS / BOGUS surveyed that factory jobs increased by 25,000 last month. Firstly…what is a survey?  Come on now.  How definitive can those numbers be?

But wait…there’s more.  The Goosed-Up statisticians added 377,000 jobs for seasonal adjustment. That just happened to be the largest such adjustment in July for the past 10 years. Wow! Who knew?

But wait…there’s even more.  Let’s not forget the invariably reliable (excuse the facetious tone) birth/death model that miraculously added another 52,000 and voila…you have way more than 163,000…in fact, way, way more…like almost 430,000.

That’s a nice big number so how come the U3 unemployment number edged UP to 8.3% and the U6 number representing under-employed as well, breached 15% again?

We’re more confused than normal.  But who cares…the market liked it and so Gentle Ben’s asset bubble remains intact…for now.

Why should we worry that 1 in 7 Americans remains unemployed or under-employed.  And that’s only counting the ones who ostensibly count.  What about all those others who have simply given up, disappeared off the rolls (but hopefully not off the rails)? In fact, according to John Williams, over at Shadow Stats, the real number should be above 22%.

Take a look at this Fox News interview.

http://video.foxbusiness.com/v/1748956928001/the-real-unemployment-numbers/

But OK…let’s cut the BOGUS folks some slack and accept that their 163,000 number is spot on.  Great…but we all know that we need to create 150,000 new jobs every month just to keep up with population growth (organic and through immigration).  So we beat it by 13,000 in July but missed it by 86,000 (150,000-64,000) in the preceding month so we’re still behind by 73,000….and that’s just counting two months.  Hardly anything to crow about.

But the market doesn’t care and the mainstream media likes to portray rosiness whenever it can…so a combination of market exuberance, short covering and effusive news coverage pushed the market up, where it remains as we go to press today.  So all is good with the world….until it isn’t!

We’ll talk more about Mr. Market in a day or so…it will be a nice break from our debt dilemma discussion.

Finally…here’s CBS reporting the BOGUS news.  Everything is good with America…unless of course, you happen to be 1 of those 7 un- or under-employed Americans who have the time to watch such drivel.

http://www.cbsnews.com/8301-505123_162-57486029/job-creation-picks-up-steam-in-july/

 

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More on the big debt dilemma and more from the BOGUS…err…BLS

August 5, 2012

Well…another week and another seven hundred million dollars ($700,000,000) added to the national debt.  We’re now over 15.9 trill and on record pace to hit 16 trillion.  Wow…if this were an Olympic race, this would be a world record for the ages.  Unfortunately, this is no game or athletic event.  This is an act of historic lunacy that has real life ramifications for literally hundreds of millions of people, both here and around the globe.  When you are the world’s leading economy, one would think you would have a responsibility to act responsibly but unfortunately, the children masquerading as our political leaders don’t think that way.

In researching this post, we went looking for periods of other such lunacy, hoping and expecting to find some interesting tidbits on such fabled fellows as the pyromaniac Emperor Nero or the fine living Louis XIV of France or even Louis XVI (his grandson, who literally lost his head over what amounted to misuse of sovereign funds).

But under the Google search heading of “Greatest spenders in history” we could only find the name of the 44th president of these United States of America…one Barack Hussein Obama II, formerly known at Punahou School in Honolulu, as Barry Obama…a decent basketball player and apparently somewhat of a connoisseur of the finest pakalolo available in the Hawaiian Isles.  Such a standout achievement (the spending, not the smoking) was deemed worthy of our attention so we delved further to discover that, in fact, President Obama may hold the dubious honor of the greatest spender of all time.

Take a look at the following graph, which shows the progression of the debt total since 2008 (Courtesy of CBS).  George W. Bush did a pretty stellar job in his two terms of office, adding almost $4.9 trillion over 8 years but President Obama has eclipsed that amount, ringing in over $5.3 trillion since his inauguration.  And let’s not forget…at $100 million per day and about 4 months to go until the election, his could well be an Olympic level performance.

 

Looking at it another way, under the Obama administration, the U.S. government has accumulated more new debt than it did from the time that George Washington became president right up till William Jefferson Clinton (remember him…good old Bill Clinton) took office.

Now…you’re probably wondering where all that money went as chances are, you are not feeling any wealthier.  In fact, during the time of both presidents mentioned above, the real income of the average American has declined, not to mention the horrendous real and imagined (by the BLS folks) unemployment currently beguiling our economy.

Well, it seems that in addition to waging real wars around the globe, the good old USA has been waging a very expensive war on poverty.  Remember, that was the other war that LBJ escalated, aside from the one across the Pacific in Vietnam.

Brief digression…don’t you think that the foreign policy wonks would have thought a bit more about sending troops into a country like Vietnam, which:

  1. Beat back three invasions by the then master of the universe, Genghis Khan and his Mongol hordes
  2. Had just recently defeated and thrown out the army of one of the world’s strongest countries…hint…starts with F, ends with E, has a capital city with a large tower and a populace who like to retire early, eat cheese and drink wine…and take August off.

Of course you would think twice after that fiasco, but American foreign policy folks think differently from us.  Otherwise, why would they have suggested sending troops into another country, starting with A and ending with the first name of a fabled comedian named Stan (Laurel), after this country…Afghanistan…for those with no sense of phonetics or comedic history…had:

  1. Never been defeated militarily by the greatest empire of the time, Great Britain
  2. Just defeated and tossed out one of the most powerful and brutal occupying regimes in history…hint…their country starts with R and ends with A, crosses 22 times zones and has a lot of citizens who enjoy fish eggs and vodka.

So our geniuses figure that in both cases, superior American troops (which may be true) could venture in and win where other much larger and extremely lethal forces had tried and failed.  History may not repeat but stupidity and hubris certainly does.  Perhaps the same idiocy is behind the massive spending that accompanied and continues to accompany the other LBJ war, that War on Poverty.

So, to get a sense of where the money went…and that is the trail we are following…take a look at this graph.

 

No gravity here! Just upward and onward...until?

 

It’s not working so let’s throw some more money at it.

Now take a look at this graph of the national debt over the same period and see if you can see any similarity.

 

Hmmm...no gravity here either...yet!

 

Here we are then…pushing 16 trillion in debt, with 8.3% “official” unemployment and diminishing GDP.  Well something must be working, right?  All that money, spent on wars and welfare…someone must be better off, aren’t they.  Apparently not, at least if you exclude the increasingly wealthy, powerful and influential political and entertainment classes.  For the rest of us, US poverty levels are on track to rise to being the highest since the 1960s…when we initially started throwing money at the so-called “War On Poverty”.

http://www.huffingtonpost.com/2012/07/22/us-poverty-level-1960s_n_1692744.html

http://articles.boston.com/2012-07-23/nation/32786966_1_poverty-rate-food-stamps-job-market

At Craven Capital, we are beginning to conclude that the US might be far better off seeking peace on everything, than pursuing war on anything.

And let’s see who else we can blame politically for this mess?

Well, our congressional leaders have done their part, of course.  We’ve already seen that Barack Obama is the clear Olympic Champion of Debt, with GW Bush coming in a distant second but still eminently qualified for the team.

But squandering such large sums is a team effort.  It has to be.  No one can possibly do it all by themselves.  So let’s look at some of the other modern contenders in the following graph.

Gingrich and Hastert are clearly not holding up their part of the debt bargain, but Nancy certainly is!

Well, it looks like the lovely Nancy Pelosi has excelled herself and deserves her place on the Olympic Debt Team of the century.  But can we really blame her for taking her eye off the ball…after all, she was spending so much time scrutinizing the 2,700 pages of the Patient Protection and Affordable Care Act (aka Obamacare) it was hard to watch where all the money was going.

Oh…you think that her time was spent granting O-Care waivers to her favored constituents instead?  Good point.

http://nation.foxnews.com/nancy-pelosi/2011/05/17/pelosi-caught-hand-obamacare-waiver-cookie-jar

http://theweek.com/article/index/215375/the-obamacare-waivers-in-nancy-pelosis-district-corrupt

But let’s be clear here. This is not a political witch hunt.  We’re just having some fun trying to figure out who should qualify for our Olympic Debt Team of the century.

As stated in the previous post, most of us have sipped from the cup of credit at some point and after all, we elected these brilliant individuals and watched our reality shows and sports events while they fiddled in true Nero fashion.

This almost 16 trillion dollar binge that we have been on over the past 20-30 years has fueled the greatest standard of living the world has ever seen, or so we think. It’s not real.  It is temporary…a mirage.  We have stuff but do we have value? We have been living way above our means for so long that we do not have any idea of what “normal” is anymore. How many bedrooms and bathroom do we really need anyway?  As best we can tell, human beings can still only use one toilet at a time.

Let’s face it, you cannot solve a debt problem with more debt. Every debt addict hits “the wall” eventually and the USA will do so as a nation.  Can we really afford to be buying processed food for 50 million people and do we really need 4,500 military installations, including 700 bases overseas?

At some point the weight of our national debt is going to cause our financial system to implode, and every American (both born and as yet to be born) will feel the pain of that collapse.  Under our current system, there is no mathematical way that this debt can ever be paid back.  Our national assets are around $2.7 trillion and our unfunded current and future liabilities exceed 50 trillion (and could be much more).  The road that we are on will either lead to default or to hyperinflation or both.  We have piled up the biggest debt in the history of the world, and if there are future generations of Americans they will look back and curse us for what we did to them.  We have sold them into indentured servitude.

It’s really not about Republicans or Democrats.  We’re all to blame.  That’s the sad truth and the bad news.

So…is there any good news?  And what can we do about this mess anyway?

There is good news and reasons to be optimistic, which we will go into more detail about in future posts.  Suffice to say, there is a reason why these United States became the most prosperous country in the history of the world.  Part of it is natural and part is human.  Stay tuned.

In the meantime, for some comedic relief let’s turn to the most recent BOGUS…err…BLS, numbers. Sorry, but that will have to wait till tomorrow…

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So…who’s to blame for this big debt mess?

July 28, 2012

Could it be any or all of these characters? 

In reality, most of us are to blame to some extent,  because we all sipped from the ever-expanding cup of credit at some time.  Whether it was a mortgage, student loan or a credit card or 20, most all Americans enjoyed the benefits of the credit bubble that has arguably been inflating since the banksters got together on Jekyll Island way back in 1910.  The purpose of that meeting was to figure out how to tame Mr. Market after the most recent panic in 1907.  JP Morgan was the driver, as he had almost singlehandedly directed financial traffic during that panic.

Funny how JPMorgan is still directing traffic to this day…with good old J. Pierpont being replaced by dashing Jamie D.  Silly banksters always think they can tame Mr. Market but Mr. Market cannot be tamed (a discussion as to why is coming in the future).  But banksters are nothing if not persistent.

Anyway, the creature born in 1910 and ultimately released from Jekyll Island in 1913 became known as the Federal Reserve, which continues to terrorize many to this day.   You can read an interesting account here:

http://www.jekyllislandhistory.com/federalreserve.shtml

But should we hold the Fed primarily responsible for our current debt dilemma?

Maybe….but they had help.

In 1933, FDR (which could also stand for First Dictator of the Republic…if that title had not already gone to Honest Abe Lincoln for his numerous restrictions on civil liberty and other atrocities) confiscated all privately held gold in the USA, thereby eliminating the only real competition to the paper dollar.  Remember, the government is often not fair or just and in this case it was neither.  Good old FDR bought the citizens’ gold for $20.67 an ounce (the going rate at the time) and once he had all he could get his hands on, revalued it up to $35 per ounce…a nice little racket indeed…which anyone else would go to jail for.

So by eliminating the only real historical currency that could compete with paper, FDR should get a lot of the credit for creating the debt bubble.   But we have to turn to the Grand Old Party and tricky Dick Nixon to uncover the ultimate culprit.   FDR may have confiscated the gold and ripped off the paying public by hijacking the price but at least he left the gold standard intact.  Under the old rules, technically and practically, each US dollar was redeemable for gold at $35 per ounce.  In the 60s, fearing that the US dollar’s strength might be waning, countries like France and Spain wanted to be paid in gold, not paper…which they were.

But this was depleting the treasury…and no emperor or president worth his salt likes to see his treasury emptied.  So Tricky Dick closed the gold window on August 14, 1971…presumably while the French and Spanish and everyone else in the Northern Hemisphere were on holidays.   From that day on, the dollar was backed by….you guessed it…”the full faith and credit of the USA”.

Given that we now owe ginormous amounts of money to everyone around the globe, that backing is looking a bit tenuous.  Ultimately we will have lost faith and have no credit.

Anyway, once Tricky Dick had done his work and finished nailing the gold window shut, the proverbial horse was out of the barn and galloping to the next county.

At the time (as of June 30, 1971) the national debt was $398 billion against a GDP of $1.127 trillion, which is a reasonably manageable debt to GDP ratio of 35%.  Since then, our GDP has grown 14 times to around 15 trillion but our debt has grown 40 times.  How in God’s name did that happen?

Well, once Tricky Dick had taken the dollar off any ascertainable standard like gold, all bets were off.  The Fed could literally print money without any physical thing backing (or restraining) it.  Once printed, that other beast known as the Fractional Reserve Banking system could be unleashed to create almost unlimited amounts of funny money.

Of course, the full faith and credit of the USA has no limits and so neither did the politicians.  Elected officials excel in good news and shrink in the face of bad.  Printing money is the easiest of options and so that is the option they select.  Far better to print now and get elected than face an angry electoral backlash and Heaven forbid, have to go back to work in the real world…assuming there is a job to be had.

Imagine all these folks trying to find jobs that don't involve spending someone else's money?

 

 

 

 

 

 

Would you hire these people? Sorry...but if you live in the great state of CT, you already did (AP Photo / Jessica Hill)

 

So who do we blame for the debt? 

Well the Fed provided a system for unlimited funny money but it was physically restricted by the gold backing.

FDR helped pave the way by eliminating the only real alternative currency.

Tricky Dick Nixon removed the last remaining control providing the opportunity for politicians to spend, baby, spend.

So every politician is surely culpable…some more so than others.  But all of us are too.  They are our politicians after all.  We elected them.  And we all enjoyed some direct or indirect benefit from the great credit bubble.   And the banksters are clearly guilty…but you’ll never convict them.  They already lack any and all conviction.

So…is there anyone not to blame.  Sure…but ironically it’s the unborn future generations of Americans, who, while blameless, will have to suffer the consequences.   It will be their financial equivalent of original sin….unless, of course, we get our house in order in the meantime.  We can, but it will take a whole new breed of political leadership and a conviction by all that excess debt is a dangerous thing.

But try telling that to Gentle Ben (Benanke), Tiny Tim (Geinther) or Super Mario (Draghi).  Although not elected officials, they all want to keep their jobs too.

Sad to say, but national bankruptcy may be our only salvation.  Let’s hope we find fiscal religion before that happens.

 

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