"The Reality Facing Us": August 5, 2012

As I have pointed out before, the ACTUAL GDP has been declining steadily since last half of the year 2000, with only one quarter of growth (in 2004) since this "contraction" started. In real GDP there has been a GDP decline of about 30% since the year 2000. The USA population has increased more than 10% in this time, so GDP per capita has decreased to about 63% of what it was in the year 2000. If you use a reasonable figure of 40 million "immigrants" during this time the GDP per capita is 54% of what is was in the year 2000. So if you are wondering why you are suddenly so much poorer, well, this is the reason. And, unfortunately, the really can be no realistic expectation of the situation improving. I expect GDP per capita to continue to decline at the present rate until conditions change and the rate of decline increases, probably markedly. And certainly the mainstream media and the political class will be of no help. The reason I write is to suggest the attached link, which leads to a Power Point like slide show that neatly describes the situation we are all caught up in, which offers a real, but not easy, way out of this ugliness. The first step is to get past the "denial" stage of grief, then the "anger", to "resignation". We must face reality with courage and without illusion and delusion. http://www.businessinsider.com/jon

"More About Spain"

Like I said some weeks back Spain needs about 400,000,000,000 Euros to recap the banks. A loan of 100,000,000,000 Euros has been promised. Three times that much is still needed, and not as a loan - unless it is a loan "in name only" - because Spain couldn't pay back that much money at 5% interest in a million years. Maybe the ECB (run by Mario Draghi, by the way; Mario Monti is prime minister of Italy) will just buy Spanish bonds and just never redeem them, just vaporize, incinerate, or put them in a drawer and forget them forever, etc. Spain needs cash to pay off loans, not loans to pay off loans. The ECB will intervene in Spanish bond markets for sure, now, with massive buys that will just murder the shorts, like driving the interest rates of Spanish bonds down from 7.5% to less than five percent long enough, a day or so, to kill the shorts, and then say they will do it again whenever they feel peckish. The message is "you might want to be careful, boys and girls". The Germans are listening now to European "reason" because Greece owes Germany Target2 funds of 692,000,000,000 Euro (which are part of German bank "assets"). As well Germany holds Greek, Spanish, and Italian debt in unknown amounts, probably over 5 trillion Euros, maybe two or three times that amount. Greece leaves the EU, Germany is out 692 Billion Euro in Target2 funds, plus whatever the Greek government owes, plus what all Greek private citizens owe. Call it a round Trillion Euro. A loss of this size would make every German bank, insurance company, and pension fund bankrupt. Throw in Spain and the loss would be something like 7 Trillion Euros. Add Italy and it would be maybe 17 Trillion Euros. The EU would explode into space.

"What's In Their Coffee on Wall Street?"

On 7/13/12, The Evansville Observer wrote: > Bear Trader > On the Squak on the Street this morn prior to the opening, Jim Cramer > commented on the announcement by JPMOrgan that their loss was 4.4 billion up > from two, that when one considered that the final net PLUS the losses was a > huge number if applied by the multiple, then the valuation of the stock was > much higher....huh? thus he was positive on the stock for the future. > Lets all not discount our losses and apply the multiple and then be wildly > positive hUH? what is the new math..or is it new meth? > > Bear Trader Answers: As I said earlier Wall Street is totally hot to Buy, Buy, Buy. I didn't use those words, exactly, as I recall. I recall saying they acted like manic bipolars off their meds. The problem is that the world central banks including the Federal Reserve have printed so much money since 2008 ($15 Trillion in 2008 and 2009, as much as the US GDP) that Wall Street is awash with cash, drowning in it, and the money is burning holes in every pocket in the financial world. Even JPMorgan-Chase is throwing money around like a coke head. Dimon even says their $5,000,000,000 trading loss don't mean nothing. Did you know that Greenberg of Bear Stearns bragged about his coke use to an underling once, and showed him his stash? About 60 or 100 grams, it appears, costing several thousand dollars. Who do you think bought, buys, all that coke up in Harlem? It is not local residents as they don't have enough money. It is easy to snort $1000 a day worth (assuming you have the cash). Too bad I can't borrow a few trillion at 0.5% and get 0.6% from soon maturing Treasuries. I would get, for each trillion dollars borrowed, ten basis points per year, or one billion dollars per year. Not bad for no work and no risk, eh? Just call

The Short Squeeze---Point, Counterpoint

The Question: On 7/5/12, The Evansville Observer wrote: > Bear Trader > Please review how the commodities spiked up prior to the 4th of July. Oil > spikes up 8 dollars in one day, coffee spikes from 1.65 to 1.80. > Question: This seems to defy the fundamentals. Was this just the program > guys trying to spook the shorts and force them to cover? What is your take > on it. > China is slowing....this should slow demand for oil...coffee is > aplenty....why why why The Answer: Date: Sunday, July 8, 2012, 2:53 AM I don't know, Observer. A short squeeze is as good an explanation as any. I think it was the HFT guys. Some sort of algorithmic interaction amongst the the machines, a bit like the Flash Crash, maybe. The machines can't dance together, they are just like assembly line robots, skilled humans must intervene when they start bumping each other. Maybe the algos were programed to anticipate a short squeeze last Tuesday. Robots are very damned dangerous to be around.

"Spain, Spain, Spain"

For Spain to be really rescued would be tough. What Spain wants is the same thing that Greece wants, that is, all the free money it desires. Actually "rescuing" Spain requires putting adults in charge of government spending at all levels, that is, cutting politics and voters totally out of the fiscal loop. Spain has shown itself incapable of self government. Spain's banks are deeply insolvent. They have to be recapitalized. I don't mean that they need loans because the last thing they need is to be deeper in debt They need cash (and right now), not loans, and about 400 Billion Euros worth. Like the Spanish government the Spanish banks have shown themselves feckless and completely irresponsible, not capable of acting like bankers, who make prudent loans, but instead like drunken sailors or the guys who caused the American S&L debacle in the late '80s and the 2008 crash. You would be amazed to see the garbage Spanish banks wrote loans on. Spain won't accept that German bankers should have line item veto power over the budgets of every level of government or that German bankers be put in charge of each and every Spanish bank. Germany doesn't want to give Spain 400 Billion Euros just to watch them piss it away and come back for more. The Question: On 6/8/12, The Observer wrote: > Bear Trader > The press the past three days has had the two parties blaming each other in > advance for the coming collapse--- > Can Germany rescue Spain? or just with smoke and eurobond games... > I see a long slow hot summer and decline into the election. What is your > forecast? >

Hedging----The Reflection

(Ed.note; The "Bear Trader's" Comments are Reflection and not market advice) You asked, "After all the hedging such as AIG etc....after the writedown of bonds of Greece by almost 80% and yet NO calling of the hedges to make the owner WHOLE? HUH? How could this be?" Have been thinking about this also. Very much "the dog that didn't bark", eh? Since there is a total media blackout on this one, and without a peep from the hedgies that were supposing to be holding all those Greek CDS, I suspect we are seeing "official government diplomacy" here. The hedgies got the "carrot and stick" treatment with enough "carrot" in the mix that they promised to keep their mouths shut. Most of the money on the other side of those CDS is European Bank money, and as the European Banks are solvent only through "smoke and mirrors" any actual payout had to be, in the end, from the ECB, that is, part of the Euro 850,000,000 recently created by the ECB and loaned to the banks. If the hedgies got a lot of money, and word got out, the Eurozone would come under drastic political pressure. You think the various electorates of Greece, Spain, Italy, Netherlands, etc. facing austerity would be happy to hear that "their" money and social benefits were going to the hedgies? Or in Germany, for that matter? The hedgies probably took an offer of big haircuts but no perp walks on their CDS. The money probably has been payed out by the banks from loans recieved from the ECB. We shall see if there is any media coverage of this to follow. You asked about FAZ and if hedging were baloney. FAZ according to their prospectus promises only to "attempt" a three times inverse of the Russell 1000 financial firms, mostly insurance companies. There are lots of reasons why this is hard to accomplish. The first is FAZ has high ongoing expenses. Secondly as FAZ gets bought and sold FAZ has to radically change it's hedging strategy buying and selling complicated custom contracts with counterparties who cut FAZ no slack of course. Options become more expensive instantly as options change like lightning these days thanks to HAL and his kindred. The result is just when more people buy FAZ it becomes less likely FAZ will perform as the buyer expects. FAZ would work better for the share buyer as a closed end fund except for Joe and Martha Sixpack would wait to long and buy high. They better hope they can beat out HAL to the punch, hah hah. Hedges are possible. Thinking and working on this. The most important thing is that any hedge that works can't have too big a following, too much herd enthusiasm, to much money invested, for it to be effective as a hedge. That is the present hazard in precious metals. In hindsight an effective hedge will look obvious but will be deeply scorned when it should have been bought.

On Coal...Natural Gas...and LNG....The long View

The future of coal. People are not going to give up coal on the long term. The "renewable energy" cant is bogus. Windmills are a 14th Century technology even with modern aerodynamic redesign. Solar is bogus because covering the USA with solar cells and storage batteries wouldn't begin to supply the amount of energy required while the cost of installation and upkeep would be totally ruinous. The same applies to windmills. On the long haul the "anthropogenic global warming" hysteria will blow over since it is faith, not science. Coal will be back and in a very big way. From an investor's viewpoint I suspect we will never live to see it happen. Coal in the ground is another matter, but only the Big Boys can play in this game. Lots of action in this play in Australia lately. Natural gas has always been a feast or famine affair caused by regulator action and changing extraction technology. The current low natural gas prices can't last because the drillers need $4 gas to break even. Right now the drillers owe a tremendous amount of money and must service their debt so they maximize sales even when this looses them money. This cannot last for ever. That this is even possible now is a product of Federal Reserve manipulation of interest rates to absurdly low levels (so the gas guys can service the debt). When you see a full court bull press in the media you have to remember that when you are playing poker if you don't know who is the sucker the sucker is you. (Sorry about that.) Right now there is a glut of gas, the greatest gas glut of all time. Not impossible we will see gas well below $2. Lots of talk about liquid natural gas. To make a difference in the US gas market LNG export capacity will have to be greatly increased. This means new large gas pipelines, liquification plants, tankers, and port facilities. We are talking about a lot of natural gas here. This means years, some real money, and regulatory support. There are plans for a very large new gas pipeline in Alaska parallel to the existing oil pipeline from the north shore to Anchorage with construction of liquification plants and port facilites for LNG tankers. The Canadians are planning a similar project from their arctic fields to a Pacific port. Negotiations are underway between Canada, the US, and Alaska to rationalize these two projects. Qatar has a major LNG liquification plant under construction. Lots of natural gas in the area, this could prove a big deal. A lot of Russian gas reserves in Western Siberia are underutilized and the Russians are mulling exporting LNG from Vladivostok. They can get a lot more for LNG in Japan (since Japan is shutting down its' nuckear plants) than they are getting for pipeline gas from the Chinese. The Chinese are building a very large gas pipeline from Iran into southwest China. India is mad for being cut out of the deal. Lots of gas in the Arctic. Really a bunch. Lots of oil, too, but more gas. This will probably lead to war, perhaps in our lifetimes. Lots of geopolitics here.