Point-Counterpoint: Bear Trader and Bro Debate Economic Mess

from my brother C: IMO, the fundamental mistake that the 'economic theorist collective' has been making lies in a Keysnian system that only works when huge amounts of idle manufacturing capacity exists within a nation. The idea of increased demand works when more people are hired with a given country (EU is not a nation) and factories there reopen, increased wages are pumped back into the economy etc. When 40% of the economy is 'financial' and, maybe, 50% of the average person's domestic needs are being provided by Chinese factories, all printing money does is increase employment in Chinese factories. Both the UK and the US had a large industrial base that provided consumer items for the British Realm, and, the huge US consumer market, respectively, in the 1930s which would respond to federally triggered increases in domestic demand. In addition, I suspect, that the use of stategic tariffs, principly to protect domestic low ticket consumer item manufacturing, would respond to a nation 'pumping up the money' (Britain in the 1930s). I believe that much of the "Walmuck Sector" domestic manufacturing has been effectively destroyed by direct outsourcing and by retailers bypassing US manufacturers completely and dealing directly with manufacturers overseas. As I repeatedly tell those who will listen, an increase in sales of 10% in Walmuck US sales (less true in their food retailing) might add .1% to the net employment monies pumped into the economy by all US employees, and, add 1 or so percent to the Chinese manufacturing employment rate. 20 -25% of Walmuck employees receive food stamps). This gutting of US domestic low ticket consumer item manufacturing extends up the food chain, with the least erosion of market share in the almost handmade high ticket items, such as commercial aircraft, movies, and, weapon systems.. Unfortunately, these sectors, IMO, do not respond to printing money well, as the reduction in net consumer discretionary income reduces air travel, encourages at home media entertainment, and, the lowering tax receipt problem that triggered printing money in the first place, reduces monies spent on future weapons platforms, etc. I am struck by how off base almost all the arguments about what is happening to the US economy appear to be. Most people I talk to attribute problems to a sector of the total economy. Manyt of my aquaintances consider the problem to be the 'Wall Street White Shoes Gang', and, if I were to have to blame one sector for our current problems, I would agree. A far smaller, largely economically successful group, blames the federal government for regulations, laws, etc., for creating the environment where business was forced to outsource, etc. Another group, principly blue collar and often unemployeed, blames the decline on the non-whites who leech federal and state monies while getting preferential job treatment. A tiny group, which I do not have the opportunity to co-mingle with, believes that they (or their relatives) acquired their great asset base through skill, and, that the masses need to be disciplined. This group has disportionate power and no visibility. Lastly, I know a smattering of a very large group of tenured government employees in education, the military, and, various departments who, due to having job security, can have a active social agenda. As employees paid by levied taxes, the group, by definition is socialist, with the only caveate being that their conservatism is applied to those outside their group. Yup, as you inferred, the problem concerns us all, which reminds me of a thought I have been having a lot lately: "The last person under the bridge gets the worst spot." (Those that don't have enough paid for assets, etc., someday will have to compete with the long term poor on equal footing...) -C My reply -- Some thoughts - "Economic Theorist Collective" indeed. Morey McDonald, old acquaintance (Econ PhD, works in Academia), very decent guy, certainly intelligent enough, back in 2008 heard me out on my "the Emperor has no clothes" arguments. At the time the "economic theorist collective" was deeply shaken by the obviously hopelessly flawed models they had been using and more tolerant of skepticism. I pointed out that the economic crash of 2007 - 2008 had not only been widely predicted but that I could see it coming clearly enough to get out of the markets in August 2007. If the economic - econometric models couldn't predict the events of 2007 and 2008, I told him, then they obviously didn't have the relevant independent variables (same thing that is wrong with the Anthropogenic Global Warming models). I had been doing spreadsheet models at GM for some years that were Important (I could have been fired if the models didn't "work"). The most important thing about models is that the math blows up if you try to extrapolate the model into the future (essentially "divide by zero"); you have to use calculus and differential equations to handle this, but if you don't have the relevant independent variables baked into the pie instead of a working model you get a simple "curve fit", a "model" that simply identifies one of many possible "trend lines" carried forward into the future, essentially a statement that the future will recapitulate the past. Physicists long ago started making models with reasonably adequate independent variables, Isaac Newton being the most notable of the Ancients. The Economists have a screaming nutcase case of model envy here, they want their theories respected like physics models are. But they don't seem to know how to do this, they don't even see how ridiculously goofy the stuff they publish is, or how to get out the stupid hole they have dug for themselves, so I told Morey what they were doing wrong and how to get it right. He listened all the way through, almost an hour. Interestingly he increasingly works in areas where the models are better (not so swelled headed, Krugmanesque). Like I said, a good man. You point out that "all printing money does is increase employment in Chinese factories". That doesn't bother the Politburo a bit, but the dollar caused inflation does, notice the great political pressure to control food prices and apartment prices. The Chinese, to an extent, are importing inflation from the USA. "Bernankeism" is aimed at China more than the USA, although critical mass has been exceeded already in real estate - another bubble is strongly under weigh and will inevitably explode there - and real US inflation is not 2% but 6.5% - Pensions are blowing up, as are insurance companies (for the same reason) because of the very destructive over 5% negative real interest rates. Free money is not free, someone has to pay for it, and the guy who pays, by definition, is the little guy. You know, if you can't see who the sucker is at the poker table the sucker is you. As far as Walmart is concerned, they don't bother me any, they and their ilk are just an opportunistic infection, if you leave money around in great big piles, or tons of illegal drugs, or gang territories, some people will see the opportunity an take it. Such things are simply caused by mismanagement. The Feds have taken onto themselves the management of all such stuff, from Bernanke to foreign trade, so therefore the Feds are responsible for all of this - not Walmart. You want some simple stuff that will work? 1. An import tariff designed to raise Federal income (an"income tariff") of 5% on all imports, repeat ALL. Since we have so many layers of financial middle men getting a cut on imports these days, the 5% tariff is not on the cost of the overseas shipment but instead of the retail cost of the good when sold to the final user. 2.Get rid of Dodd - Frank. Chris Dodd was the Senator most in bed with the Big Banks. Dodd - Frank is set up to "prevent" another crash (hardy, har, har) while making sure The Too Big to Fail could get bigger, richer, more stupid, etc. You want to fix this, Glass - Steagall worked perfectly for sixty years until Clinton's Sec Treas Robert Rubin got Glass - Steagall repealed. Rubin was a Big Bank man to the core, ex CEO of Goldman Sachs. Clinton signed the repeal. I don't know what he got out of it, but more than $50 Million anyway. (Clinton got most of his money from the Chinese for selling them anything they asked for, including how to make ICBMs work, how to make American quality air-to-air and ground-to-air missles including declaring whole factories working full time producing these weapons "surplus" and selling them to the Chinese as well as the complete specs and prints of the W series missile nuclear warheads - state of the art stuff. (Ron Brown was involved in this stuff deeply and threatened to squeal if the Clintons didn't protect him from the Justice Department. Brown and a whole planeload of other people died by accident, of course.) These are real big changes. Glass - Steagall would break up the Big Banks. The Tariff would shift income from imports to domestic production, causing lots of mad Big Boys. Repeal Dodd - Frank. Reinstate Glass - steagall. 5% import tariff (Small tariffs work better than large. Besides you can always threaten to raise it in the future.) 3. These two things will cause a lot of bankruptcies. Get set up for this. Write off bad assets thoroughly. 4. Stop the Fed "quantitative easing". This is pure money printing. No more Fed buying Treasuries, no more buying Federal Mortgage Backed Securities. This will pop the Real Estate Bubble before it gets disastrously large. This will force the Treasury to pay market interest to issue government paper. (The Federal Reserve is buying more than 60% of new Federal Notes and Bonds.) This will force the various big spending factions in the US Government to eat shit. Breakfast of champions. Remember that Government is not productive but only consumes. The Government is overhead, not production. 5 Market interest rates are needed. Fed Funds rates should be raised to higher than actual consumer inflation, currently 6.5%. This one is dangerous. The current situation is like being surrounded by attackers while in your house, attackers who will shoot you dead if they can, and your house is burning. A delicate situation. - P

Mailbag: Bear Trader writes; Is the Government all knowing or helpless?

I am starting to see patterns in stocks and bonds markets again. Markets are way different than 1995 - 2000 or 2002 - 2007. Those two markets were way different from each other and from now. The biggest thing lately is the developing fear that the money printing and deficit spending are not going to work like we were promised they would back in Econ 101. The country is getting poorer fast and the the government seems helpless to fix it. My own understanding of this matter is the government is, indeed, helpless to fix things, and, even worse, government attempts to fix things by "investment" confuse spending money with investment. You cannot spend your way to riches. Neither can you borrow your way to prosperity. People talk about "take off speed". Ain't gonna happen until the existing bad debt is written off. This means the end of the "too big to fail" enterprises, the network of derivatives binding the Big Boys into one house of cards, etc. Somebody will have to take the losses, there is no other way than "wealth destruction". Right now that means the public takes the loss, and, though the process is running very slowly because of government action, we see the results everywhere. "The Rich" don't have anything like the wealth to take the fall by themselves either. The bad debt in the USA alone is about ten times the GDP. It has to be written off, this means "entitlements". Those on the dole will be kicked off, no choice, pal. Politician's promises like "free" health care, social security, etc. will fail big, because there simply is not enough wealth to pay off the promises. Right now the insurance industry is hopelessly insolvent, living on accounting that ignores the real situation (with government blessing). Is it any wonder that people who see this, and there are many, are trying hard to plan ahead and execute their plans in the hope of protecting their families? The really rich, those 5% of the US households who own 92% of US assets (same as 92% of private net worth) have been definitely expecting confiscation, but you know, not right this minute, maybe soon, but got it "under control"; Cypress was quite a shock for them. So you see the current market behavior, reflex move to defensive patterns, concern over probable loss of British offshore "tax havens" (Parliament is now arguing about outlawing corporations with anonymous stockholders and anonymous trusts; this would kill the currently easiest money shelters, Cook Islands, British Virgin Islands, Bermuda, leaving Andorra, Liechtenstein, and I don't know where else). It looks to me that the government does not understand money and hasn't for many years. A result of this is that those people cannot distinguish between wealth and displays of wealth, between wealth and acting like a drunken sailor with money in his wallet. Or like a politician trying to buy votes.

Mailbag: Bear Trader writes on the Market

S&P Mar 1 to Mar 15 rose on declining volume. Mar 18 - present declining days have been on higher volume. Breadth has bin decreasing, NYSE McClellan summation index has been dropping since Feb 1, dramatically for the last three or four days. This works similarly to the Weekly A-D Line but (I think) better. NASDAQ McClellan is doing worse than NYSE. Notice the relatively strong Consumer Staples and Utilities sectors. These are traditional defensive stocks. Some movement into Federal bonds also. I think that the idea that the market is overbought is spreading. Looks like the $USD may be topping. $USD is the short term controller of Global investing. Not only Energy but Industrial and Materials sectors are quite weak. This is a sign that the "actual" economy - as opposed to the "financial" economy - is not improving. This is caused by the Federal Reserve and by US Govt. deficit (and excessive) spending. These operations are suffocating the actual economy. (This is why there are no $17 per hour jobs.) At the same time a class of very rich has been created; currently 5% of the people in the USA own 92% of the assets. When you get pissed off remember that those at fault are not the Koch Brothers but the US Government.

Mailbag: Bear Trader Speaks of Iran and Inflation

On Sun, Oct 7, 2012 at 4:00 PM, The Evansville Observer wrote: Bear Trader--- The decline of the Iranian currency has been pretty shocking---like every morning they wake up and call to see what the exchange rate is. I think last month they lost 40%. Come to think of it, the precursor to this is when they give you 1%on your money when they used to give you 6%. Some thoughts on what could cause the currency to decline here so suddenly? Bear Trader Wrote:: First, as Milton Friedman put it, "Inflation is always and everywhere a monetary phenomenon" (approximate quote). So the Iranian inflation is caused by government printing and spending. Secondly, the Iranian government wants to spend all this newly printed money but have no inflation (they are having food prices riots), so they have instituted draconian price controls, up to and including execution. Price controls always fail because governments always figure that, since the price controls are working so slickly, we should print just a teensy, weensy bit more. A little leads to a lot. Everyone wants more money. Vote buying and nuclear weapons projects are expensive. Remember W.I.N. (Whip Inflation Now) under Nixon and the Carter - Volker era? The reason the Iranian inflation looked surprising is just you and I are so completely out of the loop. Kept in the dark and fed shit, like mushrooms. Actually I have been seeing reports of Iranian food riots, crackdowns on "speculators", rapid increases in the value of prime real estate, etc. for two or three years. Note that civil disturbances in Iran have been of the (by Iranian standards) middle class, a sure sign that the root cause is inflation. I was most surprised that the Iranian internal security types let this situation get out of hand, actually. Denial and delusion in the upper reaches of the power structure is tough to deal with for street cops though. That is probably what we are seeing. The Iranian market price controls exploded like any other bubble. People decide that they have to get out and get out now. Prices drop. Other people sell in panic.

Is now the time to build a bearish position to prepare for sell off?

It depends on what you mean by a "sharp sell off". The retail investor is 90%+ out of the market. A "sharp sell off" nowadays won't be the gentle descent of 2007 - 2008 but instead be an algo driven mad shark feeding frenzy. Not months, but hours long. Maybe minutes. Not a fan of SOXS, FAZ, or TZA. Those triple inverse ETFs only track correctly for a few days at a time, and, if held, loose you money compared to an option. Day Trade them only. The algos are all over these leveraged ETFs and will eat your lunch. The volume charts are enough evidence this is so. Remember that an hour for you is a million hours for them - one hour for you is 115 YEARS for them. Newmont is not a "weeks or months" buy yet, the Big Boys ran it up following QEInfinity but it looks like the trading trend ("hours" to "days") is negative to me. I think it is a good stock that is not yet a buy. If you are willing to hold it through thick and thin I think you could be nicely in the money in two or three years. Since QEInfinity was priced into the market it looks to me that Mr. Market is waiting for the other shoe to drop. The elections are too close for anyone to stick his neck out. Also QEInfinity will have simply terrible "unforeseen" consequences. ("Unforeseen" except by Peter Schiff, Marc Faber, Jim Rogers, Doug Noland, Michael Burry, lots and lots of other financial world big shots, and me, I guess.) Speaking of QEInfinity I was optimistic that the FED would not do anything so stupid in any case whatever. Whenever I make mistakes they are lulus. And usually my mistake is to hold human nature in too high regard. Arrogant, conceited, stupid fools. Oh, yeah, QE has made the rich much richer, and the rest of us poorer. Just another tax on the little guy. Whenever you buy food or gasoline remember that the high prices are caused by the diluted dollar. Bernanke and his posse are trying to put out a burning city with fire hoses charged with gasoline. Or maybe they know what they are doing? That is a truly terrible thought.

International Trading Indexes Signal Trouble

The Baltic Dry Index http://en.wikipedia.org/wiki/Baltic_Dry_Index "The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the index provides "an assessment of the price of moving the major raw materials by sea. Taking in 23 shipping routes measured on a timecharter basis, the index covers Handysize, Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain." BDI is based on what it costs per ship day in $USD to move dry bulk cargo. The index is a very sensitive read on international bulk products trade rate changes. Think of it as a reliable and sensitive indicator of the way the world economy is going raw material flow rate wise. Another useful shipping indicator is the HARPEX http://www.harperpetersen.com/harpex/harpexVP.do which is based on the cost of moving the standard twenty foot long intermodal shipping container over various routes by various sized container ships. This index tracks the rate of change of the volume of finished goods being shipped by sea. As you can see by examining these indexes the world economy has slowed markedly since Q1 2011 and is now bumping along the bottom with no sign of rebounding. Yesterdays FedEx guidance and earlier UPS guidance shows decline in the flow rate of goods over this same time period. You realize that if the Federal Treasury and Federal Reserve had not diluted the $USD since 2000 so that the 2012 dollar is now worth sixty cents in 2000 dollars that gasoline would still be $2.25 a gallon at the pump? That means that the rise in the price of gasoline is not caused by "peak oil" but by money dilution? That that money dilution was making the Consumer Price Index over the past thirty years indicate inflation, as you would expect, but that the way this was fixed was by repeatedly redefining the CPI? That the situation is now so bad that the Federal Reserve ignores Energy and Food prices in inflation rate measurement, calling the resultant number "the core inflation rate"? That this mis-measured inflation rate means that when GDP and other aggregates are reported over time in "constant dollars" that "constant dollars" are not being used at all; when you do correct, as well as possible, for constant dollars, you find that the United States has been in recession for the last twelve years, somewhat masked by insanely low credit interest rates, which resulted in debts we cannot repay now and will be even less able to cope with in the future. So Bernanke tries to borrow his way out of this fix. If you are head over heels in debt more debt is not going to help but only hurt. Boy, is this ever going to get ugly.

Bear Trader "Technical Musings": August 23,2012

MOST RECENT NEWS: The recent previous S&P 500 highs: 1419.04 on April 2, 2012 1418.16 on August 17, 2012 1418.13 on August 20, 2012 Then we see an attempted breakout upward with a 1422.93 open on August 21, opening with a gap from the previous close above the April 2 high on moderate voume, rising to 1426.18 in an hour and ten minutes but on falling volume, the dropping for rest of day to 1413.31 and finishing on the higest peak volume for some time, at least a week (maybe several weeks as Yahoo Finance "forgets" the six minute charts after five days back). So here we have the "classic failed breakout", a bearish short and medium term pattern. Gaping up above resistance followed by a rise to new highs followed by a decline through the gap area to a close for the day at the low for the day (which is lower than the lows of the previous three days lows) on exceptionally high volume. The Wall Street boys are nothing if not superstitious, and this "classic failed breakout" is inauspicious, nay, downright menacing. So now "The Boys" are waiting for the other shoe to drop. MEDIUM TERM NEWS: "Seducing the fair (but shy) Bernanke" - or, "Oh, QE3, QE3, wherefore art thou, QE3?" "The Boys" had just about persuaded themselves that QE3 was coming on the First of September, but now doubts are rising; S&P 500 is too high to make the Fed "ease"; real inflation has dropped from 7% annual increase rate per quarter to 5%, still plenty of inflation but decreasing, whice is good; heavy food inflation is coming because of the drought so the Fed would rather not increase inflation sizeably, which QE3 would do; QE3 would cause a fall in the value of the dollar, making petroleum more expensive (causing inflation) and making the $USD weaker which discourages Chinese, Japanese, European, etc. cash flows into US financial assets, in particularly Federal Treasury and Agency paper, threatening rising rates instead of the declining rates the Fed expects and desires. I believe that we are at the point where attempts to lower US interest rates will instead make US interest rates go higher. Also a declining dollar will make the price of gold in dollars take off. QE3 would become a political football if begun on Sept. 1 as Wall Street hoped but would be ten times more so if triggered Nov. 1. The Fed's power and independence could easily decline, probably markedly, if they get in pissing matches with both the Dems and Pubs at once during a Presidential election. In balance, I don't expect QE3 this year, but the Big Boys are all "Strong Like Bull", sort of like Australian Rugby players, full of testosterone and piss and vinegar, so I am not sure about that. LONG TERM: Soros, Paulson, China, Russia, and the Oracle of Omaha: Soros on his latest SEC filing reports heavy buying of GLD. Paulson has been buying gold in various forms for some time now. (Paulson looks a bit of a loose cannon to me though.) Russian and Chinese national banks are supposed to be buying gold although I don't see anything special in the cash gold price. Berkshire Hathaway dropped a bomb shell Tuesday, reporting that they have bought back credit default swaps covering a collection of State and Municipal Federal income tax free bonds originally sold to Lehman in 2007. The CDS buy back nominal coverage was $8.25 Billion. Bershire still guarantees $8 Billion CDS in the same market for longer duration bonds (a less liquid market). Berkshire must have taken a sizeable loss on the deal as CDS on State and Municipal bonds are much more expensive these days. It seems that Buffett is saying that those bonds are much more risky than Joe and Martha Sixpack think; Joe and Martha have put nigh on to a $1 Billion a month in Fed Income Tax Free bond funds for some time now. Of course old Warren could just be senile. He is eighty one years old, after all. Or, of course, Meridith Whitney was right but early. Looks like a very dark cloud on the horizon. BOILS DOWN TO: Me, I see the S&P 500 stuck under resistance, and stuck good. Unless there is a convincing breakout, gap up, high volume, high above 1425, low and close above 1420 I think that the road is probably down. 1433 is still possible, gives some breathing room. There is good support at the lower bound of the channel that has been building since June 1st. Today that is 1375. There is more support in the 1300 - 1310 area. There is support from last fall around 1150 and Fibonacci support at 855. Uncle Ben would do something around 1300, at a guess. On Tue, Aug 21, 2012 at 12:42 PM, The Evansville Observer wrote: Bear Trader--- I thought I remember you telling me that 1433 was about the top. What does it look like to you.?