Bernanke Announces The Final Round of QE3: This Time, It's Unlimited

The Fed said:

• it will buy $40 billion worth of MBS per month, with no end in sight. 
• they will hold interest rate at zero until mid-2015 — "a considerable time after the economic recovery strengthens"
• it will continue operation twist
• the US has enjoyed broad price stability since mid-1990s

My points:

• The Dow is at it's all time high, the interest rates and treasuries at their all time lows, mortgage rates at their all time lows, most commodities not too far from their highs, and according to official figures, employment has dropped significantly — obviously; this is a lie. Amazingly, Bernanke didn't want to prove the market's expectations wrong, and provided exactly what the consensus wanted.
• The Fed has been forecasting an economic recovery for years, and nothing has happened, yet, they will keep on doing the same thing; over and over again. They again forecast a strong economic recovery to come in the next few months, while it's obvious that the reality is economic contraction and the Greater Depression...
• My personal opinion about Bernanke is that he's the most inept Fed chairman ever, and most probably one of the worst economic forecaster ever. I don't think his brain is wired for the real world, and even though I have the lowest esteem possible for him, Bernanke managed to surprise me by is foolishness and prove me wrong on my forecast — Mea Culpa. I know will consider him an economic and monetary terrorist. 
• Will printing money to buy MBS do anything to help unemployment? Only a madman will find a direct causation between the two, specially since when mortgage rates are at their all time lows.
• Will QE provide a boost to the markets? I don't think it will beyond the first few days after the announcement and the resulting euphoria. Why?
• Fundamentally, the markets are a discounting mechanism. So when the news comes in about the purchase of mortgage for $40 billion a month, this gets almost immediately priced into the market. The market only move by about 2% while integrating this discounting of the QE3.
• The previous QE1 and QE2 seemed to work on the surface because they were announced when the markets had experienced significant declines and sentiment was very low. Currently, we're at the opposite: markets are at euphoria levels and irrational exuberance and confidence at historically high levels. When this happens; there's room for only one way: down.
• The probability that Bernanke has signed his and Obama's political suicide is very high. Hopefully, Obama won't be elected and another inept President will take over and do a favour to the world by removing this economic terrorist from his position.

I'll need some time to rethink and see if my deflationary forecast might be postponed due to this "indefinite" printing of money... 

 Here's the Bloomberg report:

(Bloomberg) 2012-09-13 — The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.

“If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate,” the Federal Open Market Committee said today in a statement at the end of a two-day meeting in Washington.

The FOMC said it would probably hold the federal funds rate near zero “at least through mid-2015.” Since January, the Fed had said the rate was likely to stay low at least through late 2014. The Fed said “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens."

[...] The decision provoked a renewed backlash from Republicans, including Senator Bob Corker of Tennessee, who said Bernanke’s policies damage the Fed’s credibility while doing little to spur the economy.

[...] Growth will improve to as much as 3 percent next year and as much as 3.8 percent in 2014, up from upper estimates of 2.8 percent and 3.5 percent in their previous forecasts. The so- called central tendency forecasts exclude the three highest and three lowest of 19 estimates.

While the U.S. has “enjoyed broad price stability” since the mid-1990s, the employment situation remains a “grave concern,” Bernanke said at a press conference after the statement. “The weak job market should concern every American.” 

The Fed said it will continue its program to swap $667 billion of short-term debt with longer-term securities to lengthen the average maturity of its holdings, an action dubbed Operation Twist. The central bank will also continue reinvesting its portfolio of maturing housing debt into agency mortgage- backed securities.

[...] Republican presidential candidate Mitt Romney has said he wouldn’t reappoint Bernanke when his term ends in January 2014. Glenn Hubbard, the Columbia University Business School dean and Romney adviser, has said additional bond purchases by the Fed would do little to shore up the economy.

Barack "Delano" Obama Announces Meat Purchase to Help Farmers Through Drought

In a tragic move showing how ignorant and incompetent President Barack "Delano" Obama is — and also, in a move to try to buy votes for the coming election, of course — repeating the policies of Franklin Delano Roosevelt which aggravated dramatically the 1929 recession and turned into a full fledge depression.

Well, in the Greater Depression, everything will be at a grander scale, and the depression will be that much worse and longer...

Here's the relevant quote:

President Barack Obama, campaigning in Iowa today, announced $170 million in government meat purchases to help farmers struck by drought, helping to send hog prices to a one-week high. 

The purchase of as much as $100 million of pork, $50 million of chicken, and $10 million each of lamb and catfish come on top of $30 million in assistance announced last week. Farmers and ranchers are struggling with the worst combination of heat and dryness since the 1950s, the administration said. 

Obama said he also directed the Defense Department to speed up purchases and hold the meat for later use. The buying will help farmers, and the government will get a better price on products than if they were bought later, he said. 

“We’ll freeze it for later -- but we’ve got a lot of freezers,” Obama told supporters in Council Bluffs as he kicked off a three-day visit to Iowa, a swing state that is also the country’s leading producer of pork, soybeans, corn and ethanol. “That will help ranchers, you know, who are going through tough times right now.”
[...]
Later, as he visited a farm in Missouri Valley, Iowa, Obama called for Congress to pass a five-year agriculture policy bill that the White House said would “provide short-term relief and long-term certainty” to farmers and ranchers. 

“The best way to help these states is for Congress to act,” Obama said. 

A livestock-assistance program in the current farm bill expired last year. The U.S. Senate and the House Agriculture Committee have approved bills to replace the current law which contain livestock relief provisions. House Republican leaders have not set a vote on their legislation. The House on Aug. 2 approved a $383 million stopgap measure to reinstate the livestock aid, while the Senate took no action. The current farm bill was passed in 2008 and expires in September.

I mean what IQ must you have to say something like "We'll freeze it for later -- we've got a lot of freezers"? Now the US Government is in the business of buying and selling meat, and freezing and transporting it as well.

Well, let me tell you something, President. Guess what? The US population have probably more freezers than your government, and they could buy and freeze the meat themselves — if only you would let them! So, why are you interfering again?

The best thing Obama and the Congress can do to beat the draught is to perform a rain dance, and this way, they won't be destroying the US economy and balance sheet any further. Come on Obama, show us what you got!

Nazism on The Rise In Hungary — Hungary Seeking Bailout

Many countries in Europe and elsewhere are seeing extremism on the rise, and this is one trend we've been forecasting on this blog for quite some time: the Greater Depression has the potential to bring extremists back in power, and most probably wars will be on the only way forward, unfortunately.

Here's a Bloomberg report about Hungary which summarizes nicely my points of view:

(Bloomberg) June 14, 2012 — Hungary has a new hero. Towns and villages are putting up statues and naming streets after Miklos Horthy, a former head of state who led the country into World War II on Adolf Hitler’s side. 

The base for a Horthy statue is already standing in Csokako, population 1,383, a village dotted with small vineyards an hour’s drive west of Budapest. The sculpture will be unveiled on June 16 in a park below the ruins of a 13th-century fort. 

From such hamlets to the halls of the neo-Gothic Parliament in Budapest, where the nationalist Jobbik is the second-largest opposition party, radicalism and its symbols are spreading as Hungary heads into its second recession in four years. Prime Minister Viktor Orban is seeking to obtain an international bailout after Hungary’s debt was downgraded to junk last year. 

“Where there are economic problems, there are tensions between peoples and groups,” said Gabor Bognar, 47, Csokako’s deputy mayor. “If we don’t allow people to let their steam out by erecting a statue, then they’re not going to stop there.” 

Nationalists are making gains across Europe as leaders struggle to avert prolonged economic turmoil. What’s different in Hungary is that Orban is accused by Jewish groups and political analysts of including parts of the radical agenda in his own policies, a charge the government denies. Orban, 49, has condemned a flurry of anti-Semitic attacks in the past month, which the Jewish group Mazsihisz has called a “tide of hatred inundating Hungary.”

The government expanded the reading curriculum for schools last month to include books by Jozsef Nyiro, a member of Parliament during World War II. He also was an ally of Ferenc Szalasi, a former head of the fascist Arrow Cross party who was executed for war crimes. More than 500,000 Hungarians, mostly Jews, were killed in the Holocaust, according to the Budapest- based Holocaust Memorial Center. 

[...] “That the current government is openly associating itself with the ideology of the regime that collaborated with the fascists is unique in Europe,” Attila Mesterhazy, president of the Socialist Party, the largest opposition group, said in a June 2 statement. “That it’s trying to force this kind of thinking on the nation is inexcusable.” 

[...] “Fidesz senses that Jobbik is a serious rival and is trying to take the wind out of its sails by taking over parts of its agenda,” Juhasz said. “The problem is all this is doing is strengthening the extremist ideology on which Jobbik thrives.” 

[...] Hungary restricted university access for Jews in 1920 during Horthy’s first year in power, making it the first country in Europe to pass an anti-Semitic law after World War I, according to the Holocaust center. Horthy resigned 24 years later, in October 1944, when the country was under Nazi occupation. About 437,000 Hungarians had been sent to death camps between May and July of that year.
[...] “There is confusion in people’s minds and there’s also hate, and our democracy doesn’t seem to be able to handle this,” Lanczi said. “It’s a dilemma: Can we tolerate intolerance?”

With Already 94% Decline from Its Peak, Is The Greek Equities Index, the Largest Bear Market in History?

During the Great Depression, the Dow declined 89% from the peak to finally find the bottom.

The GRE ETF hit today 0.875€/share, which means that it is now somewhere about 94% down from the peak. At this price, I'm a buyer. Unfortunately, I wasn't in front of my screen today, so I missed on the opportunity — for now, as this market seems to be bottomless!

Is this the largest bear market in history?
Are you aware of any worse peak to trough performance for a flagship equity index?
With the Greater Depression unfolding before our eyes, are other equity indices on the same path, with Greece just taking the leading?

GRE Greece ETF Update and Charting the PIIGS Main Equity Indices [UPDATE]

The GRE Greece ETF is now trading at below 1.00€ (low of 0.985€) meaning that from the peak of about 14.00€, the drop has been more than 90%. One could wonder how much lower it can go.

Here's the details about the ETF, as captured from the French prospectus of the fund (click for larger image):

Conclusion: there's still room for further drop, as the banking sector still represents 33% of the index. 

[Update: initiated a small position on the ETF, bought at 0.985€ per share]

My friend SS has been kind enough to provide me on demand many charts and market data, and here's what he sent me on request yesternight: the charts of the main index of each of the PIIGS countries:

Greece: Top at 5346, currently trading at 553. This is a drop of 90%from peak. And it's a stock index of the 20 largest Greek capitalizations. 

Portugal: Top at 13729, currently trading at 4870. This is a drop of 65%. Same comment, this is the an index made of the largest companies in Portugal and my guess is that we're far from the bottom.

Ireland: Top at 10,000 bottom at 2,000 (drop of 80%) currently trading at 3,000. This is still a drop of 70% and my guess is that we're far from the bottom. 

Spain: Top at 16,000 currently trading at 6,500. This is a drop of 65%. My guess is that we're far from the bottom

Italy: Top of 44,000 currently trading at 13,000. This is a drop of 70%. And my guess is that we're far from the bottom

WWF Jumps in the Bandwagon of Commodities Über-Bulls

Markets have peaked, commodities are way down, and it's not anything to do with so-called fundamentals. It's all had to do with speculation, and always will have.

Now, since all forecaster only seem to be able to forecast linear or exponential growth extrapolation, and never seem to realize that everything that rise can also fall and collapse, many are set for quite a painful moment.

Today, WWF jumps in the bandwagon of the exponential growth extrapolation and state that Another Earth Needed to Meet Humans’ Demand for Resources

(Bloomberg) May 14, 2012 — Humans are using resources at such a pace they need another world to meet demand for land to grow crops and forests and raise animals, WWF International said. 

People required 18.2 billion hectares (45 billion acres) of land by 2008, with 12 billion productive hectares available, WWF said today in its biennial Living Planet report. About 55 percent of land needed was for forest to absorb carbon dioxide emissions. The Earth takes one and a half years to regenerate natural resources used annually by human inhabitants, WWF said.
“We are living as if we have an extra planet at our disposal,” WWF International Director General Jim Leape said in the report. “We are using 50 percent more resources than the Earth can provide, and unless we change course that number will grow very fast. By 2030, even two planets will not be enough.”

That's the main take away: there's no two planets in 2030, and there's no "unless": we will see a dramatic change in the course of the next few years, and the global Greater Depression will take its toll on everything you can imagine: consumption will fall, governments will fall — both have already started — and population will decrease as well — this has already started as well, and Japan is yet again the leader in this area, but China, Europe and even the US (excluding immigration) already have aging and declining populations.

The report, which urges humanity to cut waste and use food, energy and water more sustainably, is published before a United Nations conference in Rio de Janeiro next month where leaders from around the world will debate how governments can eradicate poverty while also halting the degradation of the environment. 

The average person required 2.7 so-called global hectares, or biologically productive hectares, to produce the resources they consumed in 2008, the most recent data available, according to the report. That compares with the Earth’s so-called bio- capacity of 1.8 hectares per person, it said. The UN has said the world’s human population passed 7 billion in October.

Japan Update: GDP Sinks, Record Trade Deficit, Fukushima Temperature Surpasses 752 Degrees, Pension Funds Nightmare Scenario

23 years into the depression following the Government and Central Bank sponsored the real estate and credit bubble in Japan, and with trillions of dollars wasted on Keynesian stimulus, there's still no end in sight, and things are actually getting worse and worse — depending on what the government will do, the end game is either going to be: massive multi-trillion default on the JGBs or hyper-inflation. Nice huh?

Here are main items from the past week or two:

Feb. 13 (Bloomberg) -- Japan’s economy shrank an annualized 2.3 percent in the fourth quarter, more than economists estimated, as slumping exports undermine a recovery from last year’s record earthquake. 

The contraction compared with the median forecast for a 1.3 percent decline in a Bloomberg News survey of 26 economists. Growth was a revised 7 percent in the previous quarter, the Cabinet Office said today in Tokyo.

Another report, another opportunity for the economists — usually referred to as "the useless bunch of highly overpaid ignorants" — to prove how useless they are and how little they understand about the economy.

Feb. 19 (Bloomberg) -- Japan posted a record trade deficit in January as the yen’s strength and weaker global demand eroded manufacturers’ profits and slowed the nation’s recovery from last year’s earthquake and tsunami. 

The gap widened to 1.48 trillion yen ($19 billion) and shipments dropped 9.3 percent from a year earlier as energy imports surged, a Ministry of Finance reported in Tokyo today.

[...] In Japan, the country’s trade deficit of 2.49 trillion yen in 2011 was the second largest since World War II. That also contributed to the nation’s current-account surplus sliding to a 15-year low in 2011.
[...]
“Clearly Japanese manufacturers are struggling,” Hiroshi Shiraishi, an economist at BNP Paribas SA in Tokyo, said before the report. “We aren’t really expecting a major pick-up in external demand because the U.S. and Europe are undergoing balance sheet adjustments.”
[...]
Japan’s exports to the EU, its third-largest export region, fell 39 percent from 2007 to last year, according to Ministry of Finance figures.
[...] 

With global demand for imports out of Japan dropping, and energy imports into Japan surging, I guess that the BoJ must be very clever to try to weaken the Yen, right?

 And in addition to the economic depression, the natural and human catastrophes are pilling in. Here's an update on Fukushima — an made in Japan, man made global disaster:

Feb. 13 (Bloomberg) -- Tokyo Electric Power Co. said the temperature in one of the damaged reactors at its Fukushima nuclear station rose to levels above safety limits even as it injected increased amounts of cooling water. 

One of three thermometers indicated the temperature at the bottom of the No. 2 reactor pressure vessel rose to 93.7 degrees Celsius (200.7 Fahrenheit) today, higher than the 80 degrees limit, Ai Tanaka, a spokeswoman for the utility known as Tepco, said by phone today. 

 But Zero Hedge claims:

But major Japanese news sources Yomiuri and Jiji note that the thermometer in reactor 2 has since climbed to 272.8 degrees Celsius, and then hit the upper limit of the thermometer at 400 degrees Celsius (752 degrees Fahrenheit).

Finally, pension funds are struggling in Japan with rates at record 0.5% for the past 2 decades or so, and equities not performing globally. Fraud and lies will not help solve the issues.

Feb. 23 (Bloomberg) -- Japan’s financial regulator ordered AIJ Investment Advisors Co. to halt its business after finding the asset manager’s clients funds of about 183.2 billion yen ($2.3 billion) may be “adversely affected” and started a probe into the 263 asset managers operating in the nation. 

“We’ve ordered AIJ to halt business for a month in order to safeguard investors, as it appears client assets have been adversely affected,” Financial Services Minister Shozaburo Jimi told reporters at a briefing in Tokyo. The regulator is still investigating the firm and can’t comment on losses. The suspension lasts from today until March 23, the regulator said. 

AIJ, a Tokyo-based asset-management firm, may have lost most of the 200 billion yen ($2.5 billion) it manages for companies’ pension plans, the Nikkei newspaper said today, citing unidentified securities investigators. Regulators have been investigating AIJ since the end of January and are unable to explain where some money went, the Nikkei reported. 

Japanese pension plans have been suffering from two decades of slumping markets and an aging population. Alternative investments were becoming one of the options for the retirement funds, which have traditionally invested mainly in bonds, as ways to maintain steady returns and fund retiree benefits in a country where more than one in five people are over 65. 

AIJ, led by Kazuhiko Asakawa, was established in April 1989, and had 120 clients including pension plans with 183.2 billion yen in assets as of the end of 2010, according to a statement from the Financial Services Agency, adding it has 12 employees. 

Only 12 employees?? Wow, you might start from here. How can a firm with 12 employees manage 120 clients and manage many billions of asset?

In the meantime, in Japan

Japanese firms are still bleeding cash and the vicious circle is still intact

Feb. 3 (Bloomberg) -- Panasonic Corp. almost doubled its annual loss forecast to a record 780 billion yen ($10 billion), the latest Japanese electronics company to predict weaker earnings because of Thailand floods and slowing demand for TVs. 

The revised estimate, which includes goodwill writedown, compares with the 420 billion-yen loss Panasonic predicted in October. The loss in the 12 months ending in March will be the biggest since the world’s largest maker of plasma TVs was founded in 1918. 

President Fumio Ohtsubo is eliminating jobs, shifting output overseas and trying to transform the Osaka-based company into a leader in solar panels and rechargeable batteries amid mounting competition in TVs. Panasonic joins Sony Corp. and Sharp Corp. in increasing loss forecasts as they struggle to cope with weak sales after the floods and March earthquake in Japan crippled plants and suppliers.           

Japanese Chartology

Japan in a few charts:

The Stock Market is still down more 75% since the collapse of the late 1980s:

Inflation rate — or, as you can, the deflation rate, since the same period. Could the same thing happen to the US and Europe?

The 10 Year JGB, yielding between 2% and 0.5% in the past 15 years — could the same thing happen in the US and Europe?

BoJ interest rate. Japan has been in ZIRP for the past 15 years — could the same thing happen to the US and Europe?

The Government Debt-to-GDP ratio — above 200%, much much higher than any European country:

And the demographic time-bomb about to hit Japan:

Population growth — the population is actually declining:

People above 65 years old — pensioners are exploding relative to the rest of the population. They pay little to no taxes and sell their pension's investments:

People between 15 and 64 years old — declining steadily. These are the people who work, pay taxes, produce and invest in their pension funds:

People under 14 — there's no new generation waiting to take over. It's normal to see such a low birthrate. Would you think about having children if you were in a depression, having hard time meeting months ends and no knowing what tomorrow will bring?

Japan's Collapse is Approaching Fast

The BoJ, Japan's Central Bank, is a prime example of irresponsibility and ignorance, having been printing like madmen (Bernanke is probably their biggest admirer) for the past 20 years by buying JGBs (Japanese Government Banks) helping the state to borrow as much as 250% of their GDP, and more recently starting to buy real estate and equities ETF — I lack words to qualify these actions.

They are now coming with another great idea: buy foreign bonds with freshly printed yens. 50 trillion of them:

Jan. 26 (Bloomberg) -- Japan’s finance minister should allow the central bank to create a 50-trillion yen ($643 billion) fund to buy foreign bonds to combat the yen’s gains, a former Bank of Japan deputy governor said.

“Everything will be solved once the finance minister says okay,” Kazumasa Iwata, 65, said in an interview in Tokyo yesterday. As a member of a government panel on national strategy, Iwata proposed the facility in October, an idea Finance Minister Jun Azumi signaled he was reluctant to embrace because it would be equivalent to currency intervention, which is dictated by his ministry.

Please note this unbelievable statement from Iwata: "Everything will be solved once the finance minister says okay".

In the meantime, their economy is collapsing fast. Here are just two examples from the past couple of days:

Jan. 27 (Bloomberg) -- NEC Corp. fell the most in 10 months in Tokyo trading after forecasting its third annual loss in four years and announcing 10,000 job cuts. 

Jan. 26 (Bloomberg) -- Nintendo Co., the world’s largest maker of video-game machines, more than tripled its full-year loss forecast as the success of Apple Inc. devices erodes demand for the company’s 3DS handheld player. 

The net loss in the year ending in March may be 65 billion yen ($838 million), compared with an earlier forecast for a 20 billion-yen loss, the Kyoto, Japan-based company said in a statement today. That was more than the average 29 billion-yen loss forecast by 18 analysts tracked by Bloomberg.

Add to that the fact that the demographic outlook in Japan is horrible, and the also the fact that most people will be contaminated by radio active waste sooner or later, it's not to difficult to imagine that the future of Japan the way we know it is at stake in the coming decade or two.

On the shorter term, I believe that Japan will soon reach their limit in their abilities to borrow and/or roll their debt and that shorting their government bond might be a low risk high reward trade.

I will write in another post how smaller speculator who have no access to the bond markets could try to position themselves for this event.

Agricultural Commodities Glut Across the Board — Farmland Price Bubble In The US

Short summary: the agricultural will, like any other of these inflationist trades, end in tears. Do not believe the hype, the Greater Depression will be just as the Great Depression was: deflationary, and full of oversupply, creating a self-sustaining declining spiral.






Record corn crop in China, but the Chinese government is still building inventories. This cannot last forever.

(Bloomberg) Nov 3, 2011 — China reaped its seventh record corn crop in eight years in the harvest now ending. 

That still won’t be enough to meet demand, driving a fivefold gain in imports as prices head for the highest-ever annual average. 

The world is awash with wheat.

(Bloomberg) Nov 14, 2011 — France may lose its place as the second-biggest wheat exporter after failing to win more than a dozen tenders in Egypt, the world’s biggest buyer, as shipments from Russia, Ukraine and Kazakhstan overwhelm markets. 

[...] France’s crop office expects a 23 percent drop in shipments in the 12 months ending in June, the most in at least a decade. 

[...] Output is also expanding elsewhere and the United Nations expects the biggest-ever global harvest. Wheat may drop another 20 percent in Paris by May, said Greg Grow, director of agribusiness at Archer Financial Services Inc. in Chicago.  “The world is awash with wheat and unless you can compete with the Black Sea you’re stuck,” said Tom Fritz, the Chicago- based co-founder of EFG Group LLC, a researcher and adviser to commodity traders. “The bias is for lower prices in an effort to clean up the glut.” Production reached 189.2 million metric tons in the harvest that began in September, 6.7 percent more than a year earlier, according to a survey of growers in the seven main producing regions carried out by Geneva-based SGS SA for Bloomberg.

Japan buys 800,000 Tons corn from Ukraine as U.S. substitute:

Nov. 16 (Bloomberg) — Japan, the world’s largest corn importer, made its biggest purchase of European grain in at least a decade, seeking a cheaper alternative to U.S. supply. 

The country bought about 800,000 metric tons from Ukraine after it removed a tax on exports last month. The purchase, made by five Japanese trading companies, was for shipments in November to March at prices that were about $20 a ton cheaper than U.S. corn, Nobuyuki Chino, president of Continental Rice Corp. in Tokyo, said in an interview today. 

Japan, which sourced almost 90 percent of its corn last year from the U.S., the biggest exporter, is seeking different options after a drought hurt the U.S. crop, driving annual prices to an all-time high and curbing global food supplies. 

“Japan joined other Asian buyers in finding cheaper alternatives to U.S. corn in feed as the American supply became too expensive,” Takaki Shigemoto, a commodity analyst at research company JSC Corp. in Tokyo, said today by phone. “A shift in demand will drag Chicago futures toward $6.”

We already discussed this a few days ago, but it's now making more headlines: the prices of farmland in the US have disconnected from their historical average yield. Their yield is now at a 40 year low.

Via Calculated Risk:

From the NY Fed earlier today: Conditions for New York manufacturers held steady in November

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers held steady in November. After a string of five consecutive months of negative readings, the general business conditions index rose nine points, to 0.6. While the new orders index edged down to -2.1, indicating that orders were a little lower, the shipments index rose to 9.4, indicating an increase in shipments. The inventories index fell to -12.2 — a sign that inventory levels dropped.
...
Employment indexes were mixed: employment levels were slightly lower and the average workweek slightly longer.

And from the Chicago Fed: Third Quarter Midwest Farmland Values Surge

At 25 percent, the year-over-year gain in agricultural land values in the third quarter of 2011 for the Seventh Federal Reserve District was the largest in just over three decades. Moreover, at 7 percent, the quarterly increase in the value of “good” farmland matched the highest since the late 1970s.

Despised Treasuries Beat Stocks Over 30 Years for First Time Since 1861

Here the Bloomberg report

Oct. 31 (Bloomberg) -- The biggest bond gains in almost a decade have pushed returns on Treasuries above stocks over the past 30 years, the first time that’s happened since before the Civil War. 

Long-term government bonds have gained 11.5 percent a year on average over the past three decades, beating the 10.8 percent increase in the S&P 500, said Jim Bianco, president of Bianco Research in Chicago. Investors seeking safety following the collapse of Lehman Brothers Holdings Inc. in September 2008 fueled demand for debt and upended the notion that equities rising along with corporate growth must offer the best gains. 

[...] Not only have bonds knocked stocks from their perch as the dominant long-term investment, their returns proved everyone from Bill Gross to Meredith Whitney and Nassim Nicholas Taleb wrong. 

“The generation-long outperformance of bonds over stocks has been the biggest investment theme that everyone has just gotten plain wrong,” Bianco said in an Oct. 26 telephone interview. “It’s such an ingrained idea in everyone’s head that such low yields should be shunned in favor of stocks, that no one wants to disrupt the idea, never mind the fact that it has been off.”

Another proof that "when it's obvious to the public, it's obviously wrong" and that inflationists are plain wrong.

That said, I do not expect the bonds to beat equities for the next 30 years. But it's still highly likely that high-quality short term bonds (are there many left?) will beat it until the end of the Greater Depression.

Harry S. Dent Interview On the YES! Energy Summit

Harry S. Dent was interviewed on the YES! Energy Summit on the 11th of October — sorry for the late post, as you realize, I am still way behind my postings — where he discusses topics not related to the markets.

He discusses his past, entrepreneurship, and other interesting topics that he usually doesn't touch during his interviews.

Harry also discusses his new book, and the collapse of the major bubbles still in place. He forecasts Silver going back to $5 and the Dow to 3,800.

These are some new materials and ideas for those who follow Harry S. Dent. He also gives away — as a free download — a pack containing 4 audio CD and 2 PDF documents about the coming debt collapse.

You can watch the video interview from the link above or download the FLV file directly here.

"Turning Japanese?" — "The US is Different"

The most dangerous sentences in the investment world always contain the word "different":

• This time it's different
• This country/city is different

These sentences are always followed a financial disaster.

So what about the US? Is it on the same path as Japan? Mr H, a friend of mine, sent me this report published on the FT

Turning Japanese? Not so fast, the US is different 

“Turning Japanese” was a classic one-hit wonder by The Vapors in 1980 and three decades later it is certainly not music to the ears of US policymakers and debt-strapped households as the world’s largest economy struggles for traction. 

The bursting of Japan’s debt bubble in the early 1990s heralded years of deflation and subdued growth, in spite of endless fiscal and monetary stimulus efforts. More That has seen equities languish, with the Nikkei 225 Average some 80 per cent below its peak, and kept the 10-year Japanese bond yield below 2 per cent since early 1999. Three years and counting since the bursting of the US credit and mortgage bubble, the yield on benchmark 10-year Treasury notes sits below 2 per cent, a level that suggests the US is in danger of emulating Japan’s experience of two lost decades. 

One significant concern is that, unlike Japan in the 1990s, the US is struggling at a time when growth expectations across much of the world are slowing. China is tightening policy and no one really knows the extent of contagion that may erupt from the denouement of the eurozone debt crisis, safe haven buying is pulling Treasury yields lower. 

While there are similarities between Japan and the US, there are crucial differences and 10-year yields below 2 per cent should be placed in context. For starters, the US does not face deflation at this juncture and also has a central bank that has been very proactive given its dual mandate of seeking stable prices and maximum employment. The US policy response since 2008 has been far faster than what occurred in Japan during the 1990s. 

Therein resides the hope for investors that the process of repairing financial and consumer household balance sheets will conclude well before the end of the decade. [...] 

Such efforts appear a hostage to the febrile political climate and a new stimulus plan announced by President Barack Obama to boost the economy this week, faces a tough ride through Congress. All of which leaves the Fed with the task of boosting the economy, as fiscal measures face the ranks of austerity hawks in Washington.[...] 

The drop in the 10-year yield below 2 per cent reflects eurozone fears and positioning by investors who hope to sell their paper back to the Fed, rather than a signal that the US is moving into a Japanese-style deflationary spiral. With the Fed determined to stop the US from sliding into deflation, an eventual recovery slowly beckons as households rebuild their savings and home prices stabilise. And “Turning Japanese” will simply remain a 1980s pop music artefact.

My take is that the author is not only completely ignorant of economics and the way the credit and fiat based currency system works, but is also completely incapable of even opening a history book and look at what happened in Japan.

Moreover, as I have stated many times in the past, "hope" is not a strategy. Buying risk on "hope" is completely stupid. Thinking that the Fed can do anything to boost borrowing when the social mood is reverting to debt averse and when both the consumer and the government are over-burdened with debt is completely is showing how high in the ivory tower the academics and journalists are.

The bottom line is that the more they will deny it, the higher the probability it will happen. It's actually happening as we speak. Deflation and the Greater Depression. You'd better admit it and start moving with the flow than deny it and face the wall a few months down the road.

A Must-See Chart — We Are Not Japanese, huh?

This Bloomberg's chart of the day — via Ritholdz — is amazing. See for yourself:

This year’s tumble in U.S. stocks mirrors the Japanese selloff that began 11 years ago, an indication to hedge fund TTN AG that American equities may have further to fall. 

The CHART OF THE DAY shows the pattern of gains and losses in the MSCI USA Index has followed the dollar-denominated MSCI Japan Index with an 11-year lag since 1990. 

[...] “We may see a Japan 2.0 scenario”[...]

I've been saying for many years that you do not need a crystal ball to figure out what will happen during the next 15 years: you need a history book of the great depression titled America's Great Depression by Murray Rothbard and a history book of the Japanese bubble economy's collapse from the peak of 1989-1990.

The Japan Syndrome is our Future, our destiny. They lead the western civilization by 11 years, that's it.

Oh, I hear all the voices yet again saying that "the US is not Japan", "the US consumers are not savers like the Japanese ones, they are addicted to their credit cards", etc.

This argument is just so easy to debunk: well, do you really think that those Japanese consumers were really savers when they blew the biggest real estate bubble mankind had ever known back in the 1980s? Really? The secular shift from debt addiction to debt phobia has already taken place in Japan, a long time ago, so long that the short sighted market participants have long forgotten that. And the same will happen in the US and Europe.

One final point: according to this chart, we are on the verge of one massive leg down that should take the S&P 500 to below 600 points.

Mutual Funds Underperforming Their Benchmark By The Most On Records

Mutual funds are investment vehicles designed to channel money of the pocket or retail investors into the pockets of funds managers. Those managers do not bring any value to their clients and suck out 2% of the total assets per year as their fees for high-life, fancy cars, suits and watches. Of course, this will come to an end during the Greater Depression, but the road will be long and painful.

Oh, and of course, nobody saw this decline and the crash ahead coming. Right?

Just see for yourself this Bloomberg report.

(Bloomberg) — Stock mutual funds are having their worst year since 1998 relative to their benchmarks, as higher volatility makes it harder to pick stocks, according to JPMorgan. 

Among 2,806 funds tracked by the brokerage, 47 percent underperformed their benchmarks by more than 2.5 percentage points this year, the most since the 55 percent recorded in 1998. Only 13 percent of the funds beat the market by the same margin. 

Nothing new here. The vast majority of managers under-perform their benchmark by more than 2.5% while they are most likely comparing their own fund which are dividend reinvested against benchmarks which are not. Add as little as 1 or 2% dividend yield and their underformance almost doubles.

But what the report doesn't say, is the actual number of funds who under perform their benchmark. Here, the number is those under-performing by more than 2.5%. The actual figure must be a lot bigger...

The underperformance accelerated last month, with the proportion of trailing funds almost doubling from July, according to JPMorgan data. [...]

The volatility helped drive August options volume to a record 550.1 million contracts on demand for a hedge against equity losses, according to the Chicago-based Options Industry Council. “The turbulence of markets in August caused a rapid deterioration of active manager performance,” Thomas J. Lee, JPMorgan’s chief U.S. equity strategist, wrote in the report dated yesterday.

Another interesting point. Passive funds cannot change their portfolio allocations and just move with the flow. While active funds need to make decisions about the direction of the markets, and these clever managers charge you extra-money for their valuable knowledge and skills, right? Well, that would seem easy, right?  You would expect that market turbulence would help active funds to perform better than passive ones, right? The only problem here, is that you would expect the fund managers to be competent and skillful. They are NOT. It doesn't need to be personal opinion of mine. The stats above are the hard proof of their incompetence.

[...] The trailing funds are likely to increase holdings in companies that move the most relative to the benchmark, known as high-beta stocks, to boost performance, Lee said. That preference may result in a year-end rally, he said. [...] “When active managers trail, there is a tendency for markets to rise into” the end of the year, Lee wrote. “Intuitively, when there are more trailing, there will be logically an attempt to outperform, which should be driven by risk-taking.”

How amazing that last statement is: any kind of news is positive for the markets. Even under performing managers, taking too much risk to play catch up with the market is seen as a bullish sign.

Massive Treasury Rise — Is Jim Rogers Still Short the Long Bond?

A couple of days ago, I posted about Jim Rogers shorting the US Treasuries, I hope he had stops and that they were tight, otherwise, he's sitting on massive losses. According to the interview on the WSJ (see previous link), he opened his position on the 10th of June, almost at a short term top in yields...

Even after the downgrade, the bonds rallied massively. Although I think that we have probably reached now the shorting zone as a short term trade :-)

I mentioned many times that Treasury bonds were a buy during the current deflationary period, and hyper-inflationists won't understand. It's not the first time he's burning himself on this trade, and I hope he will open his mind to the deflation we're facing during the Greater Depression

Barton Biggs Scarred to Death Live on BloombergTV

Very impressive interview just now on BloombergTV where Barton Biggs, the perm bull and uber incompetent hedge fund manager was scarred to death by the market. I am waiting to see the Bloomberg report come out, but it was legendary!

He still thinks that US equities are extremely cheap, and so are Asian equities.

Pathetic.

The coming bear market and the Greater Depression will crash all these ignorant fools who pretend to understand both the economic forces and the market forces.

World's Highest Standard of Living

There's no way like the American way. It will replay in the exact same fashion, but in worth, as the Greatest Depression settles in:

And looking at the food stamps number in the US and the real unemployment rate, we can see that we are already reaching the levels reached only during the peaks of the Great Depression.

There are about 46 million people in the US who are collecting food stamps. That's as many people as big European countries — image courtesy of ZeroHedge.com:

Real unemployment rate is already above 20%, close to 23-24% (ShadowStats.com figures)

My View on the Markets and the Economy

History didn't begin in 1945: comparing the great recession to any post-WWII recession and/or recovery cycle does not make sense and means you believe the origin of time is 1945. It obviously isn't, as we are only in first few years of the Greater Depression.

Once-in-a-lifetime events do occur once in a lifetime: Keeping on mentioning that the 2008 crash was a once in a lifetime events and won't happen again for another generation is misinterpreting what happened in 2008. Deflation seems to be happening in cyclical way and the time between major credit deflation seems to be the time it takes for everybody to forget the previous crisis, and get very comfortable with taking on debt and loading up on risk on their personal balance sheets. The previous one happened in the late 1920s, and the current one is 80 years later: the time it took for most of those who lived the first one to disappear from the surface of the earth. The 2008 crash was the first major down leg of the Greater Depression, and we are now very close in my opinion of the second one, similar to what happened in 1932. The once-in-a-lifetime event here is not the crash, it's the credit deflation, which will be accompanied by several major crashes.

The past 30 years cannot be considered as the norm:

• Since 1980, the western civilization has been living the biggest bull market of all times, fueled by the biggest credit bubble in the history of mankind. Valuations have been completely outliners if you look at the past 200 years, and so have been profit margins. Reversion to the mean means that these valuations and these profit margins are not coming back and will actually drop substantially.
• The biggest speculative mania of all times will end the same way that any mania ends — in tears. Unfortunately, it will probably lead to many personal and family disasters, including suicide, and also wars. So believe me, I'd rather it would end differently. Most people have been speculating in stocks and real estate and see that as the only of getting rich, since income have been stagnant but optimism high enough to keep them going. Banks have been producing 30% of the GDP and government spending about 20-30% of most western economies. This is not sustainable and won't be sustained.

Emerging economies consumers are not the reason why the S&P 500 or the Dow are rising, speculation is: I've been hearing many many times that even if the unemployment is high in the US, large US companies are doing well thanks to demand from emerging economies and that's the reason behind a 100% rise of the major indices since the bottom in March 2009. This is yet another fallacy: if is was true, the Russell 2000 containing stocks from small caps which local and making net losses after net losses wouldn't be making new all time highs. You would have seen a decoupling between the two.

China, Australia, Canada, India are propelled by major credit bubbles as well, and will crash, like any other bubble economy.

Bullishness is still extreme, however you slice and dice it:

There has been no economic recovery in any way in the US, nor in any developed economy, most of the Eurozone economies are the verge of collapse and several have already been downgraded to Junk, yet equities are at multi-year high and the Euro is also. Any disastrous news is welcomed by the market who believes there is absolutely no risk in the market, trusting that Bernanke will save them — where were they in 2008 and 2009? During any decline, analysts and market commentators ask to buy the dip and do not believe in any meaningful drop — this happened in the earthquake+tsunami+nuclear disaster in Japan, and just a couple of weeks ago as well, during the economic soft patch worry.

These are just a few signs (among dozens others) of extreme complacency and greed, not fear.

Am I a perma-bear? I was bullish on equities until 2007, then got bearish and started this blog. Made lots of profits on the short side of equities and commodities in 2008 and early 2009 then made lots of profits in being long commodities and stocks in from the bottom of 2009 until early 2010. At which point I stopped seeing any values in the shares and commodities — too early indeed — but does that make me a perma-bear? Would you buy the Dow in 1931? or the Nasdaq in 1999? So why do you buy the S&P in 2011? I believe the stock market is headed for a 70% drop from here, over the course of the next 3-5 years, and so is the commodities market, silver and oil included, in USD terms. So I prefer playing the short side from here, unless tremendously oversold markets, which hasn't happened a single time in the past 2 years.