Bruce Krasting

After Bernanke capitulated on the Fed’s responsibility to balance it’s dual mandate and committed to keep ZIRP alive for another 24 months the Swiss Franc exploded in value. It was up 6% in just a few hours. That was the biggest one-day move in 30 years.

The Swiss National Bank is getting desperate. They responded by announcing new emergency measures. They are immediately increasing “sight deposits” by CHF 40B. This is the second increase in a week. The two actions together will increase liquidity in the banking system from CHF 30B to CHF 120b. A 400% increase.

We are confronted with huge numbers every day. What does an increase of CHF 90b really mean? It’s a very big deal. Swiss GDP is about CHF 500b. So the increase in liquidity is equal to 20% of GDP. Now think of US GDP at $15 Trillion. What the Swiss have done in just a week is equivalent to $3 trillion in a big economy like the USA. That is massive.

This is the language from the SNB yesterday:

The massive overvaluation of the Swiss franc poses a threat to the development of the economy in Switzerland and has further increased the downside risks to price stability.

This was the sentence that caught my eye:

To accelerate the increase in Swiss franc liquidity, the SNB will additionally conduct foreign exchange swap transactions. The foreign exchange swap is a monetary policy instrument which the SNB uses to create Swiss franc liquidity.

From this I conclude that not only is the SNB trying to push interest rates to zero, they intend to push the interbank swap rates for Swiss Francs to BELOW ZERO. This is a form of intervention that is intended to discourage speculative holders of SFR. This action by the SNB is working as of this morning. The CHF has backed off against all currency pairs.

One sees the evidence of the monetary intervention in the short date swaps. This morning the Spot Next and Spot a Week roll of CHF to dollars is being priced in the hole. This is the area of the market where speculative holdings of CHF are rolled over. The one week bid offer spread pricing this AM is:

-1.9 / -0.83

Note that both sides of the swap are negative. This implies that CHF interest rates are negative. The left side (the bid side) is the price one has to pay if they were long CHF versus dollars and wanted to hold onto a long position for a week. Some math:

The USDCHF spot rate is .7378. The cost of the one-week roll is .00018. The cost of rolling a long CHF position of 10,000,000 Francs comes to $3,307 per week. That may not seem like a big deal as the dollar equivalent of CHF 10mm is $13,550,000. But that is not how things work in this big casino.

Currency trading is done on very high margin. Many participants can play at the table with only 2% margin. Others have to come up with as much as 5%. What does $3,307 come to when the equity involved is only a fraction of the principal? For the 5% player it comes an annualized cost of holding the position of 23% of equity. For that big shot who plays with only 2% down the rollover cost comes to an annualized penalty of a whopping 63%.

From long experience in this business I can tell you that short-term currency traders HATE negative carry trades. A long CHF position now has a big cost to it. If a trader has a short Dollar/Swiss position of $100mm (a modest currency position for these folks) the cost of holding it is now $25,000 a week. This cost was zero two weeks ago. This squeeze on short date swaps is a very good reason to cut those short dollar positions. That is exactly what has happened so far today. The CHF has backed off (a bit) against all other currency pairs as of this morning. As of today, the SNB has achieved its objective of getting people out of the currency market.


This won’t last for long. There will be another tremble in the market that gets people scrambling for safety. The “go to” trade will still be to buy CHF when that happens. The cost of ownership be damned. What will happen as a result of the liquidity steps is that greater volatility in spot Swissie will occur.

The relative rate of the CHF versus Euros or Dollars is important to the SNB. But even more important is the rate of change. The short date squeeze by the SNB may result in a bit of retrenchment for a few days. But it will almost certainly result in increased volatility.

My take on the actions by the SNB is that they are trying to buy time and create a more orderly adjustment to a stronger CHF. I think the consequences will be that we will have violent intraday adjustments, but over the course of a month the Franc will be stronger anyway. The SNB is trying to buy time as measured in days. To me, that is no plan at all, just a desperate act by a desperate central bank.

How long is the list of Central Banks that are undertaking extreme measures to influence very short-term outcomes? The list is endless. Virtually every CB in the world is doing it today. As a result, extremely high volatility across all markets will prevail. Squeezing short dates often has a negative affect. Something always blows up as a result. Yet every central bank is attempting essentially the same thing. They are trying to buy time. They are the source of the volatility we are living through.

Courtesy of Mish

Today we saw yet another wild reversal in the markets led this time not by the US or Asia-Pacific but by Europe. When I went to bed this morning around 3:00 AM central, European futures were solidly in the green.

This is what European markets look like now.

European Stock Markets 

Carnage Everywhere

There is carnage everywhere and all of those indices were in the green not that long ago. Here is a chart I picked up from Andrew Horowitz onThe Disciplined Investor.

click on chart for sharper image

I added the box in red to highlight the year-to-date losses.

Last night I was on Coast-to-Coast AM for a few minute live chat update on the economy.

I told host George Noory and the listeners that daily volatility in stocks and banks was so wild I could not help thinking there was an immediate major problem at some bank (or banks) that was not yet disclosed. Here are some headlines that suggest just that.

Record Plunge in French Bank Societe Generale 

SocGen Stock Tumbles, Leads Fall in French Banks

Societe Generale (GLE) SA posted a record decline and led a drop in French banking shares as the cost of insuring the country’s government bonds increased. UniCredit SpA (UCG), Italy’s biggest bank, paced a retreat in Italian banks after the country’s credit-default swaps widened.

Societe Generale shares slumped as much as 23 percent and were down 16 percent at 21.89 euros at 4:27 p.m. in Paris. Credit-default swaps on the bank rose 29 basis points to a record 299 basis points.

“If credit default swaps on France are under attack, that’s not a good sign,” said Yves Marcais, a sales trader at Global Equities in Paris. “That means that France is under attack and that’s worrisome. French banks hold a lot of French bonds.”

The cost to insure French government debt against default rose 10 basis points to a record 171 basis points, according to CMA.

The FTSE Italia All-Share Banks Index fell as much as 9.4 percent, the most since May 2010. UniCredit dropped as much as 9.1 percent, and was down 8.9 cents to 98 cents by 4:40 p.m., giving the bank a market value of 19 billion euros ($27 billion). Intesa Sanpaolo SpA (ISP), the second-largest lender, lost as much as 13 percent, and was down 17 cents to 1.14 euros.

Bank Options Surge to Six-Year Highs 

French Bank Options Prices Surge to Six-Year Highs; Shares Fall

Credit Agricole SA (ACA) and BNP Paribas (BNP) SA options prices rose to the highest level since at least 2005 and Societe Generale SA’s reached a two-year high as the cost of insuring French government bonds increased. The shares plunged.

Implied volatility, the key gauge of option prices, for at- the-money BNP options expiring in 30 days jumped to 129.44 as of 5 p.m. in Paris, triple the 40.24 average over the past four years. Credit Agricole’s surged to 194.23. SocGen’s rose to 100.35, the highest since March 2009, as the lender’s stock had a record decline and led a drop in French banking shares.

Societe Generale SA, Credit Agricole SA and BNP Paribas SA slumped more than 9.9 percent, leading France’s CAC 40 Index down 4.5 percent to 3,032.28 at 5:01 p.m. in Paris.

Societe Generale (GLE) plunged a record 15 percent to 22.08 euros, while Credit Agricole tumbled 14 percent to 5.92 euros, its lowest price ever, and BNP fell 11 percent to 35.15 euros, its lowest level since April 2009.

The cost of insuring debt of Societe Generale SA rose 29 basis points to a record 299 basis points, according to CMA prices for credit-default swaps.

Societe Generale Denies Everything 

Societe Generale Denies All Market Rumors, Spokeswoman Says

Societe Generale (GLE) SA “categorically denies all market rumors,” Emmanuelle Renaudat, a spokeswoman for the French bank said. Societe Generale shares have declined as much as 23 percent today.

Societe Generale did not even say what they were denying. The bank simply denied everything. Whatever the rumors are, I assure you at least some of them are true. This denial sounds just like Lehman’s denial to me.

Addendum: 

Reuters has more on the rumors in SocGen shares plunge on rumor whirlwind

Between the three top French banks, nearly 10 billion euros ($14.2 billion) in market value was wiped out. SocGen stock has lost 45 percent over the past two and a half weeks, while BNP is down 29 percent and Credit Agricole has plunged 38 percent.

“The rumors on the French triple-A rating are having a catastrophic impact, despite the denial from credit agencies. Shorts are on a rampage; it’s a calamity. This has nothing to do with fundamentals,” said Christian Jimenez, fund manager and president of Diamant Bleu Gestion, in Paris.

The three major rating agencies confirmed on Wednesday their French sovereign rating outlook was stable, while a Societe Generale spokeswoman categorically denied all the rumors.

Wild trading in SocGen and the other banks appeared to be inflamed by a perfect storm of rumors fueled by Twitter postings, market blogs and a now debunked newspaper report.

SocGen’s website mentioned an apology by Britain’s Mail on Sunday for a story claiming the bank was in a “perilous” state and possibly on the “brink of disaster.”

“We now accept that this was not true, and we unreservedly apologize to Societe Generale for any embarrassment caused,” the newspaper said.

I am sticking with my previous comments. There is a major undisclosed problem. Banks do not plunge 45% on unfounded rumors. Moreover, this decline started two-and-a-half weeks ago, not with “Britain’s Mail” three days ago.

Mike “Mish” Shedlock 

by Tyler Durden

Highlights from the just released G-7 statement:

• G7 Says Will Take Every Action to Stabilize Financial Markets
• G7 says it will commit to secure liquidity in market
• G7 will cooperate closely on currency market actions
• G7 says it will be in close contact next few weeks
• G7 says disorderly moves in markets hurt economy
• G7 says currency rates should be decided by markets

But the winning bullet point of the year is…

• G7 says currency rates should be decided by markets

As the G7 commences the biggest market intervention in history to prevent the final Ponzi unwind…

Full statement from G-7:

The Finance Ministers and Central Bank Governors of the G7 on Monday made the following statement ahead of the opening of trade in Asian markets and following the downgrade of U.S. debt on Friday:

In the face of renewed strains on financial markets, we, the Finance Ministers and Central Bank Governors of the G-7, affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence.

We are committed to addressing the tensions stemming from the current challenges on our fiscal deficits, debt and growth, and welcome the decisive actions taken in the US and Europe.

The U.S. has adopted reforms that will deliver substantial deficit reduction over the medium term. In Europe, the Euro area Summit decided on July 21 a comprehensive package to tackle the situation in Greece and other countries facing financial tensions, notably through the flexibilisation of the EFSF.

We are now focused on the quick and full implementation of the agreements achieved. We welcome the statement of France and Germany to that effect. We also welcome the statement of the Governing Council of the ECB.

We are committed to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth.

These actions, together with continuing fiscal discipline efforts will enable long-term fiscal sustainability. No change in fundamentals warrants the recent financial tensions faced by Spain and Italy.

We welcome the additional policy measures announced by Italy and Spain to strengthen fiscal discipline and underpin the recovery in economic activity and job creation. The Euro Area Leaders have stated clearly that the involvement of the private sector in Greece is an extraordinary measure due to unique circumstances that will not be applied to any other member states of the euro area.

We reaffirmed our shared interest in a strong and stable international financial system, and our support for market-determined exchange rates. Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will consult closely in regard to actions in exchange markets and will cooperate as appropriate.

We will remain in close contact throughout the coming weeks and cooperate as appropriate, ready to take action to ensure stability and liquidity in financial markets.

Bruce Krasting

The Congressional Budget Office came out with its annual review of Social Security today. I write on this topic often, so I feel somewhat obligated to comment on the report. Amid the backdrop of the past few weeks’ market action and the big move by S&P this is a ho-hummer. That said, a few observations:

This report looks at SS through the lens of a 75-year time horizon. I guess someone has to do that (its mandated by Congress). I’m having a very difficult time of late looking out 75 days. Forget 75 years.

The critical years for SS are the next 20 (Boomer explosion). If the program does not crap out before 2030 there is a decent chance it will make to the “infinite future”. There is no discussion of the shorter time frame by the CBO. I would score the report a “D-” on that basis.

There is one chart that I want all to make note of. This looks at projected tax revenue versus benefit expenses. Note that for the next 75 years there will always be a deficit in this basic definition of solvency.

Not a day goes buy without someone making the statement that SS is self-funding. That’s a lie. The CBO says so (so does SS, but many do not listen).

In the past three years SS has gone from a huge surplus to a large and growing deficit. This was predicted to first happen in 2016. It came seven years early due to the 08 recession. It’s not possible to look at what has happened and not conclude that there has been a very serious deterioration in fundamentals at SS. CBO does not accept that reality. Their status report reads, “Pretty Darn Good!” From the report:

The shortfalls for Social Security that CBO is currently projecting are marginally smaller than those projected in 2010.

How could the CBO come to this unlikely conclusion? Easy:

CBO now assumes higher immigration rates and projects slightly faster growth in real wages than it did in 2010.

For this I give the CBO another failing grade. In the past few years immigration has actually fallen. (No jobs – Why come?) And the notion that real wages are about to reverse direction and shoot higher anytime soon is the least likely outcome. If the CBO has any doubts on this fact they should consult with Ben Bernanke. He has staked his career (and our well being) on the assumption that real wages are not going anywhere any time soon. Just this one time, I’m going to agree with Ben.

It looks to me as if the CBO fudged the results of the study. Someone must have said, “Make the result look like things are getting better!” The CBO is not supposed to have an axe to grind in their review of government programs. I think they chose to spin the results in an effort to deflect pressure away from the program in the coming months. Shame on them.

The CBO does acknowledge that there is a great deal of risk in any economic forecast. They address that by doing 500 different simulations of what might happen. (For that effort I would give their computer an A). Using this statistical approach they arrive at probabilities of how various generations will fare.

The first observation is an easy one to understand. According to the CBO if you were born in the 1940’s there is a 99% probability that you will receive at least 95% of the payments that you are scheduled to receive. Not bad for the pre Boomers.

But if you are born after 1950 the odds of getting full benefits is reduced. For example, if you were born in the 1960’s you have only a 34% chance of getting 95% of what you think you will get. That’s lousy odds. If you are now 50, there is a very high probability (99%) that you will get only 70% of what you are expecting.

It gets worse the younger you are. If you are a child of the 80’s the odds of you getting back what others who are older than you have gotten fall to only a 16% chance. If one is ten years old today, well forget it. Your chance is about 1 in 10. I doubt too many toddlers read this blog, but I do hope a few parents of young kids get the message.

Ten years from now SS will be sending out $100 billion a month. It will be running cash deficits of 300-400 billion a year. That ten-year old will be 20. Probably entering the workforce. And that young person will be looking at a busted system that will pay him far less than he/she will contribute.

How much support from workers who contribute to this program will there be a decade from now? I would imagine close to zero. But don’t worry about any of this. The CBO said every thing is fine. Nothing to look at here.

The decision to downgrade the USA by S&P has forced the issue of entitlements. We will not get through the rest of this year without SS and Medicare coming on the table and subject to significant cuts. There is no way to avoid that at this point.

The CBO report is going to be highlighted by all of the defenders of SS who cry that this program is not part of the problem. I think the CBO has done us a disservice. Consider the language used to describe the status at SS by the Social Security Trust Fund in their 2011 annual report to Congress:

The open group unfunded obligation for OASDI over the 75-year period is $6.5 trillion in present value and is $1.1 trillion more than the measured level of a year ago.

Let’s be real clear here. The PRESENT VALUE of the shortfall in SS is $6.5T. A massive number. That number rose in the last year by $1 trillion. In other words things at SS got worse by 20% in just the last year. This measure of the imbalance at SS is growing by $100b a month! Yet the CBO somehow made it look good.

It is precisely this type of thinking (and manipulation) that makes it so difficult for our leaders in Washington to take the steps we must take.

Why Thousands of TRADERS are using my Trading Signals for ETF’s, Stocks and Commodities

by Karl Denninger

That didn’t take long….

United States of America Long-Term debt rating lowered to “AA+” on political risks and rising debt burden; outlook negative.

And so it begins. With the outlook, it is clear that S&P believes this is not a one-step “and done” move either.

Why? Oh, they were rather expansive on that point:

· The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.

“We said $4 trillion and we meant it.”

· More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

· Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.

Granny cannot have her two new hips and Gramps cannot have his quad-bypass. We cannot pay $100,000 for every man who gets Stage IV prostate cancer to have four more months of life. We cannot have 1 in 6 families on food stamps and half the working population paying no income tax to buy their votes, yet at the same time spend $750 billion on wars (half of which is really about securing oil supplies; ergo, we cannot spend $300/bbl on imported oil and $200/bbl on all oil on average while claiming it’s only $100) nor can we spend $15,000 a year “educating” kids who do not understand nor care about the basic function of exponents.

And we cannot sit idly by while both political parties lie about:

• Cuts that are not actually cuts. Spending less than you intended to, but more than last year, is not a “cut.” This is like a 400lb man going to the Chinese Buffet every day and eating five plates instead of six, claiming that he’s “dieting.” Ok, in a year he’ll weigh 500lbs instead of 600, but that’s not a “cut.”
• “Stimulus” that is nothing more than demand replacement. We’re now up to more than 12% of GDP. This is not a “bridge” to tide us over either – we’ve been doing it for three straight years and will be four by the end of the year. This is a major problem as once this becomes part of what the economy “expects” it is no longer stimulative and results in people doing less work and expecting more “cheese.”
• The promise to reduce spending (and raise taxes) “tomorrow” and “on someone else.” There’s a 30 year history on this – spending decreases come never, tax increases usually do occur. But this time tax decreases that were allegedly “temporary” (e.g. the Bush Tax cuts) wind up permanent (even among those who say they won’t support it, ala Democrats) and they even get added to – such as the FICA tax reduction!

We suffer from the utter inability of either political party to stand at a podium and tell the truth. We cannot have $100,000 in income and spend $170,000+ a year. Yet we have and we are. Try this in your household and see what happens. More to the point it is mathematically impossible to sustain any economic system where debt rises at a faster rate than actual productive output does. This is fifth-grade mathematics and yet we have intentionally and willfully ignored it for thirty years. There is not one politician from either major political party who will stand before the public and tell the truth on these matters. Not one.

· The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.

In short: Stop lying, right now, or else. “We said $4 trillion, we meant it, and oh by the way that was a down payment, not the total amount of reduction. Care to try our patience again?”

To the “Tea Party” that was crowing about how they were “successful”, how does that success taste? Half of your members in fact defected when it came time to vote, and despite the crows of “success” (which was really nothing more than glee over “beating the Democrats desire to increase taxes”) the bad outcome that you claimed to be trying to avoid happened. Now what?

To the Democrats who said this was a “good bill” or even one “we can support”: How does abject failure taste? Your refusal to admit that you cannot spend more than you take in on a perpetual basis and your incessant demands to spend more and more without any plan to pay for it, despite screeches of “tax the rich” and “fair shares” has gone nowhere.

To the “mainstream” Republicans who said this was “the best we could do” or even “a good bill”: How are you feeling this morning? Got out of town in seconds after that vote did ‘ya? Well gee, that worked out real well eh? Now what?

Some more facts – and you’re not going to like any of them:

• Within hours of the passage of the bill more than half of the authorized increase in the debt ceiling (the first tranch) was blown and gone as Geithner unwound all the screwball theft games he had played for the previous two months. More than $200 billion instantly vanished. The scale and price of his deception was instantly laid bare upon the table, as was our fiscal trajectory, since June is one of the heavy tax receipt months (estimated taxes.)
• In calendar year 2007 GDP was $14.3 trillion, more or less. The actual borrowing increase was $548 billion. The Federal budget was $2.73 trillion. To balance our fiscal house we would have had to cut 20% of the Federal government – in 2007.
• In the last year GDP was $14.8 trillion, more or less. The actual borrowing increase was $1,700 billion. The Federal budget (which was never actually passed and signed, a rank violation of Constitutional requirements) was $3.8 trillion. To balance our fiscal house we would have had to cut 45% of the Federal government – more than double the 2007 figure.
• To bring the economy into balance debt must not grow faster than GDP. In a time when GDP is shrinking debt must shrink faster, not grow faster. This is basic exponential mathematics. 15 minutes with Excel will prove this to anyone’s satisfaction. This has been the foundation of my perspective on the economy and our errors since I started pontificating in public on it in the 1990s while running MCSNet, and has been the foundation of The Ticker as well. Twice in the last month or so I have posted links to Google spreadsheets for those too lazy to do it themselves, making it even easier to visualize what I’ve been talking about. Anyone arguing otherwise must be able to demonstrate why the laws of mathematics do not apply and prove they are correct, and if they’re unable to they must be ejected from the debate on the path we take as a nation.

So for exactly how long did CONgress think it was going to get away with this?

Washington DC has turned into a bunch of sodomites and the American public and our currency are the victims of their serial abuse. The alleged filibuster threat on the debt ceiling bill, which would have delayed passage (oh no!) turned out to be a bunch of hot air. Sure, they had the votes for cloture but those threatening to force the vote never did so, so the threat was simple hot air – political theater.

Vote-buying with entitlements and other spending is an easy sport to engage in but it ultimately fiscally dooms a nation. I have warned of this path for years, going back to the earliest Tickers, and pointed to how companies like Washington Mutual (and others) were doing it as well, paying dividends out of money they didn’t have. This always ends in disaster, as it simply must – it is a matter of mathematics that when you continually spend more than you make you will eventually go broke.

To those in the economics “profession” who say that a sovereign that prints its own money cannot go broke, you’re technically correct and factually lying, and you know it. Yes, we can print as many dollars as we wish, but doing so makes each dollar worth less in terms of goods and services. The same outcome as if we didn’t print the money is inevitable – the “free ****” ends because the recipients all starve due to the fact that their “money” doesn’t buy anything any more. When you’re in an economy that is reliant on the import of various goods (especially energy) this sort of destructive cycle is akin to sodomizing puppies and claiming that since they’re not people your sin (and crime) doesn’t count.

These very same “economists” all laud the “virtue” of free trade. In fact it’s trade with economic slave-holders and there’s nothing “free” – or fair – about it. China’s whining about the downgrade last night and this morning needs to be met with one response: Die in a fire – and if you try anything hinky, we’ll ignite the fire. There is nothing innocent or victim-like about their role here; they were not only willing participants they have been exploiting the imbalances, stealing our intellectual property and abusing their citizens the entire time. Bluntly: China deserves the skull****ing it is about to receive.

We must rebuild our labor force. This means wage and environmental parity tariffs. Yes, this means that Giganticus Corporatus will have a 15% pretax operating margin instead of 30% and its stock price will be $40 instead of $400. So what? There will be actual income generated by actual people here in the US building actual things instead of conspiring with one another on how to steal another $15,000 from a homeowner through serial refinance fees. The former is a productive enterprise; the latter legalized extortion and theft.

We must fix the tax code. Rip the damn thing up! There are two rational choices: A flat tax with no more than three or four brackets and no zero bracket or deductions and The Fair Tax. In either case capital formation must not be penalized and borrowing must not be incented. This means that dividends must be taxed once. Taxing short-term capital gains as income is fine (speculators should not be able to get a free ride) but the long-term capital formation (e.g. pick a period – 3 years sounds about right) must not be deterred. The government could have taxed away the roughly $60,000 in cash that formed the base of MCSNet. If it had the many millions in revenue, spending, payroll and taxes ultimately resulting from the formation of that capital would not have happened.

We must eject the illegal aliens in this nation. I know neither side of the political aisle wants to, but that doesn’t matter. At a time when we have a huge percentage of citizens out of work it is an outrage that illegal Mexicans are taking any jobs in this country. Make our policy clear: Leave voluntarily right now, or we will find you, will lock you up, make you break rocks for five years and repave our freeways as your work while imprisoned, then deport you.

We must fix the health care system, not “Medicare” or “Medicaid.” I have written on this extensively and it features prominently in Leverage (the book) as well. This means an immediate end to the cost-shifting by providers, drug and device makers. It means an honest debate as to what, if anything, society owes people in this regard and that subsidy must be transparent and paid for with current tax revenues. If it cannot be, it cannot be provided. Period.

We must have that same honest debate about all other government programs. For each program the people want, they must be able to fund it with current tax revenues, and nobody can be exempt from paying something toward it. Yes, some people will get more benefit than they pay in taxes – that’s the nature of such things, but those benefits that are intangible (e.g. national defense) are different than those that are direct and personal. Nonetheless, no program may be funded and operated that we refuse to fund with present tax revenue. Period.

Stop talking about “growth” being able to fix this mess. It cannot. From 1990 onward our average GDP growth has been under 5% and since 2000 approximately 4%. But in fact all of that was false, as this chart conclusively shows:

We didn’t produce any of the so-called “economic growth” since the 1980s. We borrowed more and more money to cover up the offshoring and shrinking of our productive enterprises here in this country! That borrowing allowed us to continue to pretend we were making economic progress when in fact we were not. Consider this: The 1980s and 1990s, which were all about the great “productivity improvements of the Internet and computers” we all heard about, were pathological lies enabled by leverage abuse.

We must stop this crap – right now, right here.

Our politicians must stand and tell the truth: You were promised great things by government, but those promises were lies. We didn’t impose taxes sufficient to pay for these great things, and worse, the tax money we did collect was spent buying votes instead of providing what we promised you. We are all collectivity responsible for this – you for demanding that which you were unwilling to pay for, and us in continuing to lie to you for thirty years and enabling the fraud and leverage abuse that made the illusion of prosperity possible, along with bailing out the so-called “captains of industry and finance” that conspired with us to delude you.

Yes, this will result in a monstrous economic contraction. That was unavoidable in 2000, but it was reasonable in size. It was unavoidable in 2007 too, and was worse than in 2000. Now it’s even worse than in 2007 by a considerable degree and the longer we wait to accept reality the worse it gets. I’ve now got more than ten years of consistent, every-single-year history on my side – the claims of the “supply-siders” and “Keynesians” have not translated into a reduction or elimination of these imbalances, they have made them worse!

Stand up politicians, tell the truth, and deal with the consequences.

We are dangerously close to running out of options in this regard.

By Elizabeth Manning, Casey Energy Opportunities

Nuclear energy has taken a beating since the Fukushima crisis began in March, but we believe the arguments are strong that it’s not down for the count.

There are a couple of factors that the Casey Energy Team considers bullish for the nuclear industry and market. Let’s take a closer look and back them up.

Factor #1: The pre-Fukushima price of uranium reflected not just market perception but a very real shortage of uranium that’s looming in the face of growing global demand.

The Japanese earthquake struck just as the nuclear renaissance was gaining momentum. After a decade, efforts by the industry to promote nuclear power as a safe, clean and reliable alternative to fossil fuels were finally taking hold. So was the message that nuclear power offers the “always on” type of electricity that other, more glamorous low-carbon technologies like solar and wind power could only supplement, not replace.

China ordered a swath of new reactors, Russia embarked on a nuclear construction boom, India made nuclear power a key component of its energy plans, and the U.S. Congress issued loan guarantees for new plants.

The price of uranium responded, climbing slowly but surely out from its late-2000 all-time low of US$7.10 per pound, then spiking rapidly from the low US$70s in 2006 to a record US$136 in 2007. That unsustainable drive was fueled by speculators and hedge fund investments that disappeared with the 2008 recession. The spot price dropped back into the US$40s per pound.

While most other commodities recovered, uranium spent 2009 and the first half of 2010 dormant. The market woke up in mid-2010, starting a remarkable eight-month ascent from US$42 to US$72.65 per pound in February. Uranium outperformed every other commodity in that period, including gold, gaining 73%.

The 2007 frenzy aside, uranium’s bullish drive is justified by industry conditions. We already mentioned the construction trend; now here are some numbers to back it up.

Global uranium demand is set to increase some 33% from 2010 to 2020, according to the World Nuclear Association (WNA). China is the most important player in that prediction: the Asian giant plans to increase nuclear capacity to 80 GWe by 2020, 200 GWe by 2030, and 400 GWe by 2050. A gigawatt electrical (GWe) is one billion watts, which provides enough power for roughly one million households in a developed country.

China may lead the world in number of nuclear reactors under construction, at 27, but Russia is building 11 and India has five in the works, while countries like Bulgaria, the Slovak Republic, and Ukraine each have two under construction. Demand for uranium is absolutely on the up-and-up.

Supply is another story. To reach just its 2030 target, China alone will need some 95 million pounds of uranium each year. In 2010, the world as a whole produced just over 118 million pounds.

This WNA graph compares projected uranium demand and supplies. It’s important to note that the solid line, indicating mid-range projected demand, will only be met if mines under development make it into production and, starting in six years, if mines now just in the planning stages start also operating. Those are two big “ifs,” given that building uranium mines is an expensive, time-consuming business, and a venture with many opponents.

Most analysts do not expect supplies to meet growing global demand unless prices increase enough to make it economic to build these new mines. There’s the key bit – unless prices increase enough to make new mines economic. Commodity prices are arguably the most important factor in whether a proposed mine will be economic, and therefore production rates track prices pretty closely.

In that context, the major gains in the price of uranium during late 2010 and early 2011 were justified. A uranium price above US$70 per pound was a real reflection of restricted supplies in the face of growing demand, and most industry observers expected the price to only climb, if slowly, from there.

Then came the earthquake.

Factor #2: Fukushima will not have any significant impact on global uranium demand in the long run.

Initially, the world reacted to the Fukushima crisis with dramatic calls to reconsider the use of nuclear power. Several governments put their nuclear power programs on hold, including China. For a moment, there was a real chance that Fukushima would derail the nuclear renaissance.

But is has not. Nuclear power growth in the developed world has been impacted, but the developed world isn’t the make-or-break player for growth in the nuclear industry. The developing world is where the action will be, where governments are struggling to provide power to millions of impoverished people while still keeping some control of greenhouse gas emissions.

As expensive as a nuclear power plant is, they’re relatively economical to keep running, and these countries have little luxury of choice. Coal may be the quick fix, but it’s becoming increasingly expensive as well as laden with carbon-emissions baggage.

With that in mind, events that have garnered a lot of attention in the popular press, such as Germany’s announcement to phase out its nuclear reactors by 2022, shrink into perspective. It’s no real surprise, for one thing: the decision simply reverses one made last year to keep them open (yes, that would be reversing the reversal).

For another, Germany’s 17 reactors accounted for 5% of uranium demand in 2010. By comparison, there are 104 reactors in the United States, 58 in France and dozens being built in China, India, and Russia. Finally, Germany relies on nuclear reactors for 23% of its power, and 2022 is awfully optimistic to ramp up alternative (i.e., other clean) energy technology to fill the gap. So let’s just say we’re skeptical.

On the other side of the equation are pro-nuclear movements in several places around the globe, such as in the Czech Republic. Prague is working to approve a plan to extend the life of the country’s only uranium mine and wants to build three new reactors. It’s labeled uranium a “super strategic” commodity and uranium mining a “strategic advantage for the Czech Republic.”

Where Nuclear Energy Is Headed

Sixty of the 65 reactors currently under construction around the world are in developing countries. China has 27 reactors under construction, 50 planned and another 110 proposed. India has 5 under construction, 18 planned and 40 proposed. Russia has 10 under construction, 14 planned and 30 proposed. These countries need power, and they want to diversify their power sources as they build capacity so that they don’t end up reliant on a single commodity.

In addition, the nuclear industry’s safety record is actually pretty good. Fukushima is only the third serious accident in more than 65 years of nuclear power. No one died at Three Mile Island, and no one has died from radiation effects at Fukushima, though five people died in the hydrogen explosions and in a crane accident. Chernobyl was certainly deadly, but it was human error, not a fault in the system, that was to blame there.

By contrast, thousands of people lose their lives every year in the fossil fuel industry, in coal mine accidents, oil rig explosions, drilling mishaps, pipeline blasts, refinery fires and tanker accidents, not to mention from the raft of illnesses caused by smog and soot.

Power generation is about balancing needs with impacts. Every major power source has drawbacks, but the developing world in particular needs more electricity. In that context, nuclear power is still a necessity – nuclear plants can provide low-emission, reliable, baseload power, precisely the kind that the world needs.

Uranium was a solidly bullish market on March 10, for good reasons that haven’t changed. Even though Fukushima was scary and has illuminated the need for better nuclear power regulations, ultimately it won’t derail an industry that is poised for major growth.

We’re running out of oil, fast – and a “triple threat” makes dealing with that fact more of a challenge than many Americans know. There are many ways savvy investors can profit from this situation, however. Learn how to be among them.

By David Galland, Managing Director, Casey Research

At any point during the recent negotiations in Washington over the debt, did you seriously think for even a second that the U.S. was about to default?

Of course, in time the U.S. government (along with many others) will default. However, they are highly unlikely to do so by decree or even through the sort of legislative inaction recently on display. Rather, it will come about through the time-honored tradition of screwing debtors via the slow-roasting method of monetary inflation.

Yet most people still bought into the latest drama put on by the Congressional Players – a troupe of actors whose skills at pretense and artifice might very well qualify them for gilded trophies at awards banquets. Instead, rather than glittering statuettes, these masters of the thespian arts settle for undeserved honorifics and the pole position at the public trough. Followed by lifelong pensions.

But to the heart of the current matter, do I think that the latest antics out of Washington will have any more lasting effect on the trajectory of the economy than what I had for breakfast this morning (raw oats with a dab of maple syrup, milk, a sprinkling of strawberries, and half of a banana, sliced)?

Absolutely not. Sorry to say, but the trajectory of the economy at this point is well established, and closely resembles that of a meteor streaking through the night sky. What’s left of the solid matter of the nation’s accumulated private wealth is fast being burned off by an unstoppable inferno of government spending, inevitably leading to an earth-shaking crash.

I make this dire prediction not out of an aberrant psychology (I hope), or in an outburst of self-promotion for Casey Research because the big-picture scenario we have so long warned of is unfolding according to script, but rather due to certain fundamental truths about our current situation.

And that brings me to the five things you need to know about the U.S. economy (much of which also applies to the other large developed nations)…

1. The U.S. remains in the grip of a debt-induced depression. While personal levels of debt have eased somewhat since the crash, most of the improvements have come at the expense of debt repudiation, and are offset by the steep decline in housing prices that have left something like 50% of mortgages underwater. Meanwhile the debt on the balance sheets of the U.S. government and the country’s largest financial institutions remain at record highs – and much of that debt is toxic.

So, what’s the one thing that the heavily indebted – individual or institution – most fears? Answer: Rising interest rates.

2. Interest rates can’t stay low. Despite the debt, interest rates remain near historic lows – which is to say, well below the norm. At some point they have to at least revert to the mean, which would push the 10-year treasury rate north of 5% from current rates below 3%. But in reality, the levels of monetary inflation, the nature of the debt, and mind-numbing scale of the government’s other financial obligations – in total upwards of $70 trillion – all but guarantee that interest rates must go much higher than 5%. That in turn torpedoes the half-sunk real estate market and risks kicking off a debt death spiral as higher interest payments suck the financial juice out of the economy and causes debtors to demand even higher rates. Say hello to Doug Casey’s Great Depression.

The last time the U.S. economy found itself in such dire straits was back in the 1970s, when the problem was raging price inflation. Back then, though, the debt levels were considerably lower than they are now. Then, Fed Chairman Paul Volcker had the latitude to raise rates and by so doing helped to choke out inflation. By contrast, today the Fed is virtually helpless. Rates certainly can’t be pushed lower by any appreciable amount, and the Fed sure as hell doesn’t want them to go up. While the Fed has been a primary factor in controlling interest rates up to this point in the crisis, in the near future the direction of interest rates – particularly long-term rates – will increasingly be determined by skittish market participants. Specifically, the sovereign and institutional buyers whom the U.S. Treasury so desperately needs to keep showing up at their auctions.

To use a metaphor, the situation today is akin to a bunch of gunfighters facing off in a dusty street, hands poised over their six-shooters, eyes nervously shifting this way and that – to the eurozone, to the housing markets, to the situation in Japan, to the U.S. government spending, to the crumbling balance sheets of the banks, to the Fed. Everyone is anxiously watching, waiting for someone else to start making the first move. The standoff can’t last – and when the lead starts flying, there will be few places to hide.

3. There is no non-disruptive way to resolve the debt. I can’t stress this point enough. Simply, there is no magic wand that can be waved in order to make the debt go away. In order for this crisis to end, someone’s ox has to be gored, and gored badly.

Yet, because we live in a democracy, where any politician wanting to be re-elected has to cater to their constituency – and politicians make their careers by being re-elected – it is considered business as usual for the denizens of Washington to hand out bread and put on circuses. It is this situation that has brought us to this place in the first place.

But it is the flip side of that equation that provides a clear signal as to where things are headed. Namely that politicians will jump through every possible hoop in order to avoid making politically unpopular decisions – even if they know that failing to act will have serious and lasting negative consequences for the nation. The trick is to make sure that those consequences only become acute during the next guy’s watch.

The key point is that there is no easy fix, and there is no politically convenient time to take the draconian measures needed to rebalance the budget and get the nation’s finances in order. To actually take the measures needed to curb the deficits, let alone reduce the debt, would be political suicide.

So despite a lot of talk blowing out of Washington, if you have to make a bet, bet on the crisis continuing and getting worse. Greece provides a reasonable look at how things are likely to unwind. And the problems in Greece – problems which will increasingly include social unrest – are far from over. As I write, lenders are starting to pressure Italian bond yields up, clearly indicating the eurozone’s problems are only going to worsen, as will those of the US as we move toward systematic breakdown.

4. The monetary system is irretrievably broken and will be replaced. For a recent edition of The Casey Report I interviewed monetary scholar Edwin Vieira, who pointed out that every 30 to 40 years the reigning monetary system fails and has to be retooled. The last time around for the U.S. was in 1971, when Nixon cancelled the convertibility of dollars into gold. Remarkably, the world bought into the unbacked dollar as its reserve currency, but only because that was the path of least resistance. But here we are 40 years later, and it is clear to anyone paying attention that the monetary system is irretrievably broken and will fail.

What will replace it is still unclear, but I suspect that when the stuff really hits the fan and inflation rages the government will try the approach taken by the Germans to end their hyperinflation back in the 1920s, coming up with the equivalent of the Rentenmark – a dollar that is loosely linked to some basket of commodities and financial instruments. It won’t be convertible, because it would be impossible for bank tellers to exchange your dollar for a cup of oil, and a coupon off of a bond, and a chip of gold, or whatever makes up the basket – but it might restore some semblance of confidence in the currency. That’s one option. Another is that some government decides to make its currency convertible into precious metals; but that will only happen when all other less fiscally restraining systems have been floated and failed. Simply, at this point we can’t know what will replace the current monetary system, or when. All we can know is that the status quo cannot and so will not survive this crisis.

Between now and the point in time where the Fed throws in the towel on today’s fiat monetary system, you would have to be naïve in the extreme not to expect volatility, uncertainty, and wholesale financial dislocations.

5. The government is not your friend. Another simple truth is that the politicians, being just average humans, will always look after themselves first. They are well aware how difficult it is becoming to kick the can down the road and are only growing more desperate. And as the economy worsens and cries from the masses grow for the government to do “something,” the politicians will grow more desperate still.

As should now be clear to anyone, today’s political apparatuses are not operating based on any core principles – other than getting members of the government re-elected, that is. Thus the government of the U.S. and all the highly indebted Western nations are free to do almost anything in the name of the “public good.” Exchange controls? Higher taxes on the productive elements of society? Deliberate debasing of the currency? Outright confiscations for regulatory infractions? All of that – and literally anything else that helps mollify the masses and continue the charade – is likely.

Ironically, the worse the situation gets – and today’s GDP data again confirm the weakness in the economy – the greater the demands will be from the public for the government to do more, even though the government was mostly responsible for bringing us to this place. And so the government’s reach into your private affairs, and especially your finances, will only grow.

As this coincides with the rapid deployment of new monitoring technologies and procedures that allow the U.S. government in particular to cast its Sauron-like eye into every nook of the globe, the free flow of capital and legal avoidance of whatever new taxation schemes are passed will become increasingly challenging.

Summing up…

Unless and until the deficits and the debt are tangibly dealt with, expect things only to worsen and prepare accordingly. As there will never be a good time to deal with the debt, the situation will continue to deteriorate until there is a systematic breakdown.

Inflation remains the only politically viable way to continue the charade. Pretty much anything tangible will help offset the coming inflation, though the monetary metals of gold and silver will likely do better than most.

There is a lot of cash floating around. As equities are representative of a tangible (i.e., a share in an operating company), selective equities – especially those that provide essential services – will probably do okay, even if only keeping up with the inflation. Those of precious metals companies should do much better than that, but again, being selective is key because a lot of these companies actively pursue policies that are not advantageous to shareholders, most importantly steadily diluting existing shareholders by regularly issuing large swaths of new shares. While we expect volatility, and probably even sharp sell-offs, these should be considered as potential opportunities to fill in your portfolio with high quality resource companies.

Diversification across two or more political jurisdictions also makes a lot of sense to me. There is no place you can invest which doesn’t entail taking some risk at this point, but that fact only adds weight to the argument for spreading your assets around.

Finally, it’s important to remember that, as far as we know, you only live once. In some ways the transition we are going to live through is going to be pretty exciting. Perilous, certainly, but exciting as well. If you take the right steps, you should come out much better than most.

But if you overly obsess about this stuff – or the latest disingenuous move by the politicians – it will drive you crazy. Thus, it’s better to take the steps necessary to get in sync with the fundamental factors driving today’s troubled economy and then get on with your life.

[Recent moves by the D.C. politicians and Fed “experts” are just the latest steps in a time-honored government tradition: bleeding your wealth. Read this free report to learn more, as well as how to protect yourself.]

by Tyler Durden

The H2 economic grwoth hockeystick is rapidly becoming Kansas. To wit from Jan Hatzius: “While quarterly results for consumer spending were already known-they were published in last Friday’s GDP report-the monthly pattern means that consumption heads into Q3 on a weak trend. The report therefore points to additional downside risks to our 2.5% forecast for Q3 GDP growth.” As we predicted last Friday, Goldman will cut Q3 GDP to sub-2% within a few weeks and the QE3 onslaught avalanche will commence.

Full note:

BOTTOM LINE: Monthly details for personal income and spending show weak pattern of growth. Core PCE inflation softer than expected.

MAIN POINTS:
1. Nominal consumer spending declined by 0.2% (mom) in June, in contrast to consensus expectations for a small gain. In real terms consumer spending was unchanged in June, and revised figures show 0.1% declines in both May and April. While quarterly results for consumer spending were already known-they were published in last Friday’s GDP report-the monthly pattern means that consumption heads into Q3 on a weak trend. The report therefore points to additional downside risks to our 2.5% forecast for Q3 GDP growth.

2. Nominal personal income increased by 0.1% (mom), also slightly less than expected. Nominal income growth has decelerated steadily since the first quarter. Real income gains were more favorable due to falling gas prices. In particular, real disposable income growth increased by 0.3% (mom) in June.

3. The core PCE price index rose by 0.1% (0.113% unrounded), or 1.3% from a year earlier. The year-over-year growth rate was unchanged from May after revisions (before revisions May’s year-over-year growth rate was reported at 1.2%). The core PCE result was significantly below the level implied by its CPI and PPI inputs. The likely reason appears to be weakness in “non-market” prices (e.g. the “price” of free checking accounts). The market-based core PCE (which excludes these imputed prices) rose by 0.21% (mom).