Dec 272018
 
 December 27, 2018  Posted by at 9:25 pm Primers Tagged with: , , , , , , , , , , ,  5 Responses »


Francis Tattegrain La ramasseuse d’épaves (The Beachcomber) 1880

 

I haven’t really written about finance since April of this year, and given recent fluctuations in what people persist in calling the markets, maybe it’s time. Then again, nothing has changed since that article in April entitled This Is Not A Market. I was right then, and I still am.

[..] markets need price discovery as much as price discovery needs markets. They are two sides of the same coin. Markets are the mechanism that makes price discovery possible, and vice versa. Functioning markets, that is. Given the interdependence between the two, we must conclude that when there is no price discovery, there are no functioning markets. And a market that doesn’t function is not a market at all.

[..] we must wonder why everyone in the financial world, and the media, is still talking about ‘the markets’ (stocks, bonds et al) as if they still existed. Is it because they think there still is price discovery? Or do they think that even without price discovery, you can still have functioning markets? Or is their idea that a market is still a market even if it doesn’t function?

But perhaps that is confusing, and confusion in and of itself doesn’t lead to better understanding. So maybe I should call what there is out there today ‘zombie markets’. It doesn’t really make much difference. What murdered functioning markets is intervention by central banks, in alleged attempts to save those same markets. Cue your favorite horror movie.

Now Jerome Powell and the Fed he inherited are apparently trying to undo the misery Greenspan, Bernanke and Yellen before him wrought upon the economic system, and people, cue Trump, get into fights about that one. All the while still handing the Fed, the ECB, the BoJ, much more power than they should ever have been granted.

And you won’t get actual markets back until that power is wrestled from their cold dead zombie fingers. Even then, the damage will be hard to oversee, and it will take decades. The bankers and investors their free and easy trillions were bestowed upon will be just fine, thank you, but everyone else will definitely not be.

Central banks don’t serve societies, they serve banks. They fool everyone, politicians first of all, into believing that societies automatically do well if only the demands of banks are met first, and as obviously stupid as that sounds, nary a squeak of protest can be heard. Least of all from ‘market participants’ who have done nothing for the better part of this millennium except feast at the teat of main street largesse.

In the past few days we’ve had both -stock- market rallies and plunges of 5% or so, and people have started to realize that is not normal, and it scares them. So you get Tyler posting DataTrek’s Nicolas Colas saying “Healthy” Markets Don’t Rally 1,086 Points On The Dow. Well, he’s kinda right, but there hasn’t been a healthy market in 10+ years, and he’s missed that last bit. Like most people have who work in those so-called ‘markets’.

 

Here’s why Colas is right, but doesn’t understand why. Price discovery is the flipside of the coin that is a functional market, because it allows for people to see why something is valued at the level it is, by a large(r) number of participants. Take that away and it is obvious that violent price swings may start occurring as soon as the comforting money teat stutters, or even just threatens to do so; a rumor is enough.

In physics terms, price discovery, and therefore markets themselves -provided they’re ‘healthy’ and ‘functioning’- delivers negative feedback to the system, i.e. it injects self-correcting measures. Take away price discovery, in other words kill the market, and you get positive feedback, where -simplified- changes tend to lead to ever bigger changes until something breaks.

Also, different markets, like stocks, bonds, housing, will keep a check on each other, so nothing will reach insane valuations. If they tend to, people stop buying and will shift their money somewhere else. But when everything has an insane value, how would people know what’s insane anymore, and where could they shift that is not insane?

It doesn’t matter much for ‘market participants’, or ‘investors’ as they prefer to label themselves, they shift trillions around on a daily basis just to justify their paychecks, but for mom and pop it’s a whole different story. In between the two you have pension funds, whose rapid forced move from AAA assets to risk will strangle mom and pop’s old-age plans no matter what.

 

People inevitably talk about the chances of a recession happening, but maybe they should first ask what exactly a recession, or a bear market, is or means when it occurs in a zombie (or just plain dead) market.

If asset ‘values’ have increased by 50% because central banks and companies themselves have bought stocks, it would seem logical that a 10% drop doesn’t have the same meaning as it would in a marketplace where no such manipulation has taken place. Maybe a 50% drop would make more sense then.

The inevitable future is that people are going to get tired of borrowing as soon as it becomes too expensive, hence unattractive, to do so. Central banks can still do more QE, and keep rates low for longer, but that’s not an infinity and beyond move. It a simple question of the longer it lasts the higher will be the price that has to be paid. One more, one last, simple question: who’s going to pay? We all know, don’t we?

 

That’s where the Fed is now. You can let interest rates rise, as Powell et al are indicating they want to do, but that will cut off debt growth, and since debt is exclusively what keeps the economy going, it will cut into economic growth as well. Or you can keep interest rates low (and lower), but then people have less and less idea of the actual value of assets, which can, and eventually necessarily will, cause people to flee from these assets.

Powell’s rate hikes schedule looks nice from a normalizing point of view, and g-d knows what normal is anymore, but it would massacre the zombie markets the Fed itself created when it decided to kill the actual markets. You can get back to normal, but only if the Fed retreats into the Eccles Building and stays there until 2050 or so (or is abolished).

They won’t, the banks whose interests they protect will soon be in far too dire straits, and bailouts have become much harder to come by since 2008. It’ll be a long time before markets actually function again, and we won’t get there without a world of pain. Which will be felt by those who never participated in the so-called markets to begin with. Beware of yellow vests.

To top off the perversity of zombie markets, one more thing. Zombie markets build overcapacity. One of the best things price discovery brings to an economy is that it lets zombies die, that bankrupt companies and bankrupt ideas go the way of the dodo.

That, again, is negative feedback. Take that away, as low rates and free money do, and you end up with positive feedback, which makes zombies appear alive, and distorts the valuation of everything.

Most of what the ‘popular’ financial press discusses is about stocks, what the Dow and S&P have done for the day. But the bond markets are much bigger. So what are we to think when the two are completely out of sync -and whack-?

 

Oh well, those are just ‘the markets’, and we already know that they are living dead. Where that may be less obvious, if only because nobody wants it to be true, is in housing markets. Which, though this is being kept from you with much effort, are what’s keeping the entire US, and most of Europe’s, economies going. And guess what?

The Fed and Draghi have just about hit the max on home prices (check 2019 for the sequel). Prices have gotten too high, Jay Powell wants higher interest rates, Draghi can’t be left too far behind him because EU money would all flow to the US, and it’s all well on its way to inevitability.

And anyway, the only thing that’s being achieved with ever higher home prices is ever more debt for the people who buy them, and who will all be on the hook if those prices are subject to the negative feedback loops healthy markets must be subject too, or else.

The only parties who have profited from rising home prices are the banks who dole out the mortgages and the zombie economy that relies on them creating the money society runs on that way. We have all come to rely on a bunch of zombies to keep ourselves from debt slavery, and no, zombies are not actually alive. Nor are the financial markets, and the economies, that prop them up.

Among the first things in 2019 you will see enormous amounts of junk rated debt getting rated ever -and faster- lower , and the pace at which ever more debt that is not yet junk, downgraded to(wards) junk, accelerating. It looks like the zombies can never totally take over, but that is little comfort to those neck deep in debt even before we start falling.

And as for the ‘players’, the economic model will allow again for them to shove the losses of their braindead ventures onto the destiny of those with ever lower paying jobs, who if they’re lucky enough to be young enough, start their careers in those jobs with ever higher student debts.

You’d think that at some point they should be happy they were never sufficiently credit-worthy to afford one of the grossly overpriced properties that are swung like so many carrots before their eyes, but that’s not how the system works. The system will always find a way to keep pushing them deeper into the financial swamp somehow.

The last remaining growth industry our societies have left is inequality, and that’s what our central banks and governments are all betting on to keep Jack Sparrow’s Flying Dutchman afloat for a while longer. Where the poor get squeezed more so the 1% or 10% get to look good a little longer.

But in the end it’s all zombies all the way down, like the turtles, and some equivalent of the yellow vests will pop up in unexpected places. My prediction for next year.

It doesn’t look to me that a year from now we’ll see 2019 as a particular peaceful year, not at all like 2018. I called it from Chaos to Mayhem earlier, and I’m sticking with that. We’re done borrowing from the future, it’s getting time to pay back those loans from that future.

And that ain’t going to happen when there are no functioning markets; after all, how does anyone know what to pay back when the only thing they do know is everything is way overvalued? How wrong can I be when I say debts will only be paid back at fair value?

2019, guys, big year.

 

 

Sep 192017
 
 September 19, 2017  Posted by at 12:52 pm Finance Tagged with: , , , , , , , , ,  11 Responses »


Wynn Bullock Child on a Forest Road 1958

 

A few days ago, former Reagan Budget Director and -apparently- permabear (aka perennial bear) David Stockman did an interview (see below) with Stuart Varney at Fox -a permabull?!-, who started off with ‘the stock rally goes on’ despite a London terror attack and the North Korea missile situation. His first statement to Stockman was something in the vein of “if I had listened to you at any time after the past 2-3 years, I’d have lost a fortune..” Stockman shot back with (paraphrased): “if you’d have listened to me in 2000, 2004, you’d have dodged a bullet”, and at some point later “get out of bonds, get out of stocks, it’s a dangerous casino.” Familiar territory for most of you.

I happen to think Stockman is right, and if anything, he doesn’t go far enough, strong enough. What that makes me I don’t know, what’s deeper and longer than perennial or perma? But it’s Varney’s assumption that he would have lost a fortune that triggered me this time around. Because it’s an assumption built on an assumption, and pretty soon it’s assumptions all the way down.

First, that fortune is not real, unless and until he sells the stocks and bonds he made it with. If he has, that would indicate that he doesn’t believe in the market anymore, which is not very likely for a permabull to do. So Varney probably still has his paper ‘fortune’. I’m using him as an example, of course, of all the permabulls and others who hold such paper.

Presumably, they often also think they have made a fortune, and presumably they also think that means they are smart. But that begs a question: how can it be smart to put one’s money into paper that is ‘worth’ what it is today ONLY because the world’s central banks have been handed the power to save the ailing banks that own them with many trillions of freshly printed QE? And no, there can be no doubt of that.

And there are plenty other data that tell the story. The world’s central banks have blown giant bubbles all over the place. That’s where the bulls’ “fortunes” come from. They are bubble fortunes. It has nothing to do with being smart. And of course, as I’ve said many times before, there are no investors left to begin with, because you can’t be an investor if there are no functioning markets, and for a market to function you need price discovery.

Which is exactly what central banks have killed. No-one has one iota of a clue what anything is really worth, what the difference between ‘price’ and ‘value’ is. Stockman at one point suggests people should hold on to Microsoft, but does he really believe that Bill Gates will remain standing when everyone around him crashes? That tech stocks are immune to the impending crash for some reason? If true, that would seem to indicate that tech stocks represent real value while -virtually- no others do. Hard to believe.

Please allow me to insert a graph. This one is from Tyler Durden the other day, and it paints a clear picture as much as it raises a big question. It suggests that until December 2016 the S&P and the ‘real economy’ were in lockstep. I think not. But one thing’s for sure: ever since January, i.e. the Trump presidency, the gaping gap between the two has grown so fast it’s almost funny.

 

 

Not that I would for one moment wish to blame Trump for that; he’s merely caught up in a wave much larger than an election or a White House residency. What is happening to the US -and global- economy goes back decades, not months. Which makes the graph puzzling, too, obviously. Just ask the new-fangled platoons of waiters and greeters with multiple jobs in America. And/or the 50-60-70% who can’t afford a $500 emergency bill, the 97 million who live paycheck to paycheck.. America’s already crashing, it’s just a matter of waiting for the markets to catch up with America’s reality. That’s what price discovery is about. Here’s another, similar, graph. Note: I don’t really want to go and find the best graphs, we’ve posted and re-posted so many of them it would feel like an insult to everyone involved.

 

 

But I digress. This was to be about Stuart Varney and the platoons and legions of permabulls out there. As I said, many of them, make that most, will feel they’ve made their fortune because they’re smart. Even if riding a Yellen and Draghi and Abenomics wave has zilch to do with intelligence. But there’s another side to that supposed smartness. And Stockman is on to it.

The large majority of people who think they got rich because they’re smart will also lose their ‘fortunes’ because they think they’re smart. It is inevitable, it’s a mathematical certainty. And not only because the central banks are discussing various forms of tapering. It’s a certainty because those who think they’re smart will hold on to their ‘assets’ too long. Because the markets will become much less liquid. Because the doors through which people will have to pass to escape the fire are too narrow to let them all though at the same time.

Fortunes built on central banks largesses are virtual. You have to sell your assets to make them real. But the same mechanics that blew the bubbles in housing, stocks, bonds et al also keep people from selling them. Until it’s too late. It may seem easier to sell stocks and bonds than homes, and it is, but in a crash it’s harder than one might think. And prices can come down very rapidly in very little time.

So perhaps the right way to look at this is to tell yourself you were not smart at all when you made that fortune, but now you’re going to smarten up. There will be a few people who do that, but only a few. Most will feel confident that they can see the crash coming in time to get out. Because they’re smart enough. After all, they just made a fortune, right?

It’s not just individuals. Pension funds have been accumulating huge portfolios in ever riskier ‘assets’. Which of them will be able to react fast enough if things start unraveling? And for the lucky few that will, what are they going to buy with the money? Bonds, stocks? Gold perhaps? Crypto? Everyone at once?

Don’t let’s forget that one of the main characteristics -and its consequences- of the everything bubble the central banks granted us is far too often overlooked: leverage. Low interest rates have made borrowing stupidly cheap, and so everyone has borrowed. As soon as things start crashing, there will be margin calls, lines of credit will be withdrawn, people and institutions will have to panic sell (everything including crypto) just to try to stay somewhat afloat, it’s all very predictable and we’ve seen it all before.

But yes, you’re right. The rally continues. And we can’t know what will trigger the downfall, nor can we pinpoint the timing. Still, it should be enough to know that it’s coming. Alas, for many it is not. They’re blinded by the light. But even that light is not real. It’s entirely virtual.

 

 

 

 

 

Jun 042016
 


Walker Evans Street Scene, Vicksburg, Mississippi 1936

The Funniest BLS Jobs Report Ever (Quinn)
US Payrolls Huge Miss: Worst Since September 2010 (ZH)
This Financial Bubble Is 8 Times Bigger Than The 2008 Subprime Crisis (SM)
Lew Says China’s Overcapacity Skewing Markets (BBG)
UBS Tells Clients To Stick With Cash-Bleeding Hedge Funds (BBG)
Schroedinger’s Assets (Coppola)
Homes Should Be Lived In, Not Traded (G.)
EC Wants “Immunity” For EU Technocrats At Greek Privatization Fund (KTG)
Greek Banks Mulling Special NPL Vehicles (Kath.)
A Russian Warning (Dmitry Orlov et al)
20,000 Migrants Wait For Boats To Take Them To UK (DM)
At Least 117 Bodies Of Migrants Found After Boat Capsized Off Libya (AP)
Hundreds Rescued, At Least 9 Die In Shipwreck Off Crete (Kath.)

Is the narrative falling apart?

The Funniest BLS Jobs Report Ever (Quinn)

Only a captured government drone could put out a report showing only 38,000 new jobs created, with the working age population rising by 205,000, and have the balls to report the unemployment rate plunged from 5.0% to 4.7%, the lowest since August 2007. If you ever needed proof these worthless bureaucrats are nothing more than propaganda peddlers for the establishment, this report is it. The two previous months were revised significantly downward in the fine print of the press release. It is absolutely mind boggling that these government pond scum hacks can get away with reporting that 484,000 people who WERE unemployed last month are no longer unemployed this month.

Life is so fucking good in this country, they all just decided to kick back and leave the labor force. Maybe they all won the Powerball lottery. How many people do you know who can afford to just leave the workforce and live off their vast savings? In addition, 180,000 more Americans left the workforce, bringing the total to a record 94.7 million Americans not in the labor force. The corporate MSM will roll out the usual “experts” to blather about the retirement of Baby Boomers as the false narrative to deflect blame from Obama and his minions. The absolute absurdity of the data heaped upon the ignorant masses is clearly evident in the data over the last three months.

Here is government idiocracy at its finest:
• Number of working age Americans added since March – 406,000
• Number of employed Americans since March – NEGATIVE 290,000
• Number of Americans who have supposedly voluntarily left the workforce – 1,226,000
• Unemployment rate – FELL from 5.0% to 4.7%

Talk about perpetrating the BIG LIE. Goebbels and Bernays are smiling up from the fires of hell as their acolytes of propaganda have kicked it into hyper-drive. We only need the other 7.4 million “officially” unemployed Americans to leave the work force and we’ll have 0% unemployment. At the current pace we should be there by election time. I wonder if Cramer, Liesman, or any of the other CNBC mouthpieces for the establishment will point out that not one single full-time job has been added in 2016. There were 6,000 less full-time jobs in May than in January, while there are 572,000 more low paying, no benefits, part-time Obama service jobs. Sounds like a recovery to me.

Read more …

“..a massive surge in people not in the labor force..” We’re approaching negative employment.

US Payrolls Huge Miss: Worst Since September 2010 (ZH)

If anyone was “worried” about the Verizon strike taking away 35,000 jobs from the pro forma whisper number of 200,000 with consensus expecting 160,000 jobs, or worried about a rate hike by the Fed any time soon, you can sweep all worries away: moments ago the BLS reported that in May a paltry 38,000 jobs were added, a plunge from last month’s downward revised 123K (was 160K). The number was the lowest since September 2010! The household survey was just as bad, with only 26,000 jobs added in May, bringing the total to 151,030K. This happened as the number of unemployed tumbled from 7,920K to 7,436K driven by a massive surge in people not in the labor force which soared to a record 94,7 million, a monthly increase of over 600,000 workers.

As expected Verizon subtracted 35,000 workers however this was more than offset by a 36,000 drop in goods producing workers. Worse, there was no offsetting increase in temp workers (something we caution recently), and no growth in trade and transportation services. What is striking is that while the deteriorationg in mining employment continued (-10,000), and since reaching a peak in September 2014, mining has lost 207,000 jobs, for the first time the BLS acknowledged that the tech bubble has also burst, reporting that employment in information declined by 34,000 in May. The change in total nonfarm payroll employment for March was revised from +208,000 to +186,000, and the change for April was revised from +160,000 to +123,000.

With these revisions, employment gains in March and April combined were 59,000 less than previously reported. Over the past 3 months, job gains have averaged 116,000 per month. There is no way to spin this number as anything but atrocious.

Read more …

And growing..

This Financial Bubble Is 8 Times Bigger Than The 2008 Subprime Crisis (SM)

On July 1, 2005, the Chairman of then President George W. Bush’s Council of Economic Advisors told a reporter from CNBC that “We’ve never had a decline in house prices on a nationwide basis. So, what I think is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.” His name was Ben Bernanke. And within a year he would become Chairman of the Federal Reserve. Of course, we now know that he was dead wrong. The housing market crashed and dragged the US economy with it. And Bernanke spent his entire tenure as Fed chairman dealing with the consequences. One of the chief culprits of this debacle was the collapse of the sub-prime bubble.

Banks had spent years making sweetheart home loans to just about anyone who wanted to borrow, including high risk ‘sub-prime’ borrowers who were often insolvent and had little prospect of honoring the terms of the loan. When the bubble got into full swing, lending practices were so out of control that banks routinely offered no-money-down mortgages to subprime borrowers. The deals got even sweeter, with banks making 102% and even 105% loans. In other words, they would loan the entire purchase price of a home plus closing costs, and then kick in a little bit extra for the borrower to put in his/her pocket. So basically these subprime home buyers were getting paid to borrow money.

Read more …

They know this already, Jack.

Lew Says China’s Overcapacity Skewing Markets (BBG)

The U.S. will push China to reduce excess capacity in its economy at upcoming talks in Beijing, with Treasury Secretary Jacob J. Lew calling it an “area of central concern” Friday in Seoul. The issue bears watching when “excess capacity is distorting markets and important global commodities,” Lew said in remarks to reporters ahead of the U.S.-China Strategic and Economic Dialogue, scheduled for June 6-7 in Beijing. China Vice Premier Wang Yang, State Councilor Yang Jiechi and U.S. Secretary of State John Kerry will attend the meeting along with Lew. A senior Treasury official told reporters China has made a commitment to take serious action to reduce excess capacity in areas like steel and aluminum.

It’s a tough transition, especially as millions of workers would have to find new jobs. However, if the actions aren’t taken, excess capacity will continue to erode China’s economic growth prospects, said the official, who asked not to be identified. Chinese authorities are cutting excess capacity in industries including coal and steel while striving to keep growth above their 6.5% minimum target for this year. The economy has endured four years of factory-gate deflation, though forecasters expect that to turn around. Producer prices will improve in each of the next four quarters and turn positive in 2018, according to economists surveyed by Bloomberg in April.

Read more …

At what fee for UBS?

UBS Tells Clients To Stick With Cash-Bleeding Hedge Funds (BBG)

UBS is advising its wealthiest clients to stick with hedge funds even after the $2.9 trillion industry had its worst start to a year since 2008. While the days of “double-digit and triple-digit returns” for hedge funds are over, they still generate enough to satisfy yield-hungry clients who face negative interest rates, said Mark Haefele, global CIO of UBS Wealth Management. “Their performance in the first half hasn’t been impressive but they provide diversification,” he said in an interview with Bloomberg. “They still provide a better risk-reward or different risk-reward than other parts like sovereign bonds.”

UBS in April boosted its recommended allocation to hedge funds to 20% from 18%, saying the strategy will provide stability from volatile markets. The move comes as a net $15 billion was pulled from the global hedge-fund industry in the the first quarter and as some of world’s largest institutions including MetLife said they will scale back their holdings. Hedge funds may lose about a quarter of their assets in the next year as performance slumps Blackstone’s billionaire president, Tony James, predicted last week. The HFRI Fund Weighted Composite Index declined 0.6% in the first quarter, its worst start to a year since 2008.

Read more …

The number of non-dead assets is much higher than we let on.

Schroedinger’s Assets (Coppola)

In a new paper, Michael Woodford has reimagined the famous “Schroedinger’s Cat” thought experiment. I suspect this is unintentional. But that’s what happens when, in an understandable quest for simplicity, you create binary decisions in a complex probability-based structure. Schroedinger imagined a cat locked in a box in which there is a phial of poison. The probability of the cat being dead when the box is opened is less than 100% (since some cats are tough). So if p is the probability of the cat being dead, 1-p is the probability of it being alive. The problem is that until the box is opened, we do not know if the cat is alive or dead. In Schroedinger’s universe of probabilities, the cat is both “alive” and “dead” until the box is opened, when one of the possible outcomes is crystallised. Now for “cat”, read assets. In Woodford’s model, when there is no crisis, the probability of asset collapse is zero. But if there is a crisis, the probability of an asset collapse is greater than zero but less than 100%:

“The sequence of events, and the set of alternative states that may be reached, within each period is indicated in Figure 1. In subperiod 1, a financial market is open in which bankers issue short-term safe liabilities and acquire risky durables, and households decide on the cash balances to hold for use by the shopper. In subperiod 2, information is revealed about the possibility that the durable goods purchased by the banks will prove to be valueless. With probability p, the no crisis state is reached, in which it is known with certainty that the no collapse in the value of the assets will occur, but with probability 1-p, a crisis state is reached, in which it is understood to be possible (though not yet certain) that the assets will prove to be worthless. Finally, in subperiod 3, the value of the risky durables is learned.”

Read more …

Close to my heart, but very incomplete in its argumentation.

Homes Should Be Lived In, Not Traded (G.)

The problem is twofold: the move to viewing houses as assets, a predictable investment that lets you turn a profit and offers more return on the pound than a pension, means there’s an incentive for wealthy buyers to invest in bricks and mortar without bothering with tenants. But also, as long as our economy gets sucked into a south-east vortex, more people will head to the capital for work, as the rest of the country struggles. George Osborne’s northern powerhouse claims to address this imbalance, twinned with the excruciatingly named “Midlands engine”. But with the announcement that 250 jobs in the very department responsible for rolling out the northern powerhouse are moving from Sheffield to London, that commitment looks as weak as the efforts to give it a catchy moniker.

As long as jobs fail to materialise in post-industrial towns, empty terraces will multiply. Conservative politicians have long opined that people seeking work should “get on their bike”, without stopping to observe that many do: hence the brain drain from the north and Wales, and the exponential demand for housing in the south-east England. Houses should be lived in, most people would agree: so the government’s move to criminalise squatting is key to understanding the problem of empty houses. Contrary to scare stories, people don’t pop out for a pint of milk and find that squatters have moved in to their home. Squatters often took up residence in vacant buildings, and used the houses for their intended purpose: living in.

Prosecuting squatters reasserts people’s right to treat homes as assets, not shelter. When it comes to empty houses, it’s the inequality stupid. The inequality that means some can buy multiple houses, while others cannot rent one. That sees London swallowing up wealth, jobs and land value hikes, while parts of the country grow desolate. There shouldn’t be empty homes while some people sleep on the streets, but the fact that so many lie empty should worry us: many houses aren’t homes, they’re investment vehicles, and long term, they scupper all our chances of financial and social security.

Read more …

Selling off a country in peace.

EC Wants “Immunity” For EU Technocrats At Greek Privatization Fund (KTG)

The European Commission directly intervened in the work of the Greek Justice and demanded that EU technocrats working at the Greek Privatization Fund enjoy “immunity.” The EC intervenes two days after corruption prosecutors in Athens raised charges against 3 Greeks and 3 EU-nationals of the HRADF for selling public assets thus causing losses of several millions of euro to the state. On Friday, EC spokesman Margaritis Schinas told reporters in Brussels that EU experts working in Greece under the Greek program, should enjoy some kind of ‘guarantee’. “For us, satisfactory operating margins should be guaranteed for all European experts assisting Greece to improve its economy and find its way back to growth,” Schinas said.

At the same time, he stressed that “there is full respect to judicial procedures” currently under way against 6 members of the old Privatization Fund.but the invervention was clear. Schinas did not elaborate on the Eurogroup request referring to immunity for EU technocrats who will work for the new Greek Privatization Fund. The EC intervention came right after the corruption prosecutors raised charges against 6 members of the TAIPED for the sale of 28 public assets. Three of those members are Greeks, the other three from Italy, Spain and Slovakia appointed by the Eurogroup. The six have been investigated for the period 2013-2014 and have been called to testify before corruption investigator Costas Sargiotis.

Read more …

Yeah, let’s create some more creativity.

Greek Banks Mulling Special NPL Vehicles (Kath.)

Greece’s core banks are considering the creation of special purpose companies which will receive large portfolios of nonperforming loans and then be sold so that they stop burdening the lenders’ financial figures, as NPLs now exceed €100 billion in total. The ECB is asking bank managers to proceed with tackling this huge matter at a speedier pace and to make brave decisions for the drastic slashing of bad loans from their finances. In this context, one of the plans being examined concerns the special vehicles to be created with NPL portfolios and sold off not to third parties but to the existing stakeholders of the banks.

This creation of what would resemble a “bad bank” for each lender would serve to immediately lighten the credit sector’s financial reports, while the transfer of those vehicles to the existing stakeholders could offer them future benefits from the active management of those bad loans. Nowadays the biggest obstacle to the sale of NPLs to third parties is the great distance between buyers and sellers. The buyers of bad loans want to acquire such portfolios at exceptionally low prices, due to the country risk, the devaluation of assets owing to the protracted recession in Greece, the inefficient legal system etc. On the other hand, the sellers – i.e. the banks – are refusing to sell at such low prices as they appear certain that among the current NPL stock that reaches up to 55 percent of all loans there is a huge volume of debts that could revert to normality with the right management.

Read more …

They are not kidding.

A Russian Warning (Dmitry Orlov et al)

We, the undersigned, are Russians living and working in the USA. We have been watching with increasing anxiety as the current US and NATO policies have set us on an extremely dangerous collision course with the Russian Federation, as well as with China. Many respected, patriotic Americans, such as Paul Craig Roberts, Stephen Cohen, Philip Giraldi, Ray McGovern and many others have been issuing warnings of a looming a Third World War. But their voices have been all but lost among the din of a mass media that is full of deceptive and inaccurate stories that characterize the Russian economy as being in shambles and the Russian military as weak—all based on no evidence. But we—knowing both Russian history and the current state of Russian society and the Russian military, cannot swallow these lies. We now feel that it is our duty, as Russians living in the US, to warn the American people that they are being lied to, and to tell them the truth.

And the truth is simply this: If there is going to be a war with Russia, then the United States will most certainly be destroyed, and most of us will end up dead. Let us take a step back and put what is happening in a historical context. Russia has suffered a great deal at the hands of foreign invaders, losing 22 million people in World War II. Most of the dead were civilians, because the country was invaded, and the Russians have vowed to never let such a disaster happen again. Each time Russia had been invaded, she emerged victorious. In 1812 Nepoleon invaded Russia; in 1814 Russian cavalry rode into Paris. On June 22, 1941, Hitler’s Luftwaffe bombed Kiev; On May 8, 1945, Soviet troops rolled into Berlin.

But times have changed since then. If Hitler were to attack Russia today, he would be dead 20 to 30 minutes later, his bunker reduced to glowing rubble by a strike from a Kalibr supersonic cruise missile launched from a small Russian navy ship somewhere in the Baltic Sea. The operational abilities of the new Russian military have been most persuasively demonstrated during the recent action against ISIS, Al Nusra and other foreign-funded terrorist groups operating in Syria. A long time ago Russia had to respond to provocations by fighting land battles on her own territory, then launching a counter-invasion; but this is no longer necessary. Russia’s new weapons make retaliation instant, undetectable, unstoppable and perfectly lethal.

Read more …

Be afraid! There’s only 60 million of you!

20,000 Migrants Wait For Boats To Take Them To UK (DM)

A file lying in the drawer of the manager’s office at a small French seaside hotel provides intriguing clues about the gangsters who smuggle migrants across the Channel to Britain. It contains the passport details of four shadowy men who booked in for a night to pull off an audacious crime by trafficking 30 Pakistanis and Albanians by sea into the UK. Gangs of people smugglers now operate along all 450 miles of the north French coast — from Calais on the Belgian border to Cherbourg and beyond — as 20,000 migrants wait to get to England for a new life. During the past week they have used small fishing vessels, private yachts and speedboats to slip migrants onto England’s South Coast beaches under cover of darkness.

Early last Sunday, 18 migrants were rescued in Dymchurch, a coastal village in Kent, after their rubber dinghy began to sink offshore. The same morning, eight migrants were rescued by a lifeboat in Portsmouth harbour as they floated adrift in a fishing boat. The determination of migrants and the greed of traffickers has not been diminished by the French government’s demolition in March of the ‘Jungle’ migrant camp in Calais, an unhygienic shanty town of 4,000. The migrants simply moved on — initially 30 or so miles away to Dunkirk, where thousands live in a camp near the port, paying traffickers to cross the Channel, and then spreading further along the coast.

Read more …

How many boats and bodies sink that we never hear about?

At Least 117 Bodies Of Migrants Found After Boat Capsized Off Libya (AP)

More than 110 bodies were found along a Libyan beach after a smuggling boat of mostly African migrants sank, while a separate search-and-rescue operation across the Mediterranean saved 340 people Friday and recovered nine bodies. The developments were the latest deadly disasters for refugees and migrants seeking a better life in Europe, and they followed the drownings of more than 1,000 people since May 25 while attempting the long and perilous journey from North Africa to southern Europe. As traffickers take advantage of improving weather, officials say it is impossible to know how many unseaworthy boats are being launched — and how many never reach their destination. Naval operations in the southern Mediterranean, co-ordinated by Italy, have been stretched just responding to the disasters they do hear about.

At least 117 bodies — 75 women, six children and 36 men — washed up on a beach or were pulled from the water near the western Libyan city of Zwara Thursday and Friday, Mohammed al-Mosrati, a spokesman for Libya’s Red Crescent, told The Associated Press. All but a few were from African countries. The death toll was expected to rise. The children were aged between 7 and 10, said Bahaa al-Kwash, a top media official in the Red Crescent. “It is very painful, and the numbers are very high,” he said, adding that the dead were not wearing life jackets — something the organization had noticed about bodies recovered in recent weeks. “This is a cross-border network of smugglers and traffickers, and there is a need for an international effort to combat this phenomenon,” he said.

Read more …

Crete is a somewhat novel destination.

Hundreds Rescued, At Least 9 Die In Shipwreck Off Crete (Kath.)

Hundreds of migrants were rescued on Friday after a smuggling boat sank in international waters south of Crete, while the Hellenic Coast Guard recovered the bodies of at least nine drowned migrants. The 25-meter vessel capsized in the early hours of Friday morning under circumstances that remained unclear, leaving hundreds of migrants in the sea, some 70 nautical miles south of Crete. According to the International Organization for Migration, around 700 migrants had been aboard the vessel. Five ships – cargo and commercial vessels – had been near the scene and offered assistance, rescuing scores of migrants. The Hellenic Coast Guard sent two vessels while the navy dispatched two Super Puma helicopters to scour the area.

By late Friday, 340 migrants had been rescued and the bodies of nine migrants pulled out of the sea by rescue workers. Another vessel capsized off the coast of Libya on Friday, leading to a larger death toll, with more than 100 bodies found in the sea. Meanwhile authorities on the islands of the eastern Aegean expressed concern as tensions are rising at detention centers and frequently escalating into brawls. The influx of migrants to the islands, which had all but stopped in recent weeks, following a deal between the European Union and Ankara to return migrants to Turkey, appears to have picked up again, unnerving authorities. A group of 120 migrants arrived on Chios Friday and another 25 on Lesvos.

Read more …

Oct 122015
 
 October 12, 2015  Posted by at 7:27 pm Finance Tagged with: , , , , , ,  4 Responses »


Jack Delano Gallup, New Mexico. Train on the Atchison, Topeka & Santa Fe 1943

Some things you CAN see coming, in life and certainly in finance. Quite a few things, actually. Once you understand we’re on a long term downward path, also both in life and in finance, and you’re not exclusively looking at short term gains, it all sort of falls into place. The only remaining issue then is that so many of you DO look at short term gains only. Thing is, there’s no way out of this thing but down, way down.

Yeah, stock markets went up quite a bit last week. Did that surprise you? If so, maybe you’re not in the right kind of game. You might be better off in Vegas. Better odds and all that. From where we’re sitting, amongst the entire crowd of its peers, this was a major flashing red alarm late last week, from Investment Research Dynamics:

September Liquidity Crisis Forced Fed Into Massive Reverse Repo Operation

Something occurred in the banking system in September that required a massive reverse repo operation in order to force the largest ever Treasury collateral injection into the repo market. Ordinarily the Fed might engage in routine reverse repos as a means of managing the Fed funds rate. However, as you can see from the graph below, there have been sudden spikes up in the amount of reverse repos that tend to correspond the some kind of crisis – the obvious one being the de facto collapse of the financial system in 2008. You can also see from this graph that the size of the “spike” occurrences in reverse repo operations has significantly increased since 2014 relative to the spike up in 2008. In fact, the latest two-week spike is by far the largest reverse repo operation on record.

Besides using repos to manage term banking reserves in order to target the Fed funds rate, reverse repos put Treasury collateral on to bank balance sheets. We know that in 2008 there was a derivatives counter-party default melt-down. This required the Fed to “inject” Treasury collateral into the banking system which could be used as margin collateral by banks or hedge funds/financial firms holding losing derivatives positions OR to “patch up” counter-party defaults (see AIG/Goldman).

What’s eerie about the pattern in the graph above is that since 2014, the “spike” occurrences have occurred more frequently and are much larger in size than the one in 2008. This would suggest that whatever is imploding behind the scenes is far worse than what occurred in 2008. What’s even more interesting is that the spike-up in reverse repos occurred at the same time – September 16 – that the stock market embarked on an 8-day cliff dive, with the S&P 500 falling 6% in that time period. You’ll note that this is around the same time that a crash in Glencore stock and bonds began. It has been suggested by analysts that a default on Glencore credit derivatives either by Glencore or by financial entities using derivatives to bet against that event would be analogous to the “Lehman moment” that triggered the 2008 collapse.

The blame on the general stock market plunge was cast on the Fed’s inability to raise interest rates. However that seems to be nothing more than a clever cover story for something much more catastrophic which began to develop out of sight in the general liquidity functions of the global banking system. Without a doubt, the graphs above are telling us that something “broke” in the banking system which necessitated the biggest injection of Treasury collateral in history into the global banking system by the Fed.

That should scare even the crocodile hunter, I venture, but he’s dead, and you’re not. So move one to the next sign that you’re in way over your head. How about Tyler Durden quoting Bank of America. Turns out, last week’s gains were down to one thing, and one only: short covering. In fact, the second biggest short squeeze in history. So much short covering that stock prices went up. And that’s why they did.

Stocks Soar To Best Week In A Year On “Mother Of All Short Squeezes”

With China shut and The Fed going full dovish panic-mode over growth fears, world markets went crazy…
• S&P up 7 of last 8 days +3.2% – best week since Oct 2014
• Russell 2000 +4.5% – best week since Oct 2014
• Nasdaq up 7 of last 8 (since Death Cross) closed above 50DMA
• Trannies up 8 of last 9 +4.9% – best week since Oct 2014
• Dow up 8 of last 9 +3.5% – best week since Feb 2015
• "Most Shorted" +4.7% – biggest squeeze in 8 months
• Biotechs -2.3%
• Financials +2.2% – best week in 3 months
• Asian Dollar Index +1.4% (worst week USD vs Asian FX since Oct 2011)
• Dollar Index -1.2% (worst week for USD vs Majors in 2 months)
• AUD +4% – best week since Dec 2011
• 2Y TSY Yields +6.5bps – biggest rise in 7 weeks
• 5Y TSY Yields +11bps – biggest rise in 4 months
• WTI Crude +8.9% – 2nd best week since Feb 2011
• OJ +4.8% – best day since March
• Silver +3.8% – best week since May

LOLume!!

 

The last 8 days have seen a massive short-squeeze… 2nd biggest in history

 

The last 2 times stocks were short-squeezed this much, did not end well…

 

And the following stunning chart shows the percent of S&P 500 names above their 50-day moving-average has soared from 4% to 60% in a few weeks…

h/t @ReformedBroker

Got that? The biggest injection of Treasury collateral in history combined with the 2nd biggest short squeeze in history. Still want to buy stocks? Think there’ll be an actual recovery?

And then there’s this mass selling of Treasuries by emerging markets, as per the following Economist graph.

How many trillions are we down so far? And you still want to buy ‘assets’? You sure you can spell the word please? Josh Brown at the Reformed Broker thinks maybe that’s not the smartest move around:

QE Causes Deflation, Not Inflation

In America, Japan and the Eurozone velocity has continued to decline since the financial crisis in 2008. Thus, US, Japan and Eurozone money velocity, measured as the nominal GDP to M2 ratio, has declined from 1.94x, 0.7x and 1.29x respectively in 1Q98 to 1.5x, 0.55x and 1.05x in 2Q15.

Indeed, US money velocity is now at a six-decade low. This is why those who have predicted a surge in inflation in recent years caused by the Fed printing money have so far been proven wrong. For inflation, as defined by conventional economists like Bernanke in the narrow sense of consumer prices and the like, will not pick up unless the turnover of money increases. This is the problem with the narrow form of mechanical monetarism associated with the likes of American economist Milton Friedman.

[..] QE is deflationary because it shrinks net interest margins for banks via depressing treasury bond yields. It also enriches the already wealthy via asset price inflation but they do not raise their consumption in response, because how much more shit can they possibly buy? Finally, it leads to a preference of share buybacks vs investment spending because the payback from financial engineering is so much easier and more immediate.

Now, we’re not sure that QE ’causes’ deflation, or let’s put it this way: perhaps QE doesn’t cause the deflation we see, but it certainly reinforces it. ‘Our’ deflation originates in our debt. And there’s more than plenty of that to go around.

More is still being added on a daily basis. Though we’re approaching the limits of that. Which is a good thing on the one hand, but a bad one on the other: we’re all going to feel like heroine junkies going cold turkey. Not a pleasant feeling. But still healthier in the long run.

That US money velocity is at its lowest pace in 60(!) years -do let that one sink in- is a huge component of what deflation really is: not rising or falling prices, but the interaction of falling/rising money supply vs falling/rising money velocity.

And in that sense, isn’t it interesting to note that “US money velocity is now at a six-decade low.”?! And that, accordingly, no matter how much money is injected into the economy, if it is not being spent, deflation is inevitable?!

Why is it not being spent? Because America, wherever you look, and at whatever level, the country is drowning in debt. And so is the rest of the planet. If a large enough part of your ‘gains’ goes toward paying of what you’ve already spent in the past, you’re just a hamster on a wheel. Well, hamsters rule the planet.

And, now that we’re talking about it, deflation is inevitable anyway in the aftermath of the by far biggest credit mountain in the history of not just mankind, but of the planet, if not the universe.

It may be hard to let sink in if you and/or your pension fund own large(-ish) portfolios of stocks and bonds, or if you make a living trading the stuff, but come on, how long do you think you can keep the charade going? or should that be: ‘could keep it going’?

To add insult to injury, Bloomberg tells us that margin dent is falling fast in ‘da markets’. Ergo: smarter money is paying its money down, before too much of it vanishes into the great beyond. Watch that graph and imagine it going all the way back down to 2012, and then think about where your ‘assets’ will be.

Margin Debt in Freefall Is Another Reason to Worry About S&P 500

Most people get concerned about margin debt when it’s shooting up. To Doug Ramsey, the problem now is that it’s falling too fast. The CIO of Leuthold Weeden whose pessimistic predictions came true in August’s selloff, says the tally of New York Stock Exchange brokerage loans flashed a bearish sign when it slid more than 6% in July and August. The retreat took margin debt below a seven-month moving average that suggests demand for stocks is dropping at a rate that should give investors pause. For years, bull market skeptics have warned that surging equity credit portended disaster for U.S. shares, pointing to a threefold runup between the market low in March 2009 and the middle of this year. Ramsey, who says that surge was never strong enough to form the basis of a bear case, is now worried about how fast it’s unwinding.

“Margin debt contracting is a sign of loss of investor confidence and it’s confirmation of a lot of other evidence we have that we’ve entered a cyclical bear market,” Ramsey said in a phone interview. “We got a lot of traditional warning signs leading up to the high in terms of market action, and deteriorating breadth and margin debt is important to the supply-demand analysis.” Margin debt, compiled monthly by the NYSE, represents credit extended by brokerages for clients to buy stock. It hews closely to benchmark indexes such as the S&P 500, primarily because equity is used to back the loans and as its value rises, so does the capacity to lend.

Of course, the entire global economy has been hanging together with strands of duct tape for decades now, but hey, it looks good as long as you don’t take a peek behind the facade, right? But you know, it all comes together in that money velocity graph earlier.

People have massively toned down their spending, some because they’ve grown wary of what’s going on, but most because they either have nothing left to spend or they are too deep in debt to have anything left after they pay their money down.

And there’s no cure for that. Not even a people’s QE will do it, no matter what shape it would come in. The entire world economy would need to restructure its various debt levels.

Problem with that is, A) we’ve already committed to bail out our banks at the cost of our entire societies, and B) we largely owe our debts to those same banks. So why should they let us off the hook now? They own us.

Meanwhile, even if you think that last bit is silly, how do you yourself think you can squeeze your behind out of the massive short squeeze that happened last week? By purchasing shares? Really?

Jun 032015
 
 June 3, 2015  Posted by at 2:02 pm Finance Tagged with: , , , , , , ,  17 Responses »


Jack Delano Mike Evans, welder, Proviso Yard, Chicago & North Western RR 1940

We’ve been entertaining ourselves to no end the past couple days with a ‘vast array’ of articles that purport to provide us with ‘expert’ opinion on the question of whether we are witnessing a bubble or not. Got the views of Goldman’s David Kostin, Robert Shiller, Jeremy Grantham, Jeremy Siegel, Howard Marks.

But although these things can be quite amusing because while they’re at it, of course, the ‘experts’ say the darndest things (check Bloomberg ‘Intelligence’s Carl Riccadonna: “You had equity markets benefit from QE, but eventually QE also jump-started the broader recovery.. Ultimately everyone’s benefiting.”), we can’t get rid of this one other nagging question: who needs an expert to tell them that today’s markets are riddled with bubbles, given that they are the size of obese gigantosauruses about to pump out quadruplets?

Moreover, when inviting the opinions of these ‘authorities’, you inevitably also invite denial and contradiction (re: Siegel). And before you know what hit you, it turns into something like the climate change ‘debate’: just because a handful of ‘experts’ deny what’s right in front of their faces as tens of thousands of scientists do not, doesn’t mean there’s a valid discussion there. It’s just noise with an agenda.

And though the global climate system is infinitely more complex than the very vast majority of people acknowledge, fact remains that a plethora of machine-driven and assisted human activities emit greenhouse gases, greenhouse gases trap heat and higher concentrations of greenhouse gases trap more heat. In very similar ways, central banks’ stimuli (love that word) play havoc, and blow bubbles, with and within the economic system. Ain’t no denying the obvious child.

But even more than the climate ‘debate’, the bubble expert articles made us think of a Jerry Seinfeld episode called The Opera, which ends with Jerry doing a stand-up shtick that goes like this:

I had some friends drag me to an opera recently, you know how they’ve got those little opera glasses, you know, do you really need binoculars, I mean how big do these people have to get before you can spot ’em?

These opera kids they’re going two-fifty, two-eighty, three-twenty-five, they’re wearing big white woolly vests, the women have like the breastplates, the bullet hats with the horn coming out.

If you can’t pick these people out, forget opera, think about optometry, maybe that’s more you’re thing.

As far as we can figure out, all you need to know today about bubbles is displayed right there in front of you if you’re able to simply imagine what asset prices would be like without the $40 trillion or so in global stimulus measures the central banks have gifted upon the banks and forced upon the rest of us.

Does anyone honestly think that prices for stocks and bonds and houses and commodities would be anywhere near where they are now without all that zombie money?

How can you even pretend that anything at all has a fair valuation these days? Central banks buy bonds up the wazoo, and there’s no way that does not drive up prices like they’re being chased by the caucasian Baltimore police force department.

Home prices have stabilized for one reason only: the beneficiaries of QE money have done one of two things: either buy up homes wholesale themselves, or sign some poor greater sucker into a loan to procure a leaking and peeling American dream at inflated ‘value’.

As for stocks, they’re supposed to reflect the state of the economy, and their record setting highs obviously do nothing of the kind, because economic performance is just as obviously many lightyears away from any record high.

In fact, the only thing that’s ‘positive’ about the economy is home and share prices. And that is because corporations engage in M&A and in buybacks the size of which people just 10 years ago would have not deemed possible, or even legal, and because that drives up share prices to levels where the many millions of greater fools get tempted to participate. Just watch China.

The flipside of this, as they will find out soon enough, is that QE and ZIRP and that entire alphabet soup completely destroy price discovery. And that means that nobody knows what anything is really worth, everyone’s just guessing, there is no correlation left to the work that has gone into producing anything, let alone to the practical value of what’s being produced.

These companies that buy their own shares can do so with credit borrowed at very low rates, so low their actual activities don’t even have to generate anywhere near an economically viable profit. They can simply borrow it.

Where and when then will these grossly bloated monstrosities burst? The clue would seem to be closely related to what Martin Armstrong had to say:

Velocity of Money Below Great Depression Levels

Ever since the repeal of Glass-Steagall by Bill Clinton in 1999, this “new” way of making money by transforming banking from Relationship to Transactional Banking has destroyed the economy in ways we are soon to discover. The VELOCITY of money has fallen to BELOW Great Depression levels. This is the destruction of Capitalism, and I fear the response against the banks on the next downturn will lead to authoritarianism.

Taking interest rates NEGATIVE will not reverse this trend – it will accelerate the trend. This is all part of Big Bang. We seriously need to understand the nature of the problem or we will lose all rights and freedom because of what the bankers have set in motion. Transactional Banking only benefits the banks and fails to create a foundation for economic growth. This is not about Fractional Banking, this is all about the destruction of Relationship Banking which creates small businesses and employment.

The collapse in the VELOCITY of money illustrates the collapse in liquidity in the markets, which will erupt in higher volatility we have not seen before. The VELOCITY of money declines as HOARDING rises. This is how empires, nations, and city-states decline and fall.

Armstrong uses the following graph to make his point, which is a series that depicts (not seasonally adjusted) GDP/St. Louis Adjusted Monetary Base.

I’ll add the MZM graph (Money Zero Maturity = all money in M2 less the time deposits, plus all money market funds). It’s not as dramatic, but more commonly used (do note that the timescale is different):

It’s obvious that what ails the US economy, and all western economies, is that people are not spending. That’s what brings velocity of money down. And that’s also what causes deflation, and by that we don’t mean falling prices only.

Ergo: when Armstrong states that “The VELOCITY of money declines as HOARDING rises”, he’s half right, but only half. I’ve explained before that this is also where Bernanke’s preposterous claims about an Asian savings glut a few years ago failed in dramatic fashion.

In that same sense, I wrote recently that the ‘savings rate’ in the US is calculated to include debt payments. If you pay off your mortgage or your payday loan, that is jotted down as you saving, even hoarding your money. Just one in a long range of mind-numbing accountancy tricks the US utilizes to hide the real state of its economy. Makes one wonder what the double seasonally adjusted savings rate might be.

This issue shirks uncomfortably close to the contribution of each dollar of added debt to a country’s GDP, which in the west by now must shirk just as uncomfortably close to zero. And once it is zero, the game’s up.

That puts into perspective Jon Hilsenrath’s quasi-funny letter yesterday in the Wall Street Journal, which Tyler Durden presented with: “..to our best knowledge, this is not the WSJ transforming into the Onion.”

Dear American Consumer,

This is The Wall Street Journal. We’re writing to ask if something is bothering you. The sun shined in April and you didn’t spend much money. The Commerce Department here in Washington says your spending didn’t increase at all adjusted for inflation last month compared to March. You appear to have mostly stayed home and watched television in December, January and February as well. We thought you would be out of your winter doldrums by now, but we don’t see much evidence that this is the case. You have been saving more too. You socked away 5.6% of your income in April after taxes, even more than in March. This saving is not like you. What’s up?

The most glaring problem with this letter is -though granted, there’s quite a few- that Americans are not actually saving. Of course some of them are, but that’s not what drives the savings rate. Americans are paying off debt. They have no choice. They’re maxed out. They don’t want to lose their homes, or not feed their kids. The only jobs created have been low-paid ones. While home prices have been QE’d into a suspended state of Wile E. style false stability.

This is how you gut a society. It’s 101. Central banks’ largesse has indulged the rich with more than they can spend, while the rest get less than they need to spend to survive. Home prices are so high they keep people from spending, says Bloomberg.

That’s where the rubber hits the road. That’s where the asset bubbles hit the real economy. And they haven’t even started to burst yet, for real. When they do, the brunt of that will be borne by the real economy as well.

What will bring down our western economies is that people simply no longer have money to spend. While consumer spending in the US is still close to 70% of GDP. That won’t be solved by handing money to banks, or by keeping asset prices from reverting to their market values. Quite the contrary.