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Off the Cuff: On the Knife's Edge

Options are running out across the board
Thursday, October 25, 2012, 11:11 PM

In this week's Off the Cuff with Mish & Chris podcast, Mish and Chris discuss:

  • Phony employment
    • More workers being hired to do less work more poorly
  • Phony hopium
    • Despite QE3, over half the companies reporting Q3 earnings are under analyst expectations
  • Germany entering recession
    • The EU's only functioning economic engine is sputtering
  • Japan on the knife's edge
    • Between crushing deflation and currency destruction
  • Time for our politicians to clarify our priorities
    • What are we not going to do?

As we enter the fall and the upcoming elections, we find the status quo is becoming less and less sustainable on many fronts.

[Short summary tonight due to WS game 2. With all respect to Bob and Jim H -- Go Giants!!]


If We're Ever Going to Take Control of Our Destiny, the Time is Now

Which actions make the most sense today?
Monday, October 22, 2012, 7:25 PM

Executive Summary

  • Adapting our behavior is a must at this point. We really don't have the option not to.
  • The number of claims on real wealth is increasing. How much of the "real wealth" do you own?
  • Our economy is now truly a confidence-based system. What will be the fallout when that confidence falters?
  • What are the key knowns & unknowns we need to be addressing now?

If you have not yet read Part I: In a Bad Spot, available free to all readers, please click here to read it first.

What is completely unknown at this point is what will happen to our very complex and interwoven financial system when it finally comes to grips with the idea that old-style growth is never coming back.  One worrisome idea is that it will experience something akin to cardiac arrest and simply break down one day. 

Maybe this will happen, maybe not.  I will note that the degree to which the central banks have set themselves up as the ultimate saviors of the system has both an upside and a downside, and it is the downside that worries me the most at this point.

While all the trillions of dollars of intervention have stabilized the system, which I consider to be a good thing, the downside is that the central banks have placed themselves in a position where they had better succeed.  If not?  Then we discover just how important confidence is to a monetary system built, owned, and operated on trust.  My guess is "very." » Read more


Off the Cuff: Picking Our Poison

At this stage, we're offered only toxic choices
Wednesday, October 17, 2012, 6:50 PM

In this week's Off the Cuff with Mish & Chris podcast, Mish and Chris discuss:

  • The Presidential Debates
    • The only big winner is the status quo
  • Surprisingly Rosy Data
    • Reality? Or election year fudging?
  • The Universality of Human Behavior
    • Chris' UK trip reaffirms his confidence in his forecasts
  • Recession vs Higher Deficits
    • Picking our poison
  • Holding Gold
    • The trend is gaining in popularity

Despite the posturing and soundbyte zingers, both Chris and Mish do not find any substantial difference between the two presidential candidates when it comes to the Three Es. » Read more



Where Stock Prices Are Headed Over the Next Year

The battle between the real economy and asset prices
Tuesday, October 16, 2012, 11:12 AM

Executive Summary

  • Why household balance sheets are worse off than advertised
  • Why the recent rosy BLS jobs numbers actually mean bad news
  • How the Fed is squeezing investor capital out of other traditional asset pools and into the stock market
  • Expect to see the stock market moving higher in 2013; that is, until QE3 fails
  • What to expect if QE3 fails sooner than anticipated

If you have not yet read Part I: The Future of Gold, Oil & the Dollar, available free to all readers, please click here to read it first.

Market historians have recently started to point out that the current advance in the S&P500 is now 40 months old and has made gains of over 115% since the March 2009 lows. In other words, the doubling from the lows in price and the duration of the advance now late in its third year together suggest that a cyclical top is near. Furthermore, despite some noise in U.S. macro data – which has been briefly more hopeful, yet remains well within the phase of stagnation – earnings estimates have been coming down as the world economy continues to shift into lower gear.

Perhaps for the first time in a while, we can actually say that the Fed's decision to start QE3 was moderately anticipatory, in contrast to its ad-hoc and reactive policymaking over the past five years. It is not merely that the Fed soberly accepted that the economy was not getting better. The stagnant, tractionless macro data over the past year has spoken quite loudly to that fact. Indeed, the U.S. economy is merely treading water, and the Fed's move to QE3 serves as a sharp retort to those who would relentlessly attempt to portray stagnation as recovery. » Read more


Finding Authentic Happiness

The steps that build a solid foundation
Wednesday, October 10, 2012, 7:22 AM

Executive Summary

  • Why buying into the Status Quo undermines personal empowerment
  • Echew debt and consumerism. Instead, focus on cultivating resilience and social capital
  • The importance of differentiating hedonia vs eudaimonia
  • The key roles of Expectation, Narrative, and Challenge
  • The foundations of happiness

If you have not yet read Part I: The Pursuit of Happiness, available free to all readers, please click here to read it first.

In Part I, we challenged the assumption that the successful pursuit of happiness is based on material prosperity and what we might call the psychology of the atomized individual.

If material prosperity is necessary but insufficient, and our social and financial order is sociopathological, what does an authentic pursuit of happiness entail?

For answers, we can survey recent research into human happiness, and consider “powering down” participation in a deranging social and financial order.

Pondering Power

The primacy of power in human society is omnipresent. Humans scramble for power in all its forms to improve social status and the odds of mating, living a long life, and acquiring comforts.  What is remarkable about the current American social order is the powerlessness of the vast majority of people who have “bought into” the Status Quo. 

When the public vehemently disapproves of a policy, such as bailing out the “too big to fail” banks, they are routinely ignored, and for good reason: They keep re-electing incumbents.  Most have little control over their employment status, workflow, or income, and most devote the majority of their productive effort servicing private debt and paying taxes that service public debt.

The one “power” they are encouraged to flex is the momentary empowerment offered by purchasing something; i.e., consuming.  The corporate marketing machine glorifies acquisition as not just empowering but as the renewal of identity and the staking of a claim to higher social status – everything that is otherwise out of the control of the average person.

The dominant social control myth of our consumerist Status Quo is that wealth is power because you can buy more things with it.  But the power of consumption is one-dimensional and therefore illusory.  The only meaningful power is not what you can buy – a good, service, or experience – but what you control – your health, choice of work, income, surroundings, level of risk, and your circle of colleagues and friends.

The “wealthy” who own an abundance of things but who are trapped in debt are not powerful.  Their choices in life are limited by the need to service the debt, and their pursuit of happiness is equally constrained.

The kind of wealth that enriches the pursuit of happiness is control over the meaningful aspects of life. It is no coincidence that studies of workplace stress have found that those jobs in which the worker has almost no control over their work or surroundings generate far more stress than jobs that allow the worker some autonomy and control.

Financial and material wealth beyond the basics of creature comfort is only meaningful if it “buys” autonomy and choice.

We all want power over our own lives.  Once we free ourselves from social control myths, we find that becoming powerful and “wealthy” in terms of control does not require a financial fortune. It does, however, require sustained effort and a coherent long-term plan... » Read more


Off the Cuff: When Trillions Aren't Enough

Our banks' bottomless need for capital
Thursday, October 4, 2012, 11:36 AM

In this week's Off the Cuff with Mish & Chris podcast, Mish and Chris discuss:

  • No Joy on Wall Street
    • Banks cry poor despite record profits
  • The Invisible Recession
    • Hidden by faulty data
  • The Fallible Fed
    • It really doesn't know what's going on
  • Our Taxing Tax System
    • The case for simplification

It's clear to all that QE3 is a continued push by the Federal Reserve to rescue the banking system. But why is it necessary? » Read more


What Happens Once We've Burned All the Resources?

Why we're inheriting a 'slower moving' world
Wednesday, October 3, 2012, 1:03 AM

Executive Summary

  • Why purchasing power and quality of life will decline in OECD countries, even as economic 'growth' is maintained
  • Why 'energy mix' is as critical as 'energy supply'
  • The potential of natural gas as a "bridge" fuel
  • Why we're inheriting a "slower moving" world

If you have not yet read Part I: The War Between Credit and Resources, available free to all readers, please click here to read it first.

Low-Quality GDP

Declinists have been surprised by the ability of policy makers to slow the rate of our post-Peak-Oil financial collapse using quantitative easing. But the global economy stopped funding new industrial growth with oil starting seven years ago. Accordingly, the transition to coal as the source to fund growth was well underway before the financial crisis began.

And it remains vexing, to be sure, to understand how the world economy has been able to move forward – at least a little – in the post-2008 environment.

Nevertheless, we now have those answers and no longer need to forecast an imminent black swan or tail event... » Read more


Why the U.S. Dollar, Counterintuitively, May Strengthen from Here

When the future seems inevitable, challenge your assumptions
Thursday, September 27, 2012, 8:32 PM

Executive Summary

  • Why to expect household income will continue to decline (in real terms)
  • The ceiling that the price of oil may place on central bankers' ability to print money
  • Why money printing does not always result in inflation
  • The argument for a stable and/or strengthening U.S. dollar

A year ago, in the wake of the then-announced additional monetary easing measures by the Federal Reserve (which since sent stock prices on a rocket ride for the next nine months), many of our readers feared a major decline in the dollar was imminent. To add some balance to our site content, we asked Peak Prosperity contributing editor Charles Hugh Smith to argue the case for a strengthening dollar. He graciously accepted, and in the year since writing Heresy and the US Dollar, America's currency did indeed strengthen notably vs. its fiat counterparts. Now, after the Fed's announcement of QE3 (plus), many of us are girding once again for dollar weakness. So we've invited Charles to once again play devil's advocate.

If you have not yet read Part I: Welcome to the Era of 'Ugly' Inflation, available free to all readers, please click here to read it first.

In Part I, we covered “beautiful deleveraging,” the goal of which is to systemically distribute the financial pain so the Status Quo is left intact, and the threat to this strategy posed by “ugly inflation.”  The critical difference between “beautiful” and “ugly” inflation is that incomes keep pace with the rising cost of goods and services in the former and are stagnant in the latter.  In ugly inflation, households’ discretionary income declines, reducing consumption, slowing investment, and crippling future borrowing.  Defaults rise; consumption, tax revenues, and lending decline; and the economy enters a self-reinforcing feedback loop of contraction.

This is the position the U.S. economy is in, as real household income has declined 8% since 2007 and inflation officially bubbles along at 2-3% (and at a higher rate for many essentials).

The Status Quo attempt to painlessly inflate our way out of over-leveraged indebtedness has run up against limits that are not apparent in a strictly financial model like Ray Dalio’s “beautiful deleveraging.” If we understand these other forces and tipping points, we will understand why central-bank deleveraging will fail. » Read more


Off the Cuff: At the Boiling Point

Unrest is erupting around the globe
Wednesday, September 26, 2012, 11:02 PM

In this week's Off the Cuff with Mish & Chris podcast, Mish and Chris discuss:

  • Unrest is breaking out around the world
    • When the populace has no options, it revolts
  • QE3 bang already a whimper
    • The impact of each successive easing is less than its precedent
  • Gold showing real strength
    • Support for the metal is going mainstream
  • Canadian coal-mine canary
    • Huge drop in housing sales

As predicted, as we head out of the slow summer, events are now beginning to unfold fast and furious. Renewed street riots in Spain and Greece show how disaffected the citizens there are from the failed policies that have been used to placate them to date. China and Japan seem to be inching further to potential armed conflict, as do Israel and Iran. The market is realizing that with open-ended money-printing now announced, there is no future "juice jolt" to anticipate, and so asset prices have already returned to pre-QE3 territory. With such uncertainty growing everywhere one looks, it's little surprise that more and more of those who once scoffed at gold are now recommending the precious metal.


The Implications of a German Exit from the Eurozone

What changes to expect
Tuesday, September 25, 2012, 12:45 AM

Executive Summary

  • Why the U.S. and the IMF won't act soon enough to avoid a German exit
  • Why Finland will bolt from the Eurozone the moment Germany does (and how many others may soon follow?)
  • What a German exit (and a new mark) would really mean
  • When will Germany likely announce its departure from the Eurozone?

If you have not yet read Part I, available free to all readers, please click here to read it first.

In Part I, we covered the background to what now appears to be inevitable: Germany has to leave the Eurozone. She, along with the Netherlands and Finland, simply cannot afford to bail out the rest of the Eurozone, so she is standing in the way of a resolution to the crisis. It is therefore only a matter of time before the political classes have to face this reality.

Time is running out, and the longer Germany delays, the worse her position will be. The yields on Spanish and Italian debt will inevitably head towards and through the 7% "point-of-no-return" threshold and beyond, and Germany will get all the blame. Germany will be seen as a thorn in the side of the ECB, restricting its scope for monetary action and obstructing a solution, partly because of the Bundesbank’s stubborn conservatism and partly because Germany’s Constitutional Court frowns on monetising government debt. She will be unfairly condemned by everyone.

Let’s look at some back-of-the-envelope figures... » Read more