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Japan Is Struggling

More data on my favorite black swan candidate for 2012
Friday, July 27, 2012, 9:53 PM

In a prior piece this year, I proclaimed Japan to be my favored candidate to be the black swan of 2012. By this I mean that a financial accident in Japan that would create massive havoc in the world markets seems even more likely to me than something originating in Europe.

The reason is precisely because all eyes (and efforts) are focused on Europe, leaving Japan out of focus and unattended, so to speak. This is practically a requirement for a crisis spot; crises never seem to arise in the place everybody is already watching. Japan is nicely out of focus and therefore a good place for us to keep our eyes trained upon.

In the most recent podcast with Mish, we discussed the fact that Japan had recently posted its largest first half trade deficit in history. Then Mish asked if Japan's current account had slipped into negative territory yet, as that event will accelerate the pace at which Japan's looming structural insolvency will arrive.

While discussing the current account, a normally obscure economic term, seems a bit wonkish, it is really quite important. So let's start there, with a definition as a refresher for myself and perhaps an introduction for others. » Read more

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Off the Cuff: Time for Precious Metals to Shine?

More & more signs point to coming money printing
Wednesday, July 25, 2012, 3:43 PM

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

  • Dwindling options for capital
    • Growth is slowing everywhere and more QE looks increasingly certain
  • Mathematical disasters everywhere
    • More bad news from Europe and Japan
  • Housing market overhang
    • We may see a 'lost decade' before prices truly recover

There's much to talk about as Chris and Mish reconnect after two weeks. Signs for new global liquidity measures are burning brighter than ever and sovereign risk in Europe and Asia is mounting. Stewards of wealth are finding it harder and harder to protect it, let alone grow it. Are we finally at the stage where the world wakes up to the relative sanctuary the precious metals offer? » Read more

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California: The Bellwether for the Rest of America

Time to take notes or suffer the same fate
Sunday, July 22, 2012, 8:44 PM

Executive Summary

  • Escalating energy costs (direct and indirect) create a vicious cycle in the economy that further hinders growth/recovery
  • Overspending and other poor capital allocation decisions by state governments are compounding the problem
  • California spends $1 on public transit vs. $10 on automobile-related investment, a gap that energy costs will soon painfully reverse
  • Solutions are hard to come by and harder to fund, but without investment, alternative systems won't ever achieve scale
  • California's future is increasingly easy to predict; individuals and other state governments better take notes or suffer the same fate

If you have not yet read Part I: Dawn of the Great California Energy Crash, available free to all readers, please click here to read it first.

A key feature in the post-war industrial success of countries like South Korea and Japan, given that they had virtually no domestic energy supplies, was the ability to turn a profit from manufacturing powered by imported energy. This favorable equation relied on three key factors:

  • That imported energy remained a cheap input cost compared to the high margin value of exported goods
  • That energy producing countries had cheap energy to export
  • That purchasers of the exported goods were growing, and were running their own economies on cheap energy

These are the exact same assumptions still being made -- and extrapolated into infinity -- about California's economy.

Are we really to believe that California's GDP can forever deindustrialize, requiring fewer and fewer energy inputs, while growing in profitability, thus providing the capital to access/import energy -- at any price? » Read more

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The Consequences of a Eurozone Breakup

A perfect storm is brewing
Wednesday, July 18, 2012, 1:17 AM

Executive Summary

  • European banks have shifted their priority from supporting national governments to combating captial flight
  • Hollande's policies are accelerating France's path to insolvency, thus advancing the date of the Eurozone collapse
  • The euro can fall MUCH farther from here
  • We are currently at a stalemate being forced by Germany, but it will soon end and downward momentum will quickly build

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

In Part I, we examined the economic pressures likely to blow the Eurozone apart and concluded that there is increasing disquiet in Germany over the cost of supporting stricken economies and her increasing reluctance to write open-ended cheques. The first creditor country to leave will probably be Finland, or perhaps one of the other smaller members less committed to the Eurozone project. Let's now explore how this might come about, along with the consequences for the rest of the world.

Sovereign Debt Markets

It is obviously not possible to anticipate tomorrow’s events with any certainly, but we can lay down some pointers, the most obvious of which is changing yield levels in sovereign debt markets. Let's focus on Spain because she currently causes the most concern.

Before mid-November last year, Spain’s ten-year bond yield had run up to 6.58%, up from the 4% level that prevailed before her debt crisis became an issue (see chart below). At end-November, the yield fell in anticipation of the ECB’s first long-term refinancing operation (LTRO), because Eurozone banks used some of the money to arbitrage between Spanish bond yields and the considerably lower cost of funding from the ECB. This way of making money is encouraged by Basel 3 rules, which define short-term sovereign debt as being the highest quality, so no haircut is applied. This regulatory quirk has been conspiratorially used by the ECB, commercial banks, and governments themselves to ignore fundamental lending realities... » Read more

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The Middle-Class Survival Guide

Learn how to fight back
Wednesday, July 11, 2012, 8:31 PM

Executive Summary

  • Recognize the signs of serfdom
  • Calculate your income's vulnerability to the system
  • Don't count on high inflation to inflate away your debt obligations
  • 10 strategies you can start implementing right now to defend against the forces trying to sap your quality of life

If you have not yet read Part I: Middle Class? Here's What's Destroying Your Future, available free to all readers, please click here to read it first.

In Part I, we surveyed the key dynamics that have eroded middle-class wealth and income over the past 30 years.  Some of these were conventional (higher energy costs) and some were unconventional/politically unacceptable (financialization; neofeudalism).

Regardless of what you identify as the primary cause, that the middle class (and labor in general) has lost ground since the early 1980s is undeniable, as is the ultimate failure of debt-dependent “growth.”

What can we do about it? It seems to me there are two responses:

  1. Avoid becoming a serf in the new financialized feudalism
  2. Avoid becoming dependent on the Status Quo and avoid collaborating/supporting those elements of the Status Quo that subsidize and protect the parasitic, inefficient, and unproductive sectors of the economy.

Getting Real About Serfdom

I am going to cut to the chase here, and I expect many of you to disagree. Debt is serfdom, period.

I often illustrate this point by asking two simple questions... » Read more

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Heatwaves, Harvests, and Food Price Shocks

Stress on our food system is building
Tuesday, July 10, 2012, 4:37 PM

The persistent drought coupled with a record heatwave is seriously denting farm harvest forecasts across the US and grain futures have already been sent soaring.

In some cases, the prices are approaching the old 2008 highs, which saw food riots spring up around the globe and contribute to several rather dramatic regime changes.

It looks like the same dynamic is in play again... » Read more

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Positioning Yourself for When Our Money Dies

Hope alone is a terrible wealth preservation strategy
Tuesday, July 10, 2012, 10:35 AM

Executive Summary

  • Sustaining through a prolonged currency decline is challenging. How to best invest your capital through the speculative whipsaws that will buffet asset prices.
  • Why important-dependent countries (like the US) are particularly vulnerable.
  • What the stages of a US currency crisis will be.
  • What the lessons from the currency destruction in the Weimar Republic and modern Iran have to teach us about wealth preservation.

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

A Process, Not an Event

An important observation is that even the most destructive of these episodes are multi-year processes and are not events that transpire over a matter of days.  This means that you will most likely have to plan on navigating the waters for at least several years, possibly as many as ten, which raises issues around the depth of your mental and emotional resilience, and the durability of your physical and financial preparations. 

Sure, nearly everybody can coast through the first few weeks and months of a monetary crisis. But very few will truly thrive through the entire process until a final capitulation is reached from which a new beginning can emerge. 

Is such resilience even a reasonable goal, or something that can be consciously manifested? 

Yes, of course it is.  That's why we at Peak Prosperity are here doing what we do... » Read more

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Off the Cuff: The Heat Is On

Literally and figuratively across Europe and the US
Thursday, July 5, 2012, 10:16 PM

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

  • The Eurozone's tightening vice
    • The likelihood is increasing that the real moves will come under the declaration of a "financial emergency"
  • The deepening LIBOR scandal
    • ​The web of conspirators continues to expand, but will any indictments result?
  • Will extreme weather impact grain prices? 
    • ​Heat and drought may nix the current forecasts for a record harvest

As the temperature rises to broiling levels across the US, EU leaders are sweating about how to slow the solvency issues a growing number of Eurozone countries face. The latest machinations suggest there is little room left to maneuver in kicking the can further down the road, so Mish and Chris suspect "emergency measures" may be declared to ramrod unpopular measures through. Meanwhile, France's headlong descent into further socialism accompanied by the growing size of the LIBOR-fixing deceit make even the most sanguine wonder how Europe will possibly emerge from it's current woes without permanent damage to its stability. » Read more

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Off the Cuff: It's Becoming Every Man for Himself

Hard times reveal the true nature of our leaders
Thursday, June 28, 2012, 3:40 PM

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

  • Signs of fragmentation in Europe
    • Increasingly political leaders jettisoning Eurozone collectivism for what's best for their own country
  • The ticking pension bomb
    • US states, municipalities, and cities face unmeetable obligations
  • Fraud at the core
    • The Barclays LIBOR-fixing scandal shows how manipulated markets really are

They say that when the going gets tough, you learn what a person's true nature is. If that's so, we're learning that the bloviating European leaders are clueless opportunists with no real love or loyalty for the centralized European vision they've been selling to their populace for over a decade. Similarly, US public pension administrators and public officials are craven liars, still unwilling to admit to pensioners that poor stewardship, bad math, and generationally low interest rates have made it impossible to meet their actuarial commitments. Increasingly -- and as epitomized by the recently- fraudulent fixing of the LIBOR market -- all players are simply out to secure what they can for themselves before the system breaks. » Read more

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Coal is the Fuel for a World in Decline

On track to be the world's dominant energy source again
Thursday, June 28, 2012, 10:35 AM

Executive Summary

  • Coal is priced very attractively on a BTU output basis
  • Developing countries, where energy demand is growing greatest, are much more dependent on the power grid to run their economies
  • Coal is on track to reclaim its postion as the world's top energy source (possibly as early as this year)
  • What are the implications of a global resurgence of coal-usage?

If you have not yet read Part I: The Global Coal Juggernaut Rolls Onward, available free to all readers, please click here to read it first.

As the global economy once again moves through an acute phase of the ongoing financial crisis, it is natural that energy prices should decline. West Texas Intermediate Crude (WTIC) is once again back nearly below $80 a barrel. And coal prices, both thermal and for steelmaking, have also declined. Central Appalachian Coal, rich in thermal content, was mostly steady near $80 per short ton for much of last year. (This translates to about $3.20 per million BTUs).

However, 2012 has seen a pricing decline as the world economy once again slows down on the back of persistent debt problems -- and the persistently elevated price of oil.

One of the pernicious dynamics about coal pricing is that thermal coal is nearly always able to reset at a low enough level to compete against all other forms of BTUs.

As previously mentioned, that has recently not been the case in the United States, where a million BTUs of natural gas is now cheaper to burn than a million BTUs of coal -- especially after coal’s higher regulatory costs are factored into the equation. But if the new and grim reality of oil is that world recession no longer brings oil prices down meaningfully, it is still the case that any global industrial slowdown does indeed bring coal prices low enough to outprice other energy sources. And while rich, thermal coal from Appalachia is currently cheap at around $3.00 per million BTUs, Powder River Basin coal is even cheaper, at an amazingly low $0.52 per million BTUs.

It’s not surprising, therefore, that each time the global economy weakens and then rebounds, its hunger for coal advances more strongly. » Read more