Deflation, Inflation, Hyperinflation, Signal to Noise Ratio, Gold, Silver, and the End of the Dollar

Everything that has happened so far was predictable.

The worldwide government response to the COVID-19 pandemic was as easy to see for cynics and skeptics as the eventual lying that would take place. First, back in January and early February, the federal government told the public that the threat to Americans from the coronavirus that was ravishing China was minimal. Gradually, that advice was replaced by travel restrictions to and from mainland China, then to and from Europe, until finally, infections and deaths from the virus began to multiply in America.

By mid-March and into the first days of Spring, the veil had been lifted and the virus was spreading rapidly across the United States, thanks to millions of international travelers on ships and airplanes that had been allowed to come and go as they pleased through the winter. Individual cases turned into clusters and clusters to severe outbreaks, especially in New York City, not surprisingly a hub for international travel.

By the time congress got around to passing emergency legislation, lockdowns and shelter-in-place recommendations were put into play by governors of the individual states. The legislation contained the usual: massive injections of currency into Wall Street (because we can't have a stock market crash), a pittance for the public, and payments to hospitals for treating patients infected with COVID-19: $13,000 for each patient admitted; $39,000 for each patient put on a ventilator.

Anybody who has been following government and Federal Reserve policy knew that the response would be to throw massive amounts of currency at the problem because that's all they know about how to handle crises.

And here we are. The government is now readying a fourth "stimulus" bill, chock full of more handouts, bailouts, and currency drops. This time, the public gets nothing. States and municipalities are going to get tons of currency to bail out their broken, drained public coffers and keep millions of teachers, cops, firemen, and paper-pushers on the job and their pensions partially funded because having the Fed backstop municipal bonds simply wasn't enough. Hospitals will get more currency. Small businesses will get another tranche of loans, pressing cynics to respond that cities get grants, while businesses have to pay it back.

All of this currency printing and government deficits won't amount to a hill of beans because the transmission mechanism for the velocity of money is broken. Cops, teachers, and firemen will get paid, but they'll be scared to take on new debt and will spend much of their money paying down credit card bills and overpriced mortgages. After another crash to lower levels, the stock market will stabilize.

The US will have deflation, widely, in big-ticket assets like stocks (market crash), bonds (rolling defaults), real estate (forbearance today leads to foreclosure tomorrow), trickling down to things like furniture (no interest for 5, 6, 7 years), cars (rebates, cash back, 0% financing), and appliances (oversupply). Food, especially meat, which is getting a bit pricey right now due to chinks in the supply chain, will not be affected much. Food was the one thing that didn't go up or down much during the Great Depression of the 1930s. It was cheap enough so that people didn't starve, though meats were generally considered close to being luxuries, so no worries there, until hyperinflation. Besides, even if you have a tiny back yard, you can grow some vegetables of your own to offset any price rises in meats. Why do you think your mother was always telling you to eat your vegetables? Sometimes there just isn't enough meat.

After six to 18 months of deflation, all the while the Fed printing dollars like maniacs and the government running massive deficits (probably over $8 trillion this fiscal year alone (through September 30), prices will seem to stabilize. By this time next year (2021), many will think the crisis has passed, mostly because that's what they'll be telling you on TV. But, it's just a lull. Inflation will return as all that currency begins to be spent into the economy. As the velocity of money ramps up, the Fed will respond by raising interest rates, but it won't matter. The game is on, with hyperinflation underway, the currency will continue losing value and eventually, there will be a massive default on dollar debt.

Forget, for for a few weeks or a few months what's happening on a day-to-day basis. It's mostly noise. The signal to noise ratio (SNR or S/N), a measure used in science and engineering that compares the level of a desired signal to the level of background noise, in today's economy, politics, and society, is very low, meaning the signal is barely transmitting the message as it is being drowned out by the noise.

In terms of decibels, to hear what's really happening in the world, the signal has to be about 60, the level of sound as conversational speech. If the noise is that of a rocket launch (180), the SNR is 0.33 and the noise drowns out the signal. When the SNR gets to above one (1), the signal can be heard. Putting that in perspective, a signal sound of a balloon popping is 125, a toilet flushing is 75, producing a SNR of 1.67. Those are appropriate today, as the balloon popping can metaphorically represent the debt bubble bursting and the toilet flushing the sound of US dollars losing value, going down the drain. That hasn't happened yet, but, as time progresses, the SNR will rise, pass 1.00 and the signal will eventually be loud and clear, one that everybody can hear. That's when inflation proceeds to hyperinflation, with prices rising faster than the Fed can print new currency.

It is at that point that you'll want to have gold, but especially, silver, because it will outperform the currency, just by standing still. Truth of the matter is that gold and silver don't really rise in price. An ounce of silver or a gram of gold is still an ounce or a gram. But the purchasing power of the currency is falling because there's more money circulating. Thus, in a very natural correspondence, gold and silver rise in value as the currency falls, which is why three 1964 dimes (90% silver) can buy more gas at the pump today, in 2020, than in 1964.

In the year 1964, the average retail price of gas in the U.S. was $0.30. So, back then, you could put a gallon of gas in your car with three 1964 (or earlier) dimes. Today, three dimes from 1964 or earlier are worth a silver melt value of about $1.10 each, so, with gas prices currently deflating to around $1.50 a gallon, you could buy more than two gallons of gas, even with silver (and gold) prices being suppressed. That's deflation. One could buy just one gallon and use the other roughly dime-and-a-half to help pay for the increased price of pork or beef. That's inflation. Inflation and deflation can and will occur - in different products or services - simultaneously.

Silver, even under the severe constraints imposed by the futures, central banks, the BIS, and other manipulators, has increased in value 1100% since 1964, an annual, non-compounded return of 16.67%. Try getting that from stocks or bonds. And silver is going higher. Much higher. The price of an ounce of silver in dollars is likely to double in the next few years, then double again, and again, as the dollar is gradually debased, losing all that's left of its purchasing power. Your 1964 dime will buy at least a gallon of gas or the equivalent in bread or beef or whatever items you wish to purchase. It will have value, as precious metals have for more than 5000 years. The dollar, and with it, the pound, yen, euro, yuan, and any other currency not backed by or tethered to a tangible asset (it doesn't have to be gold; it can be anything) will revert to its intrinsic value of ZERO, or close to it because every other country will be going through similar scenarios as the United States.

That's where this is all headed. Price deflation with currency inflation through Spring or Summer 2021, relative calm from 2021 to maybe the beginning of 2023, but likely before then, with inflation ramping up; then hyperinflation for two years before a complete monetary system reset is the only solution. It's not the length of time for these varying processes to occur that's importance, it's the sequence (deflation, calm (some inflation), inflation, hyperinflation) and the ability to spot the subtle changes that matters most.

Completely wrecking a global economy takes time. The Fed's been at it since 1913, and in 107 years have reduced the purchasing power of the dollar by about 97%. The last three percent - and the sopping up of all the malinvestment and toxic assets will take time... about three to four years.

Anything that has more upside than downside from random events (or certain shocks) is antifragile; the reverse is fragile.

We have been fragilizing the economy, our health, political life, education, almost everything… by suppressing randomness and volatility. Much of our modern, structured, world has been harming us with top-down policies and contraptions… which do precisely this: an insult to the antifragility of systems. This is the tragedy of modernity: As with neurotically overprotective parents, those trying to help are often hurting us the most.

-- Nasim Taleb

It would be nice if we started listening to the people who have been right rather than the people who have theories.

-- Mike Maloney, The Hidden Secrets of Money, Episode 7, Velocity & the Money Illusion

At the Close, Wednesday, May 6, 2020:
Dow: 23,664.64, -218.45 (-0.91%)
NASDAQ: 8,854.39, +45.27 (+0.51%)
S&P 500: 2,848.42, -20.02 (-0.70%)
NYSE: 10,999.99, -135.41 (-1.22%)

WEEKEND WRAP: Stocks Lower Third Straight Week; Treasury Curve Inverts

Stocks took another turn for the worse, the third straight week in which the major averages shed points. That would constitute a trend, especially considering what happened on the Treasury yield curve, where the two-year note inverted against the 10-year-note, yielding - for a short time - one basis point more than its longer-term counterpart.

Additionally, bonds with negative yields globally moved beyond the $16 trillion mark, with Germany, among other EU countries, having its entire bond complex falling below zero yield.

Those two events in bond-land are going to prove to be crippling to global growth and the effects are already becoming apparent.

Negative interest rates destroy the time value of money. Debt is discarded. Without debt, there is no money, except for that which has no interest or counterparty. That would be gold, silver, hard assets. Gold and silver have been rallying while national central-bank fiat currencies fluctuate against each other in the desperate race to the bottom.

The idea that the country which can devalue its currency fastest and lowest will be the winner in the trade arena is offset by the fact that weak currencies - while great for exporters - are not necessarily good for that nation's consumers, because imports would necessarily become more dear.

The desire to send interest rates into negative territory - a concept launched by the Japanese and quickly taken up by Europe after the GFC - is a marker for the death of currencies, i.e., fiat money.

Negative rates are inherently deflationary, which is exactly what central banks wish to avoid, because it voids their franchise. Fiat money - which is in use globally - will die, not by hyperinflation, but by hyper-deflation.

That has been the working thesis at Money Daily since 2008, and it appears to finally be setting off into a new phase.

Facts must be faced. After the crash in 2008, banks became insolvent and were bailed out by trillions of dollars, yen and euros from central banks, which, by their very nature of money creation out of thin air, are also insolvent. Most governments are either deeply in debt or insolvent, with massive debts to their central banks offset by national resources (see Greece). Most people's finances are in a state of insolvent, with debt far outweighing assets. That leaves corporations, large and small, as the only solvent entities in the world, though many of those corporations are also insolvent, with more debt than equity, and much of their equity accounted for by stock buybacks. When the market takes a meaningful dive, many of these corporations will be prime bankruptcy targets, though the government would almost surely step in - as it did with the banks and General Motors during the crisis - with freshly-minted money to stave off creditors.

All roads lead back to the fiat money system and fractional reserve banking.

We have broken countries undertaking broken trade in broken markets. Mal-investments and wealth inequality are proliferating. Big government, running enormous deficits, carries on the fraud of counterfeiting by central banks. The currencies commonly used in exchange are worth nothing more than the ink and paper upon which are printed the pretty pictures and numbers. They are all debt instruments and negative interest rates extinguish debt. The world is headed for a radical reconfiguration of the monetary system.

At the Close, Friday, August 16, 2019:
Dow Jones Industrial Average: 25,886.01, +306.61 (+1.20%)
NASDAQ: 7,895.99, +129.37 (+1.67%)
S&P 500: 2,888.68, +41.08 (+1.44%)
NYSE Composite: 12,580.41, +170.91 (+1.38%)

For the Week:
Dow: -401.43 (-1.53%)
NASDAQ: -63.15 (-0.79%)
S&P 500: -29.97 (-1.03%)
NYSE Composite: -168.01 (-1.32%)
Dow Transports: -239.89 (-2.35%)

Adam Smith, Grains, Silver, the PPI, and Deflation

For months, if not years, Federal Reserve officials have been harping on the absence of inflation during their era of unrelenting quantitative easing (money printing). This phenomenon has baffled the pointed heads of the Fed, since it would be only natural for prices to rise with the advent of scads of fresh money hitting the market.

The problem for the Fed is simple. Their transmission lines have been blunted for the past eight years, with their easy money stopped at the bank level, never actually reaching commercial or consumer participants in the general economy. Thus, stocks, bonds and various currencies have experienced outsize gains - those assets experiencing above average appreciation, i.e., inflation - while the more mundane elements of the vast economic landscape have wallowed in a regime of low inflation, disinflation or outright deflation.

As the Fed prepares to sell off assets from its enormous ($4.4 trillion) balance sheet, the matter of price inflation has once again become a major concern. Fed officials disingenuously mutter on and about wage growth, seeking to convey the impression that they are somehow concerned for the welfare of workers (labor). Wage growth, which has stagnated since the year 1999 if not earlier, is a false argument for inflation. what the Fed wants is price inflation for everyday goods, commercial mid-production products, and base goods.

It's not happening.

In his magnificent tome, "The Wealth of Nations," author Adam Smith takes pains - and many pages - in discussion of nominal prices, concerning himself in his writings with the price of corn. Scholars rightfully insist that Smaith's intention was to show how prices in base goods are more important a measurement of economic health than pricing in currency.

With that knowledge, variations in currencies and base grains - wheat, corn, rice - can serve as an impressive measurement of real inflation, since the cost of producing marketable grain from hectares of farm land is somewhat non-variable, considering that the labor and fuel costs are relatively static.

In other words, since farmers are paying their hired hands roughly the same wage and the cost of operating the machinery to harvest the grains is also somewhat static, the price of finished grain in terms of currencies of choice - in his case, silver, can determine whether the environment is inflationary, deflationary, or neutral.

This morning's release of PPI data showed an increase of 0.4% month-over-month and a rate of 2.6% year-over-year. The increase puts the PPI at a level last seen in 2012. CPI (Consumer Price Index) remains mired in mediocrity, at a rate of 1.9% annually. That is the final inflation number, though it is hardly a reliable one.

Since the US economy is so vast and dynamic, it's difficult to get a grip on the overall flow of anything, though it's fairly certain that the inflation rate is higher than what the government is reporting.

On the other hand, taking into account Adam Smith's famous measurements, grains - the basis for much of what Americans and animals of husbandry eat - have crashed in recent weeks and months, along with silver, which has been rangebound for the past four years and is thus a benign measurement, useful in actual discussions of nominal prices.

On that basis, the Fed is likely to be disappointed in their inflation expectations. Since their data is so badly maligned, it cannot be trusted, while Adam Smith's has stood the tests of time.

It's deflation, as far as the eye can see, no matter what the Federal Reserve officials - who have proven, time and again, to be nothing more than dunces with degrees - try to squeeze out of the economy. The deflation is especially evident considering the levels of price suppression in silver. Were silver to rise to somewhat more realistic levels, the cost of buying a bushel or wheat or corn or rice would fall substantially.

Stocks made new all-time highs on Wednesday, but are pulling back in early trading Thursday morning.

Bull or Bear? By October, It Probably Won't Matter

Another day, another boring stock market supposedly awaiting Janet Yellen's annual testimony before the the House Financial Services Committee on Wednesday and the Senate Finance Committee, Thursday.

Big YAWN.

Janet Yellen's words are worthless. She mouths big words like macro-prudential, as though she actually practices it while heads spin and eyes glaze over trying to comprehend its meaning.

In reality, the term refers to policy actions designed to mitigate systemic risk. It's rubbish. It's Fed-speak. While it sounds good on the surface, everything is at risk, including the entire global financial system that nearly imploded in 2008. If enough companies, or, heaven forbid, banks, default on their obligations, the risk is interconnected, and probably more so than in 2008-09.

There are no safeguards. There are only bigger bets, known as derivatives, credit default swaps (CDS), leverage, and arbitrage.

The system is as fragile now as it was just prior to the Great Financial Crisis (GFC) of 2008-09, and probably, it is even more fragile, simply because the Fed does not have the tools to fight back against deflation and recession, the dual threats to capitalism.

So, Janet Yellen will testify to congress on Wednesday and nothing at all will change. Meanwhile, markets are stuck in neutral, which means, in these absurd times, a tilt toward slightly positive.

Another big YAWN.

The big moves will be in September, when the laid-back congress will be forced to raise the debt ceiling and come up with another annual budget. It's likely to be a wild time, even for this do-nothing congress. President Trump will be holding both Republican and Democrat feet to various fires.

If not September, then October should be another possible meltdown time frame. It always has been, and, with the markets and economy showing severe signs of fraud and stress, a market "event" is long, long overdue.

At the Close, 7/11/17:
Dow: 21,409.07, +0.55 (0.00%)
NASDAQ: 6,193.30, +16.91 (0.27%)
S&P 500: 2,425.53, -1.90 (-0.08%)
NYSE Composite: 11,746.72, -5.07 (-0.04%)

Unconvincing Open To the Week; Inflation/Deflation Debate Grows; Oil Continues Slide

In the ongoing inflation/deflation scrimmage, it's a draw, but, depending on where you've placed your bets, the victories may be huge.

For the investing crowd, stocks are golden and likely will continue to be so. Rough spots ahead include the June FOMC meeting (next Tuesday and Wednesday) and the coming fight in the congress over President Trump's proposed tax plan, which would constitute not only a major victory for the president, but also a big one for the American people, so it's far from a sure thing.

Congress, in case nobody has noticed, remains, for the most part, useless. Unless one is interested in hearings which lead to nothing or vacation time for rich Senators and soon-to-be-rich members of the House, neither the Republicans nor Democrats seem willing to actually legislate upon anything that will benefit anybody outside the District of Columbia. Truly, congress has become a closed loop between special interests represented by K Street lobbyists and insider deals that benefit one's own district (and that's becoming something of a rarity).

Noting that the government - outside of President Trump's ongoing efforts for change - remains powerless to do anything positive, Wall Street is probably giddy over the prospects, being that the major corporations which own, buy, and sell debt and equity are well insulated against any untoward legislation or outside shocks within their own cozy club.

Thus, it makes little sense to do anything except invest in the only asset class returning gains and/or dividends. Precious metals have floundered for the past four years, and oil has been in the dumps over the past two.

The slide from the low $50 range for WTI crude continued on Monday, dipping as down to 46.86 before recovering late in New York into the low $47 range.

So, in a nutshell, food and many other consumer staples remain without pricing power, restaurants are varyingly in a race to the bottom or towards diversifying menus with many of the large chains offering enticing deals. Retail overall is a basket case, now that online shopping has gone mainstream and will soon overtake brick and mortar from a gross revenue standpoint.

It's stocks for appreciation, though the wizards of Wall Street are somewhat blind to the disinflation, deflation and decimation of Main Street.

At the Close, 6/5/17:
Dow: 21,184.04, -22.25 (-0.10%)
NASDAQ: 6,295.68, -10.11 (-0.16%)
S&P 500: 2,436.10, -2.97 (-0.12%)
NYSE Composite: 11,693.65, -25.04 (-0.21%)

Global Markets Fall In Reaction To Trump Immigration Ban

In what may have been a completely convenient excuse to unwind some positions in overheated markets, analysts blamed Monday's global meltdown on US President Donald Trump's hastily-enacted immigration ban.

While the ban covers only seven countries - the same ones covered under a similar program under President Obama (Iran, Iraq, Syria, Yemen, Somalia, Libya, Sudan) - reaction from both affected and unaffected countries has been vocal, but especially in the US, where protesters (many of them paid) set up camp at airports in major cities.

Aside from the obvious left-leaning, liberal crying and tooth-gnashing, market participants largely over-reacted to the condition, giving pause to any instant analysis. What Trump may have done with the ban is fire a first volley in what may eventually prove to be an escalating trade war with the focus more on currency manipulation and tariffs than immigration limits and its consequences.

Not only were US markets lower on the day, equity indices around the world were down. That's an unusual circumstance worth noting, because, in the normal conduct of business, somebody's loss often results in gain somewhere else. Apparently, this was not the case, leading to the belief that the off-hand selling was little more than relief form overextended stocks.

On the flip side, this one-off event could be the beginning of a disorderly decline in the value of major equities around the globe and a beginning to the dismantling of a monetary system and bull market both of which are creaking from old age.

The days and weeks ahead should offer better insight to the overall direction of markets. Perhaps Trump's "America First" pledge means that US stocks will feel the brunt of the correction before the rest of the world gets on board. Deflation has reared its ugly head once again.

At The Close 1.30.17:
Dow: 19,971.13, -122.65 (-0.61%)
NASDAQ: 5,613.71, -47.07 (-0.83%)
S&P 500: 2,280.90, -13.79 (-0.60%)
NYSE Composite: 11,205.24, -77.95 (-0.69%)

Risk On - Risk Off Roller Coaster Is Expected In The Age Of Trump

Get used to volatility in the age of Trump.

Markets - especially stocks and bonds - are more than likely to correct and enter bear territory during Trump's administration. The bond bubble has been extended beyond its "use by" date and the stock rally since 2009 has been nothing short of miraculous, if one considers the creation of 11 trillion dollars (probably more) out of thin air to be the stuff of miracles.

Stocks and bonds are both overvalued, thus, we should experience a 10-year note at 3.0% or higher at some point in the near future, and stocks reversing course due to the competition and relative safety of bonds. Trump's policies are likely to exacerbate the condition of extreme overvaluation which will manifest itself in wild swings. He'll certainly get much needed help from the Fed, whose stated aim is to impose a regime of never-ending inflation.

Problem is, there are major distortions in the US and global economy, mostly the overhang from doing nothing to fix the issues of 2008 (actual bank failures). Let's see interest rates rise, stocks fall and somehow, inflation? A dubious argument at best.

Deflation is the friend of the frugal and that's what's coming. With less capital to blow on hookers and blow, the thrift-loving Americans in the heartland (forget the cesspool cities, they're toast) will benefit from all manner of liquidations and fire sales. It's a transfer of wealth from rich to poor and urban to rural that is long overdue. Most of the debt is tied to cities, not arable land and/or hunting/wilderness/undeveloped/underdeveloped properties.

One can get a unique impression from living in one of America's poorer areas, such as rural upstate New York, but you know what? Some people are thriving, those being land owners, farmers, growers, people with roadside stands, trade specialties, mechanical abilities and low overhead. It's pretty basic stuff, but large swaths of rural America are going to be very affordable and desirable. The cites, not so much. Pain for some, gain for others. The survivalist mentality had it right all along and will be proven winners in coming months and years.

As for today, two days before Mr. Trump assumes the office of president, markets were roiled again, lurching from one idea to another, up, then down, then sideways. European stocks were higher, WTI crude oil got smashed early but rebounded. Gold was flat, then lower; silver, always the outlier, hit its best level in a month, ended the day in New York down on the session, and has been trending higher into the inauguration, but options and futures settlements are closing fast (26th and 27th of January).

Mostly, stocks tread water and didn't offer much in the way of direction though by now, unless reading charts is grossly overrated, it's apparent that the Trump rally has run its course and Dow 20,000 is a fleeting memory.

At The Close 1.18.16:
Dow: 19,804.72, -22.05 (-0.11%)
NASDAQ: 5,555.65, +16.93 (0.31%)
S&P 500: 2,271.89, +4.00 (0.18%)
NYSE Composite: 11,196.11, -0.18 (-0.00%)

Janet Yellen And The Fed Are Dangerous To Your Well-Being

Apologies for the blaring headline, but this is getting a bit ridiculous. Truthfully, the headline suggested by our ace writer, Fearless Rick, had a definite Donald Trump tone to it, so it was scrapped in favor of the watered-down version.

For seven years - since the great collapse of 2008-09 - we've been listening to the babble coming out of the mouths of various Federal Reserve governors, and none of it was believable nor helpful. The US economy is circling the toilet drain, and various economies around the globe have already been flushed down the sinkhole of fetid monetary policy.

Here is just one quote from Janet Yellen in her address to the World Affairs Council (another bunch of clueless monetarists) that speaks volumes about what she knows and doesn't know:

I see good reason to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones.

If Mrs. Yellen would care to elaborate on just what those positive forces could be, it's expected that almost nothing would come out of her mouth, because she's doing what she does best, spout nonsense, in the best tradition of the Maestro himself, the venerable former Fed Chairman, Alan Greenspan. In all honesty, just what positive forces are there supporting employment growth after last week's disastrous non-farm payroll report for May, in which the US economy created a paltry 38,000 jobs when 164,000 were expected.

Additionally, Chair Yellen believes inflation is good for the economy, when most people in the real world would like to see some softening of prices and/or an increase in their wages. On the one hand, deflation in consumer prices stretches one's money; on the other, wage hikes usually occur when the economy is growing robustly. Since Americans can't have both at once, it is supposed that we'll get the former, and like it.

Naturally, the bozos on Wall Street took all of it in stride and just bought more overpriced stocks:


S&P 500: 2,109.41, +10.28 (0.49%)
Dow: 17,920.33, +113.27 (0.64%)
NASDAQ: 4,968.71, +26.20 (0.53%)

Crude Oil 49.69 +2.20% Gold 1,247.70 +0.39% EUR/USD 1.1362 -0.02% 10-Yr Bond 1.72 +1.12% Corn 426.75 +2.03% Copper 2.12 +0.31% Silver 16.49 +0.73% Natural Gas 2.81 +1.41% Russell 2000 1,176.62 +1.07% VIX 13.61 +1.04% BATS 1000 20,677.17 0.00% GBP/USD 1.4455 -0.14% USD/JPY 107.6200 +1.10%

Retail Sales, Inventory, PPI Fall; Stocks Full Steam Ahead

Events of the day no longer matter, as we are clearly in the final stages of a global financial catastrophe, one which few will see coming, though signs of malaise and deconstruction are everywhere.

On the day, March retail sales were reported to be off by 0.3%, that being a negative, as opposed to a positive, which was expected. Despite the obvious collapse of the consumer pocketbook, stocks disregarded the data - as per usual - and marched higher, with the Dow Jones Industrial Average arching towards the magic 18,000 mark, a number that has not been seen on Wall Street or anywhere since mid-July of last year.

PPI, an inaccurate guide to wholesale inflation, fell 0.1%, on expectations of a rise of 0.3%, another blow to the Fed's inflation targeting of two percent, and yet another arrow in the quiver of the punchy speculators who view all bad economic news as good.

Business inventories for February also fell, by 0.1%, a result of over-ramping holiday buying without the resultant sales. Businesses find themselves largely overstocked, and have no need to build inventories, especially at a time in which the global economy is either not growing at all or actually contracting.

Meanwhile, anecdotal reports of falling food prices are rafting throughout the US economy. One consumer reported a dozen eggs at $1.50, when they were $3.00 or more just six months ago, due largely to a 2015 bird flu which decimated the nation's chicken population.

Therein lies the conundrum: with gas prices low, food prices falling, consumers are still finding difficulty opening their wallets and spending. Primary culprits include excessive taxation, health care (Obamacare), college tuition, and high housing costs, be they either renting or owning, and, since making ends meet via interest on savings has become a relic of a bygone era, people are also paying down debt.

It doesn't matter to Wall Street. Main Street could shrivel up and die - which, in many smaller cities it already has - and stocks would still enjoy the speculative splendor of negligible interest rates.

Splurge, baby, splurge.

DJIA: 17,908.28, +187.03
S&P 500: 2,082.42, +20.70
NASDAQ: 4,947.42, +75.33

Crude Oil 41.55 -1.47% Gold 1,244.10 -1.33% EUR/USD 1.1277 -0.95% 10-Yr Bond 1.76 -1.07% Corn 373.75 +3.03% Copper 2.17 +1.14% Silver 16.24 +0.08% Natural Gas 2.04 +1.80% Russell 2000 1,129.93 +2.19% VIX 13.84 -6.80% BATS 1000 20,682.61 0.00% GBP/USD 1.4206 -0.43% USD/JPY 109.3075 +0.67%

Yellen's Congressional Testimony Fails to Inspire Confidence

As Janet Yellen testified to the House of Representatives (on Thursday, she speaks and takes questions from the Senate), stocks hung on her every, stuttering, stammering word, but eventually fell in late trading as the Fed Chair seemed a bit too concerned about recent data, stock declines and global tensions to allow congress or investors any happy talk on the now-stalled "recovery."

S&P: 1851.86, -0.35 (-0.02%)
Dow: 15914.74, -99.64 (-0.62%)
NASDAQ: 4283.59, +14.83 (+).35%)

As per this article, JP Morgan economists are now "not all that worried" about negative interest rates in the US, my response:

Of course, negative interest rates are the embodiment of absolute insanity, madness of the markets. Whats worse, perhaps, is that some commentators are touting that this will bring on hyperinflation, though none of them explain the mechanism.

Here at Money Daily, the widely-held belief is that if rates go any lower, we will have an outright deflationary depression, or, an extension of the deflationary depression which has been underway since 2008. We've been hearing about hyperinflation for years now, and, while there admittedly is some inflation, there's more deflation, especially when it comes to cash.

If the banks go NIRP and put on more capital controls (ban on cash not going to actually occur in some places), cash will surely be king, as it was in the Great Depression. Gold and silver should be worth even more, but that's not until the COMEX gets stung (still waiting on that one).

Anybody who's read "When Money Dies" by Adam Fergusson should recall that during Germany's Weimar, the farmers were barely affected until near the end when hordes of people came out from the cities and actually slaughtered animals and raided crop stores.

There's a free PDF, though this is not recommended for everyone - it's somewhat dense:

When Money Dies: The Nightmare of the Weimar …

In the meantime, farmers figure on getting started with seedlings in about three weeks here in (now, finally) snowy upstate NY. Then, investors with any sense should go long vegetable stands. If the banks want to charge money to hold cash, figure people will be more than willing to exchange it for FOOD.

The central bankers have lost their minds. Ask a farmer about storage costs for cash and you'll probably hear, after a long, sidewards stare, that he'd be happy to help you out, since he has plenty of storage for livestock, tools, equipment, produce, and his family (commonly known as a home or household).

People in a city or large town/village should be concerned. Out in the country, not an issue. Besides, this madness will only last - at best - a year. Donald Trump will be president and life will get better. We are (pun intended) banking on it.

This, from a poster called "The Continental," is apropos:

Positive interest rates cause capital to form. Negative interest rates destroy capital.

The banks are desperate to prevent the bond bubble from collapse and are extrapolating to negative interest rates. In short, it's game over for the dollar and its fiat currency brethren.

Central bank reserves were growing exponentially after 1948 up to mid 2014 whilst going vertical they suddenly stopped and plateaued. In the last year, ~$1 trillion of reserves have "disappeared" the collective balance sheets of the world. This means that cash/credit dollars are being created while counterbalancing bonds are being destroyed. This is monetization at its worst. The reserve base of the currency is slowly vanishing.

In the short run, cash dollars will become scarce and valuable. In the long run there is nothing, not even bonds, backing cash dollars and they will collapse (hyperinflate) when trillions of dollars return home looking for assets to convert to.

Buying physical gold (and silver) at any price is not only a no brainer vis-à-vis protecting capital; it is financial suicide not to buy gold.

Stocks, Oil Whacked Again; 10-Year Note at 1.86%; Yellen's Fed in Shambles

It's official.

The groundhog didn't see his shadow, and Janet Yellen didn't see the recession just ahead, proving, within a shadow of doubt, that animals have better sense than most humans.

At least in the case of furry rodents versus doctors of economics, the rodentia class is in a class all its own. Punxsutawney Phil, the most famous of ground hog prognosticators, came outside this morning and reassured everybody in the Northeast that the most mild winter in decades would continue, and, to boot, be short-lived.

By not seeing his shadow, Phil assuaged the assembled crowd that what remains of winter would be over within two weeks, rather than the usual six week span that extends nearly to the first day of Spring, March 20.

Despite this being a leap year, which adds a full day to the cruel month of February, residents in the most densely-populated area of the country seem to be settled in for a short stay on the chilly side.

In upstate New York, there is little to no snow on the ground. What remains are a few remnants of shoveled piles that take a little longer to melt, though even that should be gone by tomorrow, as temperatures from Buffalo to Albany are expected to approach sixty degrees on Wednesday.

Similar circumstances prevail throughout the Mid-Atlantic region and into New York, Pennsylvania, New Jersey and Massachusetts. The milder-than-normal conditions have resulted in lower use of heating fuels such as oil and natural gas, both of which are hovering around decades-long lows.

As for the Federal Reserve and the captain of that sinking ship, Janet Yellen, she and her hench-fellows seem to be on the wrong side of economic history, considering that since their historic rate hike in mid-December, interest rates have gone in the opposite direction, the 10-year note today closing at 1.86%, as the winds of global deflation and tight labor conditions continue to push consumer demand and consumption lower and lower.

Compounding the complexity of the Fed's non-tenable situation are the twin engines of stocks and oil, both of which have hit stall speed in 2016. WTI crude close in New York within whispering distance of the $30 mark, while the major stock indices were battered into submission by a combination of reduced earnings capacity and a growing confidence gap from investors.

Even with last week's brave showing by the markets in the face of a 2015 fourth quarter that slipped to 0.7% growth, stocks were unable to regain the footing which took the Dow 400 points higher on Friday as the Bank of Japan endorsed negative interest rates on its treasury bonds extending though eight years.

Supposedly, cheap, easy money was good news for the stock market. However, with the BOJ cancelling a treasury auction today due to lack of interest (no pun intended) from selected participants, equity markets around the world backtracked towards the lows of January. Apparently, there aren't many out there who see it as a prudent idea to pay somebody to hold your money.

Negative interest rate policy, aka NIRP, is the death-knell of central bankers. Traditionally, banks paid OUT interest on savings, but, in this decade of upside-down economics, the glorious kings and queens of monetary policy are sticking to the belief that people are so afraid of losing what they've earned that they will pay to have the banks hold it for them.

Mattresses and shotguns are back in style, kids, but nobody seems to have told the central bankers. Everybody from simple savers to mega-millionaires are losing confidence in a clearly broken system, pulling their assets out and into cash, precious metals, gemstones, art, real estate, or other stores of value that have stood the test of time. The only buyers of government debt are governments, a condition which cannot be sustained long.

Truth be known, the Fed, the ECB, BOJ and PBOC are all aware of this condition and have yet to devise a strategy that will resolve the liquidity and solvency crunch with a minimum of pain. Pain will come to many, precisely those holding debt which cannot be repaid. Ideally, this epoch of economic history will see the end of central banking with fiat currencies and fractional reserves.

We may be within weeks or months of a global reset, a change in the nature of money which will tear at the fabric of society itself.

Stay tuned. This is only the middle of the show which started in 2008.

Today's crap shoot:
S&P 500: 1,903.03, -36.35 (1.87%)
Dow: 16,153.54, -295.64 (1.80%)
NASDAQ: 4,516.95, -103.42 (2.24%)

Crude Oil 30.02 -5.06% Gold 1,129.20 +0.11% EUR/USD 1.0920 +0.27% 10-Yr Bond 1.8640 -5.19% Corn 372.00 +0.20% Copper 2.05 -0.29% Silver 14.31 -0.26% Natural Gas 2.03 -5.81% Russell 2000 1,008.84 -2.28% VIX 21.98 +10.01% BATS 1000 20,356.76 -1.72% GBP/USD 1.4411 -0.10% USD/JPY 119.84

Wall Street Sulks as Fed Is Not Dovish Enough

In the aftermath last month's federal funds rate hike - the first in eight years, and, a paltry 0.25% at that - the Fed held their first FOMC rate policy meeting of the year and the reaction from Wall Street was nothing short of derisive.

While the Fed governors did their level best to hem, haw, and dance around their policy "mistake" - which has taken US stocks roughly seven percent lower and cratered confidence - market participants apparently wanted more, as in a complete roll back of the hike and a return to ZIRP, the policy that had prevailed since the fall of 2008.

Stocks were trading close to the flatline until the 2:00 pm announcement by the Fed. After a small amount of see-sawing, sentiment turned radically negative, with all indices taking a punch to the gut that extended into the close.

The Fed cannot escape its fate. It will be overseeing the utter calamity of a global currency crisis, brought about by their excessive credit policies from the Greenspan and Bernanke eras. Janet Yellen, the current Fed Chair, will be scapegoated, and rightfully, as she is completely tone deaf to the needs of the US and global economies, which are screaming deflation at every turn.

The best Ms. Yellen can hope for in her sure-to-be-short tenure as Chairwoman of the Federal Reserve is for Japan or Europe to somehow come to the rescue with additional QE in coming weeks and months, which will buy her additional time to exit in an orderly manner.

The handwriting is on the wall and the handwringing can be seen on the faces populating the video screens from CNBC and Bloomberg TV. Nobody wants stocks, and soon enough, nobody will want dollars, at least not for long. But first, the powerful grip of deflation will have to work its way through the system, crushing the investor class while shoring up those at the bottom of the societal and economic ladders.

That process has been underway for at least a year, as shown by the price of crude oil. It will eventually infest all consumer goods, crushing corporate profits in manufacturing and retail. The systemic underutilization will commence until governments fall, first in emerging markets, then developed ones.

There is no escaping a monetary event such as what is coming. Gold continued to ramp up. Silver is lagging, but will eventually follow and then surpass the gains made by gold.

Today's closing quotes:
S&P 500: 1,882.95, -20.68 (1.09%)
Dow: 15,944.46, -222.77 (1.38%)
NASDAQ: 4,468.17, -99.51 (2.18%)

Crude Oil 32.19 +2.35% Gold 1,124.90 +0.42% EUR/USD 1.09 +0.32% 10-Yr Bond 2.0010 +0.35% Corn 369.75 +0.14% Copper 2.06 +1.08% Silver 14.50 -0.44% Natural Gas 2.15 -0.51% Russell 2000 1,002.75 -1.50% VIX 23.11 +2.71% BATS 1000 20,083.96 -0.92% GBP/USD 1.4245 -0.72% USD/JPY 118.63 +0.18%

Week Ends Poorly for Stocks, as PPI Indicates Deflation, Euro Falls, Dollar Rallies

Since stocks are close to all-time highs, there isn't much in the way of analysis to explain marginal moves in one direction or another, except along the lines of anticipatory buying/selling in the face of a potential Fed rate hike in June... or September... or never.

That's why it was a little surprising to see stocks fall on news that the PPI registered an outsize negative number this morning, indicative of outright deflation, the one thing of which the Fed and the government are deathly afraid.

PPI had dropped 0.8 percent in January. In the 12 months through February, producer prices fell 0.6 percent, the first decline since the series was revamped in 2009. February PPI, measured on a month-t-month basis, fell 0.5 percent.

Falling prices mean less spending, and less spending begets lower prices in a competitive environment (according to economics 101) and lower prices, as part of the spiral, means lower wages, or, at least no raises in wages, but it's what has been occurring, more or less, since the last financial crisis in 2008-09. One need only know where to look for deals and bargains; they are out there.

But, lower prices cause all kinds of problems for the Fed, already at the zero-bound on rates, because the have no tools to fight deflation, since the entire banking regimen depends on at least some inflation, all the time and everywhere.

Lower oil prices were just the first symptom of the deflation problem, or, maybe the second, following stagnant wages and a lack of job growth (forget the unemployment figures - they're a sham) and now the decline in the price around which everything else revolves has gotten the vicious cycle working overtime. The dollar rising is another ancillary symptom of a moribund economy, one which is about to keel over and die for good, something it should have done in 2009. The other shoe is dropping, and the Fed isn't going to be able to catch this one before it hits the floor with an awful thud. Imports are becoming cheaper, due to just about all our trading partners desperately devaluing their currencies.

The Dollar Index shot up over 100 today, closing at 99.41, a twelve-year high. The euro dipped below 1.05 again. It is rapidly approaching parity with the dollar, and will likely be worth less than a greenback within mere months.

Without inflation, people save instead of spend, pay down debt instead of incurring more, and generally speaking, life gets better for the average Joe or Jane consumer. The honest truth is that banks - at the heart of our global economic malaise - don't want people out of debt, they want them deeper and deeper in debt.

And, if wages stagnate or decline, and people get laid off, the government collects less in taxes and - boo-hoo - they can't service the debt (they can't anyhow, that's proven by our $18 trillion national debt, but that's another story) or provide needed (or unneeded) services.

So, rock, meet hard place. And that's why even if a stinking bad economy keeps Wall Street flush with fresh money from the Fed printing press, it's still a bad economy that is, in the end, unsustainable.

That is about the best guess as to why stocks sold off today, even on BAD news, which was supposed to be GOOD.

Stocks were also down for the week. The Dow fell 107.47 (-0.60%); the S&P shed 17.86 (-0.86%) and the NASDAQ led the downside move, losing 55.61 (-1.13%). It was the second straight weekly loss for the NASDAQ and the Dow, the third in a row for the S&P.

Closing Prices (3/13):
Dow Jones 17,749.31, -145.91 (-0.82%)
S&P 500 2,053.40, -12.55 (-0.61%)
NASDAQ 4,871.76, -21.53 (-0.44%)

Deflation, Followed by More Deflation

In its simplest terms, deflation is defined as a decline in the money supply, but, because of central bank meddling such as QE and ZIRP (Zero Interest Rate Policy), money supply isn't really an issue, but, where the money is going turns out to be the bogey.

For all the pumping the Fed and other central banks have done since the Lehman crash in 2008, inflation and growth have failed to materialize because the money is stuck in transmission lines between the central banks and the TBTF banks, who don't want to take the risk of loaning money to real people, preferring instead to speculate in stocks and reward their cronies with fat bounties, otherwise known as bonuses.

The three trillion dollars by which the Fed has expanded its balance sheet since 2008 hasn't found its way into the real economy. Meanwhile, governments, from municipalities on up to the federal level, have done their best to over-regulate and over-tax working people, causing further strain on the bulk of consumers. So, if money, on one hand, is stuck in transmission, and taxes and fees are going up on the other hand, with incomes stagnant or falling, people have less to spend, and make their spending choices with just a little bit more prudence.

Depending on your age and circumstances, you may or may not be experiencing a bout of deflation this winter.

It really depends on what you spend your money on, where you live, where you shop, and what you do for a living.

Obviously, despite the best efforts of oil price manipulators to keep prices above $50 per barrel, the price of a gallon of gas has fallen precipitously over the past six months. That's a plus, as is the low price of natural gas. Consumers in the Northeast, experiencing one of the coldest winters in history, haven't had it too bad, because the cost of heating a home has dropped like a rock. It would be even better if Al Gore had actually been right about Global Warming. (Well, he did invent the internet, so you can't expect him to be perfect.)

Food prices have moderated, and, because fewer and fewer consumers are dining out, restaurants have been offering more specials. Food is one of those things that you really can't manipulate much, as it does have limited fresh shelf life. A decent summer growing season has kept a lid on food prices.

However, if you've got kids at all, and especially kids in college, you're likely feeling the pinch of higher tuitions and cost for college text books. Health care costs haven't moderated as much as the government would like you to think, either, so, if you have health insurance (Doesn't everybody? It's the LAW!), you're paying more.

Housing prices have moderated a bit, and bargains ca be found, especially in the Northeast and in rural areas. Farmland prices are coming down dramatically.

Behind all of this is the strong dollar, helped by the rest of the world, which is cutting interest rates and debasing currencies at a furious pace.

Thanks to Zero Hegde for the complete list of 21 central bank rate cuts so far in 2015:

1. Jan. 1 UZBEKISTAN
Uzbekistan's central bank cuts refi rate to 9% from 10%.

2. Jan. 7/Feb. 4 ROMANIA
Romania's central bank cuts its key interest rate by a total of 50 basis points, taking it to a new record low of 2.25%.

3. Jan. 15 SWITZERLAND
The Swiss National Bank stuns markets by discarding the franc's exchange rate cap to the euro. The tightening, however, is in part offset by a cut in the interest rate on certain deposit account balances by 0.5 percentage points to -0.75 percent.

4. Jan. 15 EGYPT
Egypt's central bank makes a surprise 50 basis point cut in its main interest rates, reducing the overnight deposit and lending rates to 8.75 and 9.75 percent, respectively.

5. Jan. 16 PERU
Peru's central bank surprises the market with a cut in its benchmark interest rate to 3.25 percent from 3.5 percent after the country posts its worst monthly economic expansion since 2009.

6. Jan. 20 TURKEY
Turkey's central bank lowers its main interest rate, but draws heavy criticism from government ministers who say the 50 basis point cut, five months before a parliamentary election, is not enough to support growth.

7. Jan. 21 CANADA
The Bank of Canada shocks markets by cutting interest rates to 0.75 percent from 1 percent, where it had been since September 2010, ending the longest period of unchanged rates in Canada since 1950.

8. Jan. 22 EUROPEAN CENTRAL BANK
The ECB launches a government bond-buying programme which will pump over a trillion euros into a sagging economy starting in March and running through to September, 2016, and perhaps beyond.

9. Jan. 24 PAKISTAN
Pakistan's central bank cuts its key discount rate to 8.5 percent from 9.5 percent, citing lower inflationary pressure due to falling global oil prices.

10. Jan. 28 SINGAPORE
The Monetary Authority of Singapore unexpectedly eases policy because the inflation outlook has "shifted significantly" since its last review in October 2014.

11. Jan. 28 ALBANIA
Albania's central bank cuts its benchmark interest rate to a record low 2%. This follows three rate cuts last year, the most recent in November.

12. Jan. 30 RUSSIA
Russia's central bank cuts its one-week minimum auction repo rate by two percentage points to 15 percent, a little over a month after raising it by 6.5 points to 17 percent, as fears of recession mount.

13. Feb. 3 AUSTRALIA
The Reserve Bank of Australia cuts its cash rate to an all-time low of 2.25%, seeking to spur a sluggish economy while keeping downward pressure on the local dollar.

14. Feb. 4/28 CHINA
China's central bank makes a system-wide cut to bank reserve requirements -- its first in more than two years -- to unleash a flood of liquidity to fight off economic slowdown and looming deflation. On Feb. 28, the People's Bank of China cut its interest rate by 25 bps, when it lowered its one-year lending rate to 5.35% from 5.6% and its one-year deposit rate to 2.5% from 2.75%. It also said it would raise the maximum interest rate on bank deposits to 130% of the benchmark rate from 120%.

15. Jan. 19/22/29/Feb. 5 DENMARK
Incredibly, the Danish central bank cuts interest rates four times in less than three weeks, and intervenes regularly in the currency market to keep the crown within the narrow range of its peg to the euro. (The won't last. See Switzerland.)

16. Feb. 13 SWEDEN
Sweden's central bank cut its key repo rate to -0.1 percent from zero where it had been since October, and said it would buy 10 billion Swedish crowns worth of bonds.

17. February 17, INDONESIA
Indonesia’s central bank unexpectedly cut its main interest rate for the first time in three years.

18. February 18, BOTSWANA
The Bank of Botswana reduced its benchmark interest rate for the first time in more than a year to help support the economy as inflation pressures ease. The rate was cut by 1 percentage point to 6.5%, the first change since Oct. 2013.

19. February 23, ISRAEL
The Bank of Israel reduced its interest rate by 0.15%, to 0.10% in order to stimulate a return of the inflation rate to within the price stability target of 1–3% a year over the next twelve months, and to support growth while maintaining financial stability.

20. Jan. 15, March 3, INDIA
The Reserve Bank of India surprises markets with a 25 basis point cut in rates to 7.75% and signals it could lower them further (they did, yesterday, to 7.50%), amid signs of cooling inflation and growth struggling to recover from its weakest levels since the 1980s.

21. Mar. 4, POLAND
The Monetary Policy Council lowered its benchmark seven-day reference rate by 50 basis points to 1.5%.

There will be more rate cuts and currency debasement, especially once the ECB gets its own QE program going. Note that all of these countries want to reflate, inflate or otherwise spur demand. The problem, as discussed above, is that people just aren't buying it, and they aren't buying. People have been paying down debt and saving, because, in an era of unprecedented central bank intervention and government regulation, the average Joe and Jane is uncertain about the future. It's a social phenomenon the economists can't compute.

Perhaps, in a free market without central bank meddling and government intervention into every aspect of one's life, capitalist economies might just have a chance.

Who knew?

Bottom line, central banks hate deflation, because it causes debt-driven economies to seize up and die, which is exactly why consumers should appreciate it.

Dow 18,096.90, -106.47 (-0.58%)
S&P 500 2,098.53, -9.25 (-0.44%)
Nasdaq 4,967.14, -12.76 (-0.26%)

Are We Recovering Enough?

Editor's Note: Money Daily stopped being a daily post blog in March, 2014. Well, it's now March, 2015, and, after a year off, little has changed, but Fearless Rick is once again re-charged to begin making daily (Monday - Friday) posts. This is, with hope, the first of many...

The following list is courtesy of the good squids over at Goldman Sachs.

From the start of February through March 2, these are the misses and beats of various US macro data.

MISSES

1. Personal Spending
2. Construction Spending
3. ISM New York
4. Factory Orders
5. Ward's Domestic Vehicle Sales
6. ADP Employment
7. Challenger Job Cuts
8. Initial Jobless Claims
9. Nonfarm Productivity
10. Trade Balance
11. Unemployment Rate
12. Labor Market Conditions Index
13. NFIB Small Business Optimism
14. Wholesale Inventories
15. Wholesale Sales
16. IBD Economic Optimism
17. Mortgage Apps
18. Retail Sales
19. Bloomberg Consumer Comfort
20. Business Inventories
21. UMich Consumer Sentiment
22. Empire Manufacturing
23. NAHB Homebuilder Confidence
24. Housing Starts
25. Building Permits
26. PPI
27. Industrial Production
28. Capacity Utilization
29. Manufacturing Production
30. Dallas Fed
31. Chicago Fed NAI
32. Existing Home Sales
33. Consumer Confidence
34. Richmond Fed
35. Personal Consumption
36. ISM Milwaukee
37. Chicago PMI
38. Pending Home Sales
39. Personal Income
40. Personal Spending
41. Construction Spending
42. ISM Manufacturing

BEATS

1. Markit Services PMI
2. Nonfarm Payrolls
3. JOLTS
4. Case-Shiller Home Price
5. Q4 GDP Revision (but notably lower)
6. Markit Manufacturing PMI

OK, so the US economy is going backwards at a 7:1 ratio of Misses to Beats, but stocks, since the beginning of February, have been roaring (today excluded).

The point is that stocks are ignoring the somber truth that the US economy is running on fumes and Wall Street is running on pretty much less than nothing (kinda like the motto for the NY Lottery - a dollar and a dream).

There are collapsing scenarios unfolding everywhere, from the disgusting behavior of executives at Lumber Liquidators (LL), who were exposed on 60 Minutes this past Sunday. There, the CEO says he didn't now that the below-cost flooring coming out of China didn't meet California (and much of the rest of the US states) standards for toxic emissions, especially formaldehyde. Sad fact is that after being punched down on Monday, the stock rallied more than 5% on Tuesday, but, worry not, it was at nearly 70 about a week ago, and was punished well before the TV coverage, down to around 40 now. Somebody knew something and obviously was front-running. Nothing new there, move along...

The award for most disgusting public display over the past few days is split between three distinct candidates:

• 1. The US congress, for cheering on the speech of Israeli Prime Minister, Benjamin Netanyahu, in a joint meeting.
• 2. The utter stupidity of millions on Twitter over whether some dress was white and gold or blue and black. Hasn't anyone ever heard of distortion?
• 3. The cops who shot the homeless guy in Los Angeles.

Like I said at the outset, not much has changed over the past year (or five years, for that matter). We're still kicking the can down the road, entrapped in a senseless bout of normalcy bias which is allowing the elite segment of society (Wall Street and DC, mostly) to trample on our freedoms and steal every last cent from the middle and lower classes, along with every shred of dignity.

Yep, like I said when I stopped writing daily diatribes a year ago, nothing is going to change until the Fed stops pumping money into the system. Well, they actually did stop, in the third quarter of last year, but the QE baton was quickly raised by Japan, and will shortly be taken up by the ECB, so, don't expect much to change any time soon. We've got at least a year and a half before the federal funds rate (you know, that one that seems to be permanently stuck between 0 and 0.25%, the rate at which the TBTF banks borrow) gets anywhere close to one percent, and even that could cause a panic in stocks.

In the meantime, the Baby Boomers are trying to figure out how to retire without any interest income, and that's an increasingly difficult trick, since the only reasonable yield one can get is at the far end of the curve, in 30-year bonds, currently hovering around 2.75%. $100,000 invested at that rate returns a whopping $2750 a year, so, you have to put up (and tie up) a million bucks just to live barely above the poverty level. Not much fun when you're 70 years old.

Deflation... it's what's for dinner (after the cat food).

Dow: 18,203.37, -85.26 (-0.47%)
S&P 500: 2,107.78, -9.61 (-0.45%)
Nasdaq 4,979.90, -28.20 (-0.56%)

More tomorrow...

Phantom GDP, Deflationary QE and Releasing the Consumer Kraken

Money Daily stopped being a daily post blog in March, 2014. While the name remains the same, the posts are now on an intermittent basis, as conditions warrant, though it is advised to read the archives (from 2006-2014) regularly, even daily, for insights and historical perspective.

OK, this is a little mind exercise for the new year.

Capital consists of money, labor, and resources (land, materials, machinery, buildings, infrastructure).

The Fed has control of just one of these three essential tenets of economy: money.

They make it out of nothing (to be more succinct, they create money from government debt - the Mandrake Mechanism, well-explained by G. Edward Griffin, in his expose of the Federal Reserve, The Creature from Jekyll Island - there are PDFs of this book available, or, buy it from Amazon or eBay, just go look.)

GDP growth is a canard, which the Fed and government can - and do - conspire to adjust according to their whims, wants, needs.

Unless somebody's building something that wasn't there beforehand, or there are more people building things (population growth, which is, after all, potential capital) or being more productive (technology), the only way to increase GDP is through money creation, i.e., inflation, which, in its most strict definition is an increase in the money supply, and, that is the essence of QE.

So, why hasn't there been inflation? In addition to the various reasons offered in this article, allow these meager observations:

• Money is moved off-shore
• Money is wasted
• Money goes into non-productive assets (stocks, especially stock buybacks, the most unproductive of all, actually deflationary)
• but, fewer people are working (unemployment)
• the amount of land in the US (and the world) is fixed
• a building burns, becomes dilapidated (impaired asset) or is vacant (lots of homes like that in the US thanks to the banks), becomes less-valued, non-productive, heading towards zero value, and that is deflation on a grand scale.

So, the people who want programs to improve the infrastructure in the US (roads, bridges, power grid, etc.) are correct in assuming that such programs would improve the economy. More jobs, more income, more velocity of money, and, most importantly, better, more efficient, more productive infrastructure, which leads to better manufacturing, agriculture, i.e., a virtuous cycle.

What we have today is a nearly closed-loop of money creation and destruction. Government issues bonds, Fed (or one of their many conduits, or other central banks) buys them with newly-created-out-of-thin-air money. That money goes to banks, which buy stocks or hoard as reserves, adding nothing to the general economy. GDP stagnates. Any little that may trickle out as loans to businesses or mortgages, is actually productive, but the banks, being the arbiters of money and controllers of credit, don't trust the public, and, additionally, have a hard time making a profit at 2, 3, or 4%. The problem for the Fed is the massive oversupply in everything from existing homes to corn to cheap junk from China, to now, oil and gas.

You want inflation, raise interest rates, because the pent-up demand will be filled by banks which can make money at 5, 6, or 7%.

My conclusion is that either the Fed doesn't understand this process (unlikely), or they actually want stagnation and/or disinflation or deflation (very likely). Remember, the dollar was getting weak up until 2009 and beyond, but look what's happened, the dollar is strengthening, and people want more of those dollars (the 10-year yield at 2.15% is magnitudes better than the German bund or the Bank of Japan's 10-year yield.). The Fed, as usual, has been lying through their teeth about everything from the virtues of quantitative easing (QE, i.e., free money) to the strength of the global economy (fact: it's weak.). There's a long history of the Fed saying one thing and knowing that the complete opposite - or nearly so - is actually true. That's how they get everyone to go along with their schemes of booms, busts, inflations, depressions, recessions... they and their crony, member banks, front-running everything.

The past few years have been good years for investing (ask anyone with a 401k or stocks), but it's not going to last. Maybe a few more years, because, once the banks start lending again in earnest, the inflation spigot will be wide open and the Fed knows this.

The Fed knows exactly what it is doing, and they're doing it slowly, as to avoid shocks. Anybody who hasn't been able to prosper (as in paying down debt, cutting expenditures, improving existing infrastructure - remodel your house, add solar panels, buy a better vehicle, increase acreage of productive land, learn new skills or improve existing ones) has missed the boat.

Point in fact: In 2005,6,7,8, I could not get a credit card with less than 22% interest. In 2009, I got a 4% home equity line of credit for roughly 50% of the value of my property (owned free and clear) from a local credit union (thank God for them). That one valued asset (my home) has, along with the meager line of credit, in five years time, allowed me to pay off all my existing credit card debt, buy inventory for my business, buy other assets (mostly silver) then get deals from various banks (yes, the very ones which caused the near-catastrophe of 2008), which now has me in this most unusual predicament: I have 0% credit - some of it guaranteed through June, 2016 - in an amount which far exceeds my original 4% home equity line, much of which I have already paid back.

My trick, if I can pull it off, will be to use the 0% credit as ready cash as part of a down payment on a better property for my home and business. With interest rates so low, it's almost foolish NOT to make this move.

The only risk, as far as I can tell, is if my income nosedives (not likely) and I'm unable to service my debt. In that case, I pay the mortgage (and taxes, the government always get theirs, don't they?) first, and let the banks figure out what to do with the defaulted CC debt. Long story short, I could then file for bankruptcy protection, and, even though the CC debt would not be fully discharged, I could get restructured and/or some forebearance/forgiveness and, keep my home, which, in the long run, is all that matters, the REAL, productive, improvable capital.

Seriously, I've been stacking silver, hoarding cash and business inventory for four years, and it's about time to unleash the Kraken!

Banksters beware! You've enabled your own worst nightmare. More adventures in high finance are sure to follow.

Today's advice: Pay attention and stay liquid. Interest rates keep going lower, meaning there's still another two years of embraceable low interest rates to be had.

Why the Hyper-Inflationists Have Been Wrong, Are Still Wrong and Will Continue to be Wrong

The hyperinflation argument is completely worn out. The proponents of such nonsense have been pitching it for five years now and the Fed continues to print, print, print.

Why?

The deflation which began in earnest in 2008 is still staring them in the face.

Look at it this way: When the Fed prints, it creates debt. That's their job and they're working overtime. On the other side of the equation are the countless numbers of homes (millions of them) that went into foreclosure or are on their way to forclosure and all the mortgages that are still being paid down. That last bunch constitutes the bulk, and that is destroying debt.

The Fed is promoting bubbles in stocks and college loans, car loans and any other loans they can find because many, many consumers and businesses are paying down debt and not incurring any more.

If the Fed keeps its foot to the pedal at $75B or $100B or more per month, it's because there's at least that much debt being eradicated at the same time, so they're trying to keep up.

Remember, in our fiat debt-based system, if there is no debt, there is no money and that's why the Fed keeps printing. And if interest rates rise too much, that's game over because then nobody could afford debt and most debtors would, facing higher rates they cannot pay, default.

The Fed has itself backed nicely into a corner. They need to keep the US dollar strong, but at the same time, they'd like inflation at 2-3%, and GDP growth at 3-4%, which they consider equilibrium.

They've managed to keep the dollar stable, even higher lately, but that plays against their inflation and growth desires.

They can't have it all and deflation is winning and will keep winning as long as people have choices and there's no wage increases. If a loaf of bread doubles in price, people will eat half a loaf. Yep, some will starve, which lowers consumption, and thus, lowers again, the price of a loaf of bread.

The Fed is totally screwed with ZIRP and QE, which, the evidence is beginning to prove out, cannot exist at the same time, lest you get a result of zero growth (which is probably what we've really had the past five years in sum when you take out all of the BS hedonics and other magnificent calculations).

They're completely screwed. If I could borrow at 0.25%, like the banks, I'd do it all day long and pay it back just as quickly. So, what does the Fed gain from that? They created cheap money, and just as fast as it was borrowed, it was repaid.

Businesses are also self-funding, with stock buybacks and their own debt issuance, which, if you've read the Creature from Jekyll Island, the bankers hate, because corporate stock and debt is like having your own currency, and the banks make nothing off that.

The deflation will continue as long as interest rates remain low, like a 10-year under 3.5%, which is likely to remain that way for at least another year or two or three.

So, enjoy the deflation. Buy land, ammo, guns, vehicles, any reliable alternative energy source (wind, solar, deep cycle batteries, etc.), non-GMO seeds and opt out of the debt system. As long as the deflationary regime remains intact, you'll be fine. When it ends, you'll be prepared to survive without money.

---

TODAY'S MARKETS

Stocks did a serious about-face on Tuesday, based upon... hmmm, maybe the bogus retail sales data for December, which showed modest increases only by revising November sales down.

That's how it works in the present regime of making it up as the economy rolls along. While most retailers reported dismal holiday sales, we're supposed to believe the government's claim that everything was rosy in December. When the store, and later, entire malls, begin closing down, then what will they say? Go ahead, guess. They'll probably blame the weathre or threat of terrorist attacks or some other nonsense.

Also boosting stocks was, maybe, fourth quarter results from JP Morgan (JPM) and Wells-Fargo (WFC), two of the nation's mega-banks, which are supposedly flush with cash and making money hand over fist, even though their filings are so opaque and farcical, nobody really believes them at all, except those brokers and traders who make money by selling stocks to retail investors.

The banks aren't as unhealthy as they were in 2008, but, by no means are they the cash-cows we're led to believe.

Deflation, over-supply and an aging demographic will continue to erode the economy. And that ACA (Obamacare) isn't helping, either.

DOW 16,373.86, +115.92 (+0.71%)
NASDAQ 4,183.02, +69.71 (+1.69%)
S&P 1,838.88, +19.68 (+1.08%)
10-Yr Note 98.95, -0.15 (-0.15%) Yield: 2.87%
NASDAQ Volume 1.88 Bil
NYSE Volume 3.33 Bil
Combined NYSE & NASDAQ Advance - Decline: 4132-1568
Combined NYSE & NASDAQ New highs - New lows: 255-35
WTI crude oil: 92.59, +0.79
Gold: 1,245.40, -5.70
Silver: 20.28, 0.103
Corn: 431.50, -3.00

Merry Christmas from Struggling Retail Sector, Darlene Love Baby Please Come Home

Today, somebody suggested a few ways to "run a few big retailers into bankruptcy."

Don't worry, they don't need any help. They are doing a smash-up job of it all by themselves. JCP will be the first to go; I have a choice parking spot already picked out for the "EVERYTHING MUST GO, CLOSING OUR DOORS, ALL SALES FINAL" going out of business sale at JC Pennys at the local mall (I need some new pants). But, just to be safe, don't bet the house on JCP taking down any banks. Goldman Sucks already has the real estate under many JCP stores locked and loaded.

Actually, Blockbuster already started the trend. There's a huge yellow sign on the Blockbuster near me. Can't miss it. Too bad nobody wants DVDs at anything over $2-4. There are some ebay sellers ready to swoop down and purchase all their remaining inventory for actual pennies on the dollar. 2014 will see numerous large bankruptcies, led by retailers, IMO.

Now, when these retailers start dropping like flies, the media will crow that it's because of the success of the internet (Obamacare web site not included). Net result is moar deflation... err, I mean, disinflation.

And Old Yellen will, as quietly as possible, probably by surreptitious means, increase QE to well over $100k per month, maybe buying up something like securitized student loans gone bad (video out soon).

The government will no longer want the shirts off your backs, because the shirts - sewn in Southeast Asian sweatshops by brown and yellow people who do not matter - aren't worth anything.

Usually, I'm not big on making predictions, as they're difficult to get right and most people will maim you more on your errors, rather than praise your correct calls, but I do believe bankruptcies are in order for 2014 in the retail sector, at least, and spreading to other consumer discretionary companies, maybe a couple of REITs or large mall owners (could be one and the same). More layoffs, more welfare, more SNAP, more phony government statistics, more lame excuses, more liberal apologists, and, as usual, the banks will profiteer like never before.

America has this coming, because it has ignored, squandered and/or pillaged the true wealth of the country - its land, its labor, its accumulated wealth and its populace - to save its fraudulent banking and political system.

As for the markets, the annual year-end ramping continued in Tuesday's short session.

In keeping with the spirit of the season, here's a treat from the David Letterman Show: Darlene Love singing, "Christmas, Baby Please Come Home." If this doesn't bring a tear to your eye, well, then you're either the Grinch or another old Scrooge.



Merry Christmas, and may we all survive the coming New Year!

-- Fearless Rick

DOW 16,357.55, +62.94 (+0.39%)
NASDAQ 4,155.42, +6.51 (+0.16%)
S&P 1,833.32, +5.33 (+0.29%)
10-Yr Note 98.03, -0.11 (-0.11%) Yield: 2.98%
NASDAQ Volume 763.66 Mil
NYSE Volume 1.30 Bil
Combined NYSE & NASDAQ Advance - Decline: 3550-2028
Combined NYSE & NASDAQ New highs - New lows: 587-41
WTI crude oil: 99.15, +0.24
Gold: 1,203.60, +6.60
Silver: 19.48, +0.071
Corn: 434.75, +0.50

Stocks Fall After October Fed Minutes Released; Deflation Commences

Just in case anyone forgot that the only thing that matters in this market is Federal Reserve policy, the message was forcefully driven home precisely at 2:00 pm ET, when the minutes from the last FOMC meeting were released.

Within those arcane discussions of all things monetary were warnings from more than a few members that tapering bond purchases by the Fed might begin sooner rather than later. Accepted thinking had been that the Fed would not taper until March, though after today, analysts are suggesting that December - just two weeks away - might mark the beginning of the end of the Fed's bond-buying spree.

While the cutback in bond purchases monthly may only be a decrease of $10 to $15 billion of the current $85 billion, Wall Street money-grubbers were spooked as usual at the suggestion that money would be anything other than nearly free to borrow.

Today's action in stocks shows just how fragile the 4 1/2-year-plus market rally is and how quickly paper profits may vanish if the Fed doesn't keep the money-printing machine going pedal to the metal.

It's a ridiculous market made up of ridiculous valuations and propositions, that, without Herculean-like support from the central bank, could fall apart in days or weeks.

The Fed will no doubt taper, the only remaining questions are when and by how much. Whatever the decision shall be, markets will not like it one bit, and the general economy may suffer even more than it already has as Wall Street will no doubt throw a massive hissy fit.

When it's all done with, when the Fed stops buying bonds altogether (when will that be, 2065?), either stocks or the US dollar (and maybe both) will be worth a lot less than they are today.

Lunatic policies by the Fed will be followed in time by equally hilarious conclusions to those misguided policies. The results will be a catastrophe financial markets have never seen before.

What is either amusing or distressing is the reaction in precious metal markets, which fell in concert with stocks and bonds. If the markets are correct, Fed tapering will be a deflationary event with magnificent outcomes ahead.

In the long term, the Fed cannot taper back on bond purchases because they have succeeded in crowding out the few remaining participants over the past four years. Deflations and defaults will be the most likely results, though emerging markets will feel the pain much sooner and to a much greater degree than established economies, though no nation will be spared the death spiral of deflation.

Dow 15,900.82, -66.21 (0.41%)
Nasdaq 3,921.27, -10.28 (0.26%)
S&P 500 1,781.37, -6.50 (0.36%)
10-Yr Bond 2.79%, +0.08
NYSE Volume 3,094,246,250
Nasdaq Volume 1,686,541,875
Combined NYSE & NASDAQ Advance - Decline: 2180-3428
Combined NYSE & NASDAQ New highs - New lows: 162-98
WTI crude oil: 93.33, -0.01
Gold: 1,258.00, -15.50
Silver: 20.06, 0.276
Corn: 425.25, -1.00

UPDATE: Stocks Near Record Highs as GDP Goes Negative

Editor's Note: We're back up and running with a new computer, after ten days of muddling through with three old Macs.

Wednesday was a pivotal day for US stocks as the government reluctantly reported that GDP shrank in the fourth quarter (remember, hurricane Sandy will be blamed for disappointing holiday retail sales) as defense spending fell by the largest amount in 40 years and inventory growth lagged.

The talking heads across the CNBC and Bloomberg networks blamed the "unexpected" decline of 0.1% mostly on the defense spending, a result of congress' inaction on the budget process and potential for sequester cuts to kick in shortly.

Federal Reserve officials, completing a two-day meeting, noted the economy had "paused" due to weather-related disruptions and other "transitory factors." Nothing like a Fed Open Market Committee that continues to furiously pump dollars into the coffers of the banks and keep interest rates artificially low calling climate change "disruptions" and employing the "transitory" verbiage to mask an incredibly weak nominal economy.

What is not so well hidden in the report is the lack of replenishment of inventories. Through the holiday season, retailers were adamant about reducing overhead, slashing prices and keeping costs to bare-bones levels, opting to wait until later to order new goods. The lack of confidence going forward exacerbates the slow "recovery" further, putting pressure on manufacturers (those few remaining on US shores) to cut prices and make concessions on delivery and payment dates and rates.

The setup is deflationary at worst, erratic at best, but continues to point up issues developing from the federal government's plan to kick the fiscal can down the road a bit further instead of tackling the nation's debt and deficit problems head-on.

As for stocks, they did an about-face after the Fed's afternoon announcement that they would change absolutely nothing, reiterating their intent to purchase $85 billion a month in MBS and Treasury issuance, the inflationary frontage against the winds of stagnation. The Fed also will keep rates artificially low, boosting home sales, but doing little for bank profits. Their attack on the monetary system continues to hamper business investment while inflating real estate through low interest rates. With no exit strategy in place, the only place the Federal Reserve and the government are kicking that can of deflation is directly into a brick wall of deflation and recession. The negative GDP print for the fourth quarter of 2012 is exactly what their policies will produce down the road, though the decline will be vastly greater.

It's important to note that with one quarter of negative GDP already on the books (though revisions will likely change that to a positive integer), another consecutive quarter in the red is the textbook definition of a recession. Regardless of whether the downturn is isolated in one or two areas, the overall picture remains clouded, manipulated and quietly desperate.

There's no good way out of a financial crisis, such as that which occurred in 2008, but the Keynesians in Washington have kept the plates spinning, frantically turning the sticks of quantitative easing and heavy-handed deficit spending. These policies have an end at some point, the question being whether the end will come by their own hands or be forced by the merciless invisible one of Mr. Market.

Optimists will point out - correctly so - that even though the economy is staggering along, it is still vibrant and productive. However, to think that corporate profits are a one-way street to the heavens is a folly on par with thinking the sub-prime housing bubble would never burst.

There's going to be a short-term pullback in both housing and stocks, both having been bid up too high, too fast, on artificial stimulus, a condition approaching that of 2005-07. While the near term cannot be characterized as horrifying, it is most certainly unstable and unsure, and profits will be taken at nose-bleed levels. The chances of a short duration correction are high, those of a cyclical turn to a bear market less likely, though the current bull is now entering its 48th month, worth noting that the turn in 2007, which led directly to a crash in the fall of 2008, was on the heels of a 53-week-long bull run.

Out in the fantasy land known as economic and stock market predictions, the sounds are of quiet groaning accompanied by squeamish forecasts of 2% growth in GDP for 2013 and an S&P ramping toward 1550. While the general public and regional economies twist in the wind under the thumb of higher taxes and tighter regulations, making business development a non-starter, Wall Street will continue to binge on the Fed's free money, the punch bowl that Chairman Bernanke will not take away, and the government debt will continue to be monetized by that same Fed.

Both of these conditions cannot continue indefinitely, but those in control continue to deny the possibility that anyone will feel any economic pain, no matter how slight.

Thus, it would not be at all surprising to see stocks continue to rise in the face of stagnant or deteriorating conditions in the real economy. Either the stock market wakes up to reality or the current bull trend will wind up being the longest in recorded history, all built on an inflationary bubble of the Fed's creation.

It is false to believe that these conditions can continue indefinitely. There is a price to be paid for every manipulation and falsehood presented to the markets and the fallacy of current policies suggests that the price will be enormous.