EU Elite to the People: Anoint us as Financial Kings and Dictators or Perish

As the onion of debt has been getting unpeeled in Euroland, the measures to combat it have escalated.  The trend is clear: accounting rules have been discarded, private banks have been bailed out with public funds, sovereignty has been diminished and power has been concentrated into the hands of fewer people.  With all that has gone on so far, the problems have not gone away and in fact the flame is getting nearer to the boiling fat.  One wrong move and the whole EU could go up in a fire ball.

Instead of letting the debt Ponzi unravel with bad consequences when it was first discovered, the EU "leaders" (con men) have kicked the can down the road again and again thus ensuring that the eventual collapse will not be just bad, it will be a disaster.  The thought that one can fix a debt problem with more debt is ridiculous but that has been the "solution" over and over again.  The people have been putting up with this because at first they believed that government actually knew how to fix things.  But over time I think that has ceased to be the case.  Now the people are simply afraid to think about what the consequences will be and so they keep agreeing to more and more can-kicking.

But it's now getting to the point of absurdity that I think most people will realize that they are damned if they do and damned if they don't.  There is no longer any possibility of escape and in fact the potential for any kind of a landing other than a hard crash has been off the table for some time now.  But it can get worse.  It can always get worse.  Here is the face of worse: the ESM bailout treaty.  In short, the Euro-Elite are now suggesting that they either be made a new type of royalty by law or the whole debt Ponzi will collapse.  Royalty might be the wrong words.  This is more like a financial dictatorship.  The Euro Dictator will:

• Have immediate and unlimited access to cash from all member nations upon demand.
• Be able to sue anyone who doesn't comply.
• Be completely above any scrutiny.
• No audits.
• No ability to seize papers normally afforded to governments trying to shut down organized crime.
• Be completely above any form of prosecution
• The implication is that this refers to prosecution regarding financial stuff but as soon as any Euro-Elite gets implicated in other crimes they will claim that they are immune from that prosecution as well because it is only being used as a way to circumvent their financial immunity.

This is so arrogant and brazen as to be something out of a fantasy book instead of being real life. What kind of people would agree to something like this?

• Sleeping, unconcerned, unaware people.  This would have been my top choice a few years ago but I think it's less likely anymore.  That the video exists and decodes the legal jargon into such clear terms of financial dictatorship is proof that people are awake and looking at these things.
• People who cling to the foolish hope that their elected leaders are honest and trustworthy and that they know what they are doing instead of the reality that they are in it to win it for themselves.  I think a lot of people are in this stage of denial.  Kubler-Ross 101.
• Scared people who don't know what else to do.  Unfortunately, I think this is where a lot of people find themselves today.  Through their own ignorance about money, credit and history, they laughed at the likes of statesmen such as Ron Paul (or the Euro-versions of him), thought his ideas were "kooky" when in fact he was right about everything.  Their pride will not allow them to admit how stupid they have been in listening to dirt bag statists and moneymen.  Now they see no option but to ride the snake to wherever it takes them.

Anyone who agrees to this new scam is a complete a$$.

Anyone who sits by complacently and watches it become the law of Euroland will get the government they truly deserve.

Anyone who does not fight against it by all means will become a slave to the new financial dictatorship.

Euroland: don't be afraid of the collapse.  It will happen no matter what you do so embrace it and work through it with your family, friends and neighbors.  It will be over within a couple of years if you just take the bull by the horns.  Don't count on corrupt government and their cronies to save you because they cannot and will not do that.  They are only saving themselves and to do that they must dig a bigger hole for you and yours.  Don't embrace more scammery in a foolish attempt to escape punishment for the scammery you already let happen.  Take responsibility for your own personal past complacency which allowed it all to happen as if it didn't matter.  Rise up and put these moneymen and elitists down as you would a rabid dog.

Figuratively speaking of course.

Deflation now but some day inflation. Big inflation.

We are still in the throes of deflation but deflation never lasts forever.  At some point the inflation will come.  It must come.  And when it does come, it will come big.  How big?  I think Addison Wiggins has done a good job of explaining the potential in his free online slide presentation which is presented in a narrated video style format.

Addison Wiggins is someone that I have read and listened to for years.  He "gets" most of the problems that the US and the world is facing today.  I have subscribed to his free email, "The Daily Reckoning", I have read his book, "Empire of Debt" and I went to the public showing of his moving "IOUSA".  He is an excellent resource and his information helps fill in many pieces of the big jigsaw of understanding.

Smart people will take advantage of the free history training provided by his recent video.  Yes, it's a bit long winded.  Yes, it's really a sales tool for things mentioned at the end of the video (paid subscriptions to his recurring publications).  He also provides "suggestions" as to particular financial services which can save you from bad times.  As smart and perhaps as well intentioned as he is, let's face it, he's gone to all this trouble in order to sell you something.  His ability to pay his mortgage, feed himself, etc. depends on selling you these things and so he must sell them.  One of the advantages of being an uncompensated blogger (see any ads on my blog??) is that I can say whatever I want to say whenever I want to.  Nobody owns my words but me and I lose nothing for telling the plain truth as I see it.

My advice is to invest the time (30-40 minutes) it takes to watch his video but to just cut it off when Addison begins to talk about how to protect yourself because all of his suggestions are really just the sales pitch.  Your goal is to learn something without swallowing the sales hook.  I'm not saying that his suggestions must turn out badly and in fact some of the basic advice makes sense.  For example his first suggestion is to "make sure you live and work in someplace safe".   Well, that's pretty basic advice.  Have you noticed that even State Farm Insurance Company is now telling you exactly that in their latest commercials? 

Addison does expand on this to explain what safety is; he suggests you avoid states that have made significant unkeepable promises.  If I had to summarize his position it would be that broken promises (especially those made by trusted government agencies) will be the fuel of civil disobedience.  I agree with this.  As part of his sales hook he will share his research of where to move to avoid some of this.  The only problem is that I wonder if there are such places.  Even states which are touted to be better off then others (i.e. Texas vs. California for example) may have hidden, off balance sheet problems which would only surface after things get bad elsewhere.  One look at Rick Perry's insincere, elitist, smiling face tells me that things are not as rosy in TX as they appear.  He's just another disingenuous stuffed shirt looking to cash in on the ignorance of the people.

Addison's next suggestion is to move your money out of harm's way.  Sounds great, huh? Addison suggests moving money into overseas asset storage or into "underground banking" suggesting that risk free investing is possible.  His testimonials focus on people touting their "investment" gains as if a bank is a way of investing as opposed to just being a way to store (save) what you earned. Since I'm not trying to sell you anything it's easy for me to say: all of these are red flags for me.  Where will your money be safer in a crisis: in your hands or in the hands of a stranger?  Ummm, I'll bet on myself, thank you.  I'm pretty sure I won't rip myself off when the $hit hits the fan and I'm also sure that if all the bad things happen that are pointed out in Addison's video that the US will not be the only place in major trouble.  The whole world will be in trouble and there will be no safe havens.  But hey, it's hard for Addison to make money selling floor safes, food vaults and submachine guns which are probably the best way to ride out a global financial meltdown.

I could go on but out of respect for Addison I will say, just ignore the 2nd half of the video and learn what you can from the first half.  As you consider his video, consider these things as well:

• The US is at the top of the debt Ponzi.  Our position there will tumble for sure over time but we will be the last to get hit.  Europe will collapse, China (what a real estate bubble!) will collapse, Japan (debt:GDP 200+:1!) will collapse and South America will collapse before we do.  Why?  Because they have our debt notes and we have the physical goods that we traded for them.  That is not going to change any time soon.  Our government has already shown that when foreigners try to bring their dollar savings back into the states to buy assets like oil companies or sea ports, the US government steps in and blocks the sale in the name of national security.  We will only see more of this protectionism.
• Any "profits" you make on any of his suggestions will be taken by the government in the form of taxes and inflation.  The best way to protect your stored labor (i.e. your savings) is to store it in universal money (gold and silver bullion coins) in your own secure, hidden facility.  It's just too easy to do this to consider other risk strategies that will all be monitored and probably criminalized by government as it fights to retain its current level of power and consumption by sucking the life out of the citizens (who it considers to be its property as a rancher would consider its livestock).  That's right, the government believes that it owns you and that you can be "monetized" in any way that it likes.  This is not so obvious perhaps right now but when the crap hits the fan the masses will finally figure it out.  While we were sleeping and allowing government to grow out of proportion, it stopped being useful flesh in the body and instead became an aggressive cancer which is now intertwined into everything such that it cannot be easily extricated without killing the patient.
• The US military is ridiculously over funded.  Back in WW2, tiny little Germany in cahoots with tiny little Japan were considered a real threat for taking over the world.  When the American people begin to figure out that the America Dream was exactly that, a credit induced illusion, then the appetite for war as a mechanism for staying on top will likely increase.  While many in the world wallow around in knee deep mud in order to scrape a living from the Earth (and are grateful for it), Americans have been taught that our lives and labor are worth more than other people's.  It's a nice illusion if you are on the right side of it but when the illusion can no longer be perpetuated using fake money there is a better than even chance that it will be backed up by military force.  The option to "Go Roman" on the world has been left wide open as a means for retaining US global dominance.  The US military will one day be faced with two choices: either pay for your own existence somehow (i.e. conquest and plundering) or be downsized massively because Americans cannot afford to pay the cost of our own military.  I can't say which route will be taken.  Right now I see it as a coin toss in terms of odds.
• No matter what you do, learn from history as it tends to repeat itself or at least to rhyme with the past.  People today are the same as people back in Roman times or at any other time in recorded history.  If the herd reacted a certain way before then the odds are high that similar stimulus will result in a similar reaction in the future.  Never forget that while the people of the world have already proven that we can produce enough goods in order to satisfy the living needs of everyone currently alive, they have only put in the effort to do so because they were promised things which they can mathematically never receive.  As long as money continues to be the motivation for production and as long as the money supply continues to be fraudulent we will always be at risk that the producers of the world will simply stop producing (something like a global strike if you will) and that the store shelves can become empty in a matter of 3-4 days.  This can happen.  It has happened.  It will likely happen again.  Make sure you have your own stock of canned and dry goods today while prices are cheap and people are not killing each other in order to get that last can of beans on the shelf.  You can put up with almost anything if you have food to eat and bullets to protect yourself from those who didn't have the brains or the sense to stock up like you did.

If all of the above just sounds too "gloomy" to be true then you are probably in denial as Addison's video (and many of my past writings) predicted would happen.  The Kubler-Ross grief cycle will not be denied.  It took me a couple of years to get though it to the point where I can see and think with clarity.  Most people will get a crash course in it over the coming years and it could occur much sooner.  Look at what is happening in the world:

• Greek sovereign debt is now universally agreed to be worth only 50% of face value.  IMO that is still way too high.  It will lose 90% or more before the house of cards has finished collapsing.  Some financial authorities are trying to claim that the 50% default is not a default but the US credit ratings agencies which are trying to rebuild their massively ruined reputations are calling bull$hit on this obvious attempt to sweep default under the rug.
• Spain, Portugal, Italy are now on deck and they will want their 50% off sale too.  This is 100% guaranteed because they cannot pay back 100% of the debt.  In fact they will not be able to pay back any of it.  High unemployment will guarantee inability to repay.  All of it will eventually default as the Eurozone effectively breaks up.
• Chinese real estate bubble is rolling over with gusto.  Expect big civil unrest as a lot of not-so-humble Chinese suckers finally realize they have been played.
• The middle east is in shambles with obvious chaos, riots, mass public murder by the authorities shooting into demonstrating crowds, despots being dragged into the streets and executed, you name it.  The aftermath of the serial takedowns of US-installed government puppets in the middle east is going to be a big deal and it will likely be more anti-US than ever before because it is clear that the US has been meddling in everyone's business over there for decades.  As Ron Paul likes to remind us, the accepted CIA term for what happens after the meddling eventually falls apart is known as "Blow Back".  Idiots who did not listen to Ron Paul will be feeling the effects of middle east blow back for decades to come.
• The Canadian housing bubble is going to roll over big time and so will the Aussie housing bubble. 

These bubbles were driven by profits from exporting commodities to China which itself was building a huge housing bubble.  Canada and Australia will follow Bubble-China over the cliff.  The chart at left shows how big the Canadian housing bubble is in aggregate.  Clearly, averages can be misleading because it combines sky high property values in Toronto with lower prices in other areas but at the end of the day the only real thing to care about is that it was all funded by banks.  When the debt goes bad, and it will because it must, the Canadian (and Australian) banks will be saddled with tons of bad debt that they have already determined will be dumped onto the back of the government (i.e. the taxpayers).  The whole world is one big debt Ponzi.  There are no "safe" places.  There is only self-reliance and reliance on family and friends which is, after all, how it was always meant to be before government took over using the corrupt tools of fiat currency and fractional reserve lending.

Why are photovoltaic solar companies experiencing a Greater Depression?

Despite the fact that it is only a small part of the future solution for global energy, I believe that the long term future for photovoltaic solar technology is bright.  It has several things going for it:

• Peak oil is real although will take longer to be fully felt because the US has been sandbagging its reserves. 
• Oil extraction keeps getting more expensive.  Solar energy keeps getting cheaper as panel efficiency continues to climb.
• Solar PV energy can be captured onsite instead of having to rely on government and government backed energy companies to keep up on maintenance of central power generation and distribution at a time of falling revenues.  When the rolling blackouts become the norm, expect people to step up and pay up for local generation.
• Installed PV solar farms need little maintenance, have no moving parts and they make no sound.  They can be put on the roofs of any structure whose primary purpose was to simply block the sun (carports, etc.)

So if all this is true, why have most solar plays crashed, many of them sitting at levels which are greater percentage losses from the top than the DJIA saw during the Great Depression?  I think there are several reasons for this:

1. The price per watt for PV solar is still too high.  Oil prices have gone up in the past 10 years but the real cost of it has been masked by the use of debt to buy it.  At some point debt will no longer be accepted as a means of payment and then we will know what the true cost of oil is.
2. Despite many people thinking that immediate inflation or hyperinflation is right around the corner, the unfolding collapse in credit is telling a different story.  The money supply is made up of the monetary base plus the outstanding credit (AKA debt) with credit being at least an order of magnitude larger component of the money supply than is the monetary base.  Thus, as credit evaporates from the economy, the overall money supply shrinks and that is deflationary. The Federal Reserve and all of the government have been combating deflation, not inflation.  Bernanke has been inflating the monetary base as much as he dare without setting off a panic but still wages and jobs are, in aggregate, flat or falling while an increasing number of cities are going bankrupt (see predictions from Meredith Whitney).  All you have to do is look at the plummeting price of copper to know that the inflationists are re-thinking their positions.  China has stockpiled commodities like there was no tomorrow and soon we will see the great Chinese real estate bubble collapse.  This will cause commodity prices to roll over big time.
3. PV solars, being new, are the canaries in the deflation coal mine.  They are front runners.  They got hit first and they will bottom first. When the commodity crash has played out and the inflation finally does kick in (and it eventually will), the surviving (key word is surviving) PV solars will be among the greatest beneficiaries. 
4. PV solars were artificially kicked into high gear by government.  Unfortunately, governments pay for things with debt.  As the debt game began to unravel globally, solars stopped getting subsidized.  Thus, their crash is worse than if government never got involved at all.  Government intervention made things great for gamblers and market timers but horrible for normal investors and the whole industry is now worse off than if government had just let the free markets run the show.  Government involvement distorts markets and crushes the free market feedback loop that is so necessary for stability.  Central planning is always and everywhere misguided and in many cases is nothing more than a scam.  Government scammers back industries with taxpayer money and loan guarantees and then invest in these things personally, generally through hedge funds which are told about the government backing in advance (AKA illegal insider trading).  With weight of government behind the investment, personal profits fly for the con men.  Of course, in times like we have right now, the investments can also blow up in the faces of the con men.

 
The coming deflation is likely going to be the story of the decade IMO.  Bernanke’s helicopter looks to be out of gas.  He now has to choose between letting the natural credit deflation play out or putting the Federal Reserve – which is a private bank contrary to what many believe – into real jeopardy.  He cannot have it both ways.  As Harry Dent said, the Fed is checkmated and it has to choose badness in one form or another (massive deflation and bankruptcy vs. massive inflation or even hyperinflation).  I believe that the fed will try to save itself by allowing deflation to occur.  It will likely get bad for people (unemployment, civil unrest, etc.) such that Congress finally shuts the Federal Reserve down (in some form or fashion to include the simple installation of puppets) and then goes on a money printing spree which eventually destroys the dollar.  We are talking years and years here not months and quarters.  This is, of course, assuming that nobody honest like Ron Paul wins the 2012 US Presidential election and that we are instead left to the devices of new con men like Romney, etc.

Given that I like Elliott Waves, I will call your attention to the fact that Elliott Wave International is having “free week” for people interested in commodities.  All you have to do is create a free account at elliottwave.com.  I want to call your attention to this chart from their Sept version of their Futures Junctures newsletter (normally a subscription resource but provided free to anyone during free week…). 

What’s interesting about this chart is that they are calling a top in the CCI (Continuous Commodities Index) based on the wave count (and other technical indicators).  They are doing this at a time when it’s becoming clear that China’s housing bust is likely getting very close.  Anyone who thought that China’s consumption would save the world is going to be very disappointed when they find out that China is nothing more than a debt Ponzi just like everyone else.  It could easily lead to a huge contraction in commodities, including silver and gold (I suggested that gold was due for a pullback in this post).  Perhaps the most important thing to look for should this predicted contraction occur would be if gold failed to contract with everything else (or contracted at a slower rate such that the ratio of gold to commodities was still climbing).  It would be good proof that the silent remonification of gold which I believe is happening is in fact happening.

The truth about import export imbalances, part 2.

In response to my last post on export imbalances, a reader commented, "But isn't Spain getting the better deal by trading apples and worthless paper for Mercedes?"

This is soooo the right question to ask.  Unfortunately, the answer is not a one-liner.  When dealing with a corrupt global money supply, everything is made 10x more complex than it should be.  Simple trade is never simple in this environment of Wimpy promises.  At the same time, I want to try to state the answer succinctly up front and then dive into some supporting arguments later in the response.

And so the simple answer is that Spain is getting exactly the deal that it and Germany have agreed upon, not more and not less.  If Spain were to show up at the border with apples and no worthless paper to use as a deal “kicker” then Germany might not show up with cars.  Germany should (and I believe does) know that the paper Spain is bringing with it is worthless given the many hundreds of years of trading history they share.  But it demands that paper anyway.  Why?  Because Germany has made unkeepable promises to others, all of which are tracked by possession of the worthless paper.  Germany has ramped up production using debt for the very purpose of acquiring more apples plus worthless paper from Spain, more olives plus worthless paper from Greece, and so on for the rest of the PIIGS.  We are now in the end stages of a global circle jerk of debt.  Real money (i.e. gold and silver) have been pushed to the back of the bus over the past 50 years.  All that counts now is the debt because it is floating around in the global economy in quantities which are an order of magnitude (conservatively speaking) higher than real money.

But back to Spain and its apples where the Chester Karrass factor is at play.  Spain did not get what it deserves, it got what it negotiated.  Spain has allowed Germany to intimidate it into accepting a cars:apples exchange rate that is unrealistically in Germany's favor and the result is a huge trade imbalance.  In reality, it's a form of intimidation.  Now before you roll your eyes, look to history for precedent like I always do.  Remember the Gouda Tulip mania of the 1600s?  At one point a single tulip bulb was traded for 12 acres of farm land.  On another occasion, a lot of 40 tulip bulbs were sold for 100,000 florins which were worth about 2 man-years of skilled labor.  Could you imagine working 2 full years in order to earn 40 stinking inedible tulip bulbs?  This actually happened.  Some how, some way, people had placed a ridiculous value on tulips which you can't even eat!  Chester Karrass was there in full force on the side of the farmers back then.

At the border, people want to trade value in one form for equal value in another form.  In order to see the truth of the matter, you have to go all the way back to the basics about how value is created which is through the labor of man (multiplied by tools/machinery which are powered by energy).   Take away the tools component (rendering the energy component non-applicable) and what is left is man A in country A trading some percent of his labor with man B in country B.  In aggregate, labor must be traded straight across for labor.  Man A cannot reasonably trade 90% of his labor for 10% of man B’s labor.  What cannot happen will not happen.  Something (debt) is causing this imbalance on the production side  and so the only way it can be made up on the consumption side is also debt.  The labor component of humanity is essentially fixed.  There are only so many laborers with only so many hours to work and only so much energy to put into their work.

Spain’s problem is that one German is standing on the border ready to trade the one car that he took one day to build because of the work multiplication enabled by tools and energy whereas 5-10 Spaniards are standing on the other side of the line to represent the labor that it took them to grow and deliver to market the massive boxcar full of apples which they have negotiated as a fair trade for the one German car.   Spaniards lost sight of the fact that German productivity is so high because they have so much automation without which one man would not be able to build 1/10th of a car in a single day.

And so we get into the very heart – the very engine – of the debt Ponzi because where did Germany get the money for all that automation?  Did they earn it first?  If so, how did they amass so much wealth to buy such tools while Spain made no relative progress?  I contend that people are basically the same the world over in aggregate and so when I see such imbalances I am not inclined to blame them on laziness of the people or some other genetically driven factor.  For example, I have written in the past how Toyota’s awesome manufacturing capacity was all funded by debt. 

The use of debt to build capacity distorts everything resulting in gross unfairness.  Consider this: you and your neighbor decide to start small businesses that compete head to head.  At first, you are both in your garages working away but the market for your product is big and so you want to expand.  You are politically unconnected and so nobody will loan you money to expand.  Thus, your expansion must wait until you earn the money honestly to do so.  Your neighbor, on the other hand, has a brother in the banking system.  His loans inexplicably sail through the approval process and he expands his production rapidly to fill market demand.  You are unable to compete with his economy of scale and so you are pushed aside in the market place even though you worked just as hard if not harder and even smarter than your neighbor.  He won and you lost because of his political connections, not because of his hard work and ingenuity.  This is the unfairness of capacity growth that is funded by debt. 

In another situation, both companies are greeted by willing lenders.  First company A expands using debt.  Company B responds by making unkeepable pension promises (just another form of debt) to attract better labor.  Once started, this upward spiral of leverage must continue until one side can, for whatever reason, no longer leverage up.  The winner is not the one with the best products or management but rather the one with the best lawyers, bankers and government connections (really handy for bailouts, loan guarantees, etc.).  Unfortunately, the salaries of workers were funded by this debt spiral and when one side collapses then jobs and salaries collapse, eventually leading to collapse of demand because nobody has any money to buy anything.  At the end of the day, even the winner is a loser because it is left to pay off all that past debt with a fraction of the income that it was projecting it could have. 

Debt is the engine of crony capitalism and it is the fuel source of economic booms and busts.  It it is a slap in the face of any honest, hard working capitalist and it is the friend of bankers and politicians who use it to concentrate power into a very few hands.  If debt based prosperity was sustainable then I might sing a different tune despite its unfairness.  After all, doesn’t the rapid expansion of debt create jobs exactly as politicians and money men keep telling us?  The answer is, yes, but it is a false, unsustainable expansion that must inevitably collapse under its own corrupt weight.  Why must it be so???  Because debt based growth can only be fueled by debt based consumption and consumers can only afford so much debt, even at historically low interest rates.  Why do you think the housing market is still rolling over despite historically low interest rates?

At some point it will be discovered that somehow, some way, German car makers are in the same boat as the Japanese car makers and none will be better off than Spanish apple growers or Greek olive farmers.  To be fair, I haven’t taken much time to look into the books of Germany.  But I don’t need to because I know they are not “the master race” or in any way superior to the rest of the workers of the world.  They are in fact just good, hard working humans like the rest of us.  They do not work twice as hard as anyone else or even 15% harder.  They are just good, solid workers. 

They are also world renowned bankers which is the more important factor.  Bankers are experts at playing the debt shell game and so you will not see the full truth of the German problems until the big debt Ponzi collapses.  I believe that German production expansion is more related to the cunning of its bankers than the productivity of its workers.  There are many things that point to this including but not limited to the frantic way that Merkel is trying to prop up the Euro Ponzi.  She is not doing this for the benefit of Greece or Spain or Italy but rather because she does not want to admit that the money lent to PIIGS was gone the minute it was lent.  She wants everyone to continue to think Germany is prosperous simply because deadbeats owe it money.  Nothing could be further from the truth.

The truth about import export imbalances.

I've been rather quiet on this blog for a few weeks because I've had little to say.  The markets are quietly setting themselves up for eventual collapse as money runs out the back door while the headlines still look for hope.  We got a fancy 330 point rally on the Dow today based on more Wimpy promises from proven liars in Euroland that everything is going to be just fine.  Seriously, how can anyone listen to these pathological liars without vomiting in their Cheerios anymore?  Nobody can say when reality will set in because we want to be lied to.  We beg them to PLEASE lie to us.  At the end of the day, Jack Nicholson was right: "You can't handle the truth", people.  Well, maybe YOU can handle it otherwise you would have stopped reading this blog a long time ago.  But how about your spouse, parents, siblings or friends?  Oh, that's right, you haven't told them about this blog have you...?  You know they can't handle the truth.  After all, giving bad news is such a downer don't you know...

I am more convinced than ever that the stock market is going to collapse.  I see the real action happening in the background while the foreground is being painted a prettier picture.  The global banking system is, for the first time in history, completely bankrupt.  Even China is a dead man walking.  Anything you think you know is likely tainted or just outright wrong, especially if you learned it from the main steam media.  I wish it were not so but I talk to so many people who think they have a clue.  They have strong opinions no matter how uneducated they are.  This is, it seems, an American birthright.  I feel a bit sad for them because they are merely repeating the failed Keynesianism that got us here: "Government should do more.  We would all be OK but government doesn't want to do anything for us".  I used to be angy with them but now I just understand that it is not for everyone to know the truth.  It is not for everyone to survive.  And so they won't.  Economic Darwinism will have its day. 

But enough of all that "pessimistic talk".  In today's lesson I want to explain something that is very simple in concept but almost impossible for economists or politicians to wrap their arms around: the truth about import/export imbalances.  I've written several times about the basic premise that exporting as a sustainable profit mechanism is a scam.  The logic is inescapable and if you are an economist or if you fancy you know better, I challenge you to express your views in the comments section on this post. I do not suppress dissenting views, I welcome them and I promise to be gentle when I rip you to shreds as I respond  ;  ).  But now I want to explain a new insight that I have had regarding how countries find themselves on the losing end of the trade game.  The insight stems from the age old article that any business traveler has read in the magazine found in the airplane seat back pocket by Chester Karrass who states, "You don't get what you deserve, you get what you negotiate."  Side note: amazing, isn't it, how Karrass' photo in those ads hasn't aged at all over the years? 

When I first read that, I blurted out loud "ain't it 'da trut'" as diet Coke from one of those little plastic airplane cups spurted out my nostrils.  How many worthless, soul-less, brainless, visionless, bureaucratic VPs and directors of this and that have I met in my career in high tech?  More than I want to count.  Several of them touted PhDs and other useless sheepskins and intimidation credentials that had propelled them so far beyond anything that the Peter Principle had ever envisioned that it was mind numbing to watch them in action.  Sure, they talk a good game but they are nothing without standing on the shoulders of anyone in range.  If plunked down in the middle of a wilderness they would certainly die of stupidity and the attempted execution of grand but asinine ideas which are their stock in trade.

But I digress.  Back on subject, let's ignore Greece for a minute.  Actually, I think it is safe to ignore Greece forever from a purely economic perspective (drums go Ba Dum Bah).  So let's talk about Spain.  The reason Spain is in debt is because it is running a trade deficit with France and Germany.  Let's keep it simple and just make it between Spain and Germany.  Spain is famous for its apples; Germany for its cars.  When they come together to trade on these things, Germany has negotiated a high value for its cars and Spain a low value for its apples.  Thus, Spain could never have a trade balance with Germany.  Now, if you have ever flown into any major German city you would know how bleak they look from the air.  How much bleaker would they be without Spanish apples?  Said differently, what would Germany do if all the food producers said "F U Hanz; Your cars are nice but food is nicer.  You want food?  We will trade 1 barrel of apples for one Mercedes Benz".

If this sounds simplistic, you still don't get it because this is essentially already happening without the expletive deletives.  Spain and Germany are trading what Spain has to offer for what Germany has to offer.  Spain is offering a load of goods plus some paper markers which are supposedly good for future trade (AKA Euro notes AKA IOUs AKA debt) to Germany in exchange for manufactured goods (symbolized by the Mercedes).  But Spain can never pay off this negotiated debt.  And it's not that Spain doesn't choose to pay off its debt but rather that Spain is mathematically incapable of ever paying off its debt.  Why???  Because it didn't negotiate worth a damn when trading apples for cars!  Chester Karrass where are you??

The only difference between what is happening now and between my scenario is honesty.  The dishonest part of the current situation is that Spain is holding off on the "FU" statement since Germany is accepting the worthless promises to pay later (Euro debt).  Other than that it's exactly the same because the debt they have assumed will never be repaid.  When you factor out the worthless debt, Spain is trading apples for Mercedes straight across.  Since this is the only reality that can ever sustainably exist in the export game (trading goods for goods straight across without the use of debt), Spain needs to hire Karrass to negotiate a better price for apples (and everything else that Spain exports) so that it can just stop using fraudulent debt to balance the trade.  Until then, it needs to stop buying Mercedes and instead should look at the newer models of Kia.  That would bring down the price of Mercedes in a hot hurry because, at the end of the day, sellers don't set the prices in the market place - BUYERS DO.

If this sounds just too easy to be true then contemplate this: what would Germany do if Spain just said "FU, your car prices are just TOO DAMNED HIGH relative to the price of our apples (and other stuff we export).  Keep your cars, Mein Herr.  Germany has ramped car production to meet Spanish (and other PIIG demand).  They took on big time debt to do this.  They need to service that debt.  They cannot live without cash flow any more easily than you or I.  Trust me, the result would be prices on German cars falling faster than tool prices at Harbor Freight during a holiday sale.   OK, well, that is what would happen if Spain voluntarily curtailed its import purchases.  But consider what the outcome would be if Spain were involuntarily forced to cut its import spending because nobody could offer them credit anymore...  this is going to happen and soon.

And now you know why Merkel is so keen on keeping the PIIGS in credit...  It is nothing but a con job to convince Spain that apples are worth nothing compared to cars even though the labor required to bring them to market is the same as that required to build cars (minus the debt from German factory automation of course).

Goldman Sachs, revisited

In a post made this past July, I suggested that Goldman Sachs common shares might be rolling over.  There was never any question in my mind that all the big, corrupt banks would eventually crash and burn but the question is always "when?".  In fact, I wrote, "When the great debt Ponzi eventually collapses GS will certainly have a leadership role in the collapse, AIG style.   Right now these con men have everyone fooled into thinking that they are not part of the system but rather damned near the system itself.  Nothing could be further from the truth.  If they were so strong they would not have needed backdoor bailouts via the AIG scandal.  Goldman is using Art of War tactics.  It is acting strong when it knows it is very vulnerable ... In the long run Goldman will be lucky to survive at all.".  The chart looked pretty bad and so I made the call.  GS was trading for about $135 on the day of that post.

Today the shares are trading for about $93.  People in the investment community think the shares are cheap at this level.  After all, with $815 billion in cash and only $485 billion in debt their net cash position of $330 billion looks pretty strong relative to their $47 billion market cap even if the shares still pay only a paltry 1.4% annual dividend.  While the shares may be due for a short term bounce, I think we will see them trade well below $50 before this crash is over (well below).  In fact, the company will be lucky to remain intact.  The recent Wall St. sit in is telling me that the sheeple are tired of getting sheared and when politicians see the people self-organizing like this they know that something must be done.  If people self organize in order to right the wrongs of the world then why do we need police?  Why do we need massive government?  This is the question that bureaucrats fear the people will ask themselves.  Self preservation, not service to the people is what drives the government to step in and "do something".  And so they must soon "do something" even if it means attacking their partners in crime on Wall St.  This is always how criminal organizations fall apart: they turn on themselves internally when the ratio of criminals to patsies gets too high.

I believe that nasty facts about GS will be brought to light in the coming years.  Their massive corruption will be exposed, probably leaked to the press by their partners in crime in government, in order to give people the moral imperative to demand that government dismantle GS.  Either that or we will find out that this huge cash position pales in comparison to off balance sheet losses on highly leveraged bets.  One way or another, GS will fall.  This is not my hope or desire but rather my prediction based on how these things have unfolded so many times in history. 

The thing to keep in mind is that if you want to know who is most involved in the operation of a Ponzi, look to those who have profited the most.  Thus, when the Ponzi finally collapses as they always must at some point, look to those who have profited the most to have their legs kicked out the hardest.  Goldman Sachs is a great place to cash in for employees (for now) but it's shares are a really crappy investment for the common man.  The employees are spiriting all the value of the company out the back door via the compensation they pay themselves.  Investors in this corrupt Ponzi scheme will some day realize that they are nothing more than clueless patsies in the big con.  IMO, Goldman Sachs will be exposed to be Madoff but on a much grander scale before this is over.  This may not be a very popular opinion today but I suspect that some day the main stream media will be writing about how obvious it was.

Silver, revisited.

In a prior post on silver I did a short recap of what a mania is and then pointed out that silver had a big, exponential run up which could make it look like a mania.  I wrote,

"Since late 2009, Silver has been on incredible tear rising from $9 to $50 in that time frame.  The cause: fear of Bernanke and his printing presses.  Now that it looks like Bernanke is going to stop printing QE2 money in June, the herd has run back out of silver taking it to the $35 range.  Traders will now determine whether this is just the Elliott Wave a-b-c pullback that refreshes (caution, these pullbacks have 3 common retracements: 38.2%, 50%, and 61.8%) or a complete run out of silver by the herd - a complete mania retracement."

My assertion was that it was not a mania.  I wrote:"My humble opinion on the matter is that the silver chart will eventually form some sort of inclining double bottom and then take off again to reach new highs."

Since then, silver took another wave down only to stop its plummeting (for now) at the 61.8% fib.  In my

experience, the 61.8% fib is generally the largest price retracement that an assest will encounter during a normal Elliott wave a-b-c retracement.  If that observation holds true again this time then we should expect another run at a new high as a 5th wave unfolds.  Of course this is only a model, models are just models, even the Federal Reserve's models don't always hold, blah blah blah.  Do keep in mind that I never asserted that silver or gold were anything but money.  They are not an investment (especially gold - silver has one foot in both camps because it is an industrial commodity).  The purpose of money is not to make you rich but rather to ensure that you keep your buying power until you 

are ready to trade what is in effect your stored excess labor (for that is the only thing that real money was ever invented to be) for goods and services offered by someone else. 

So if gold (and to a lesser degree) silver are money then their buying power should not be falling against everything.  And so it is not.  As you can see from the charts to the left, despite having fallen hundreds of dollars per oz. recently, gold is rocketing relative to Hewlett Packard

common shares (ticker HPQ) and also relative to the solar sector ETF (ticker TAN).  I could post many other chart comparisons including gold vs. oil, gold vs. steel, gold vs. a major commodities index ETF such as DBC and all of these charts would show gold holding its own or actually gaining against them on a relative basis.

Note: I generally try not to talk about individual stocks, stock picking, etc. because I would rather focus on the big picture in this blog, but solar stocks (especially Chinese solars) have recently entered smack down territory which is far worse in many cases than the smack down received by the Dow during the great depression.  Chinese solars with plenty of cash are trading for PS of well under 0.5, PEs of 5, PB of less than 0.5, etc.  The reasons are many and varied but in many cases it is a complete panic sell off which will result in the strong buying out the weak for pennies on the dollar.  I expect to see the gold:tan ratio come back down rapidly to at least its 50 day moving average over the next few months.  That will probably be due to a bottoming of solars and a massive short covering of the sector. 

Keep an eye on Congress for the next move.  Mish reports that Bernanke is out of bullets (i.e. does not want to put the private bank called the Federal Reserve in more financial risk by taking on more bad assets than it has already done) and thus Bernanke wants congress to do something to slow the path of deflation. 

If congress does nothing then deflation will take hold with great shock and the stock market will crash thus killing the powerful Wall St. speculators.  In this case the rich and the powerful will move to protect themselves and there will be congressmen falling left and right as the past bribes paid to them are revealed and scandals will appear that could rock the very foundations of this country.  The corruption is there but nobody cares because it is out of sight and out of mind.  But if rich Wall Streeters don't get their bailouts then everything will be exposed because that is what happens when criminal organizations fall into problems: they start ratting each other out.  On the other hand, if congress opens up the printing presses and debt machine in the historic way which will be needed in order to address the Greater Depression then it will kill main street whose dollar based savings will evaporate.  In this case, there will be riots and crime will skyrocket and people will die.  As Harry Dent said, "The Fed Is Checkmated".  The fiat money and fractional reserve banking based debt Ponzi will unravel at some point one way or the other.

Economati's view remains the same as always:  If we get the massive deflation then silver and gold can temporarily retrace, perhaps dramatically if government finally stops stimulating everything, as dollars become highly demanded.  But know in advance that this is only a temporary condition.  Deflation never lasts very long because deflation = honesty and leaders do not value honesty.  Also, and this is absolutely key to know, while deflation increases the value of dollars held by US citizens, it also increases the value of dollars held by foreigners.  Deflation results in lower salaries, lower taxation, lower everything.  There is no way we can repay China et al. if we just allow deflation to take place.  In a deflationary scenario, the debts remain at inflated levels while the earnings and thus ability to make repayment plummet.  We will someday have to choose between sovereign default or opening up the printing presses.  The con men running the show know that outright default will put them in danger personally (bribes they took and past corruption they were involved in will be exposed; some will go to jail.  Some of them will even have "unfortunate accidents" and forced suicides will be seen.  Future history will show that internal corruption in US government really is no less than any 3rd world $hithole because people are people the world over) and so they will open the printing presses. 

Just keep buying metals on a slow, measured, dollar cost averaged basis.  Do it instead of contributing to corrupt, government controlled savings accounts like 401ks and IRAs (both will be exposed as scam-ridden traps within the next decade).  Do it instead of gambling in the stock markets.  Always buy physical metal and store it yourself.  If you just do this type of saving on a regular basis then you will find that come retirement you will still have the stored labor that you worked so hard for.  If you trust government, Wall St. or anyone else besides yourself then you will end up getting taken for a patsy, fleeced of everything.  You will end up angry at the world for what amounts to your owned damned foolishness.  It really is time to figure out that you don't want to trust a con man, especially when the con is in the collapse stage like it is right now.