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Image | Understanding the Outcomes that Will Matter Most
Understanding the Outcomes that Will Matter Most
 PREVIEW
by charleshughsmith

Executive Summary

  • Paper wealth will revert to its intrinsic value
  • Risk will continue to be transferred onto the taxpaying public
  • Moral hazard and fraud will by the norm, not the exception
  • Complexity will be used to mask failure
  • Individuals will increasingly opt out of the system through means both covert and overt

If you have not yet read The Trends to Watch in 2013, available free to all readers, please click here to read it first.

In Part I, we examined eight dynamics which will likely influence society, politics, and finance in the next few years. In Part II, we examine different manifestations of the one dynamic that counts: the inability of the Status Quo to make meaningful structural reforms. This inability has many facets, but only one root: political sclerosis caused by entrenched, vested interests seeking to protect their perquisites and power.

An economy that is controlled by the government is one in which political power, not the market, controls the distribution of national income. A government in which political power is for sale to the highest bidder puts the wealthy at an extreme advantage, as they have the means to buy political power to protect and expand their share of the national income.

In order to do the bidding of the financial Elite, the political Elite redistributes enough national income to the bottom 50% and retirees to buy their complicity in the arrangement.

A nation in which political power is for sale is one in which the rule of law is bent to serve those with power.

This is the U.S. in a nutshell.

Among the many manifestations of this arrangement, I have selected these as prominent examples of systemic financial and political rot:

Understanding the Outcomes that Will Matter Most
 PREVIEW by charleshughsmith

Executive Summary

  • Paper wealth will revert to its intrinsic value
  • Risk will continue to be transferred onto the taxpaying public
  • Moral hazard and fraud will by the norm, not the exception
  • Complexity will be used to mask failure
  • Individuals will increasingly opt out of the system through means both covert and overt

If you have not yet read The Trends to Watch in 2013, available free to all readers, please click here to read it first.

In Part I, we examined eight dynamics which will likely influence society, politics, and finance in the next few years. In Part II, we examine different manifestations of the one dynamic that counts: the inability of the Status Quo to make meaningful structural reforms. This inability has many facets, but only one root: political sclerosis caused by entrenched, vested interests seeking to protect their perquisites and power.

An economy that is controlled by the government is one in which political power, not the market, controls the distribution of national income. A government in which political power is for sale to the highest bidder puts the wealthy at an extreme advantage, as they have the means to buy political power to protect and expand their share of the national income.

In order to do the bidding of the financial Elite, the political Elite redistributes enough national income to the bottom 50% and retirees to buy their complicity in the arrangement.

A nation in which political power is for sale is one in which the rule of law is bent to serve those with power.

This is the U.S. in a nutshell.

Among the many manifestations of this arrangement, I have selected these as prominent examples of systemic financial and political rot:

Image | The Price of Everything and the Value of Nothing
The Price of Everything and the Value of Nothing
 PREVIEW
by Chris Martenson

The title of this piece is The Price of Everything and the Value of Nothing.  The subtitle is Why Your Bread Is Going to Cost More.  I connect these two in reflecting on my recent podcast with David Collum, in which he stated that our money has no value and that this fact is distorting everything.

What he meant was, if you take your money to the bank to deposit it, the bank offers no interest on that money, implying that money has no value to them.  If they valued it or had a legitimate use for it, they would offer you something for its use.  Obviously, money doesn't have zero value to the banks; they can place it on deposit with the Fed for 0.25% yearly interest.  But by any historical measure, money has no value right now.

That's just what happens when any commodity – which money happens to be – becomes too abundant.  It drops in price.  What 0% rates on money tell us is that there's just an enormous amount of it sloshing around – and that, my dear friends, distorts everything else.

As I have said many times, when you misprice money itself, everything else becomes mispriced, too. 

The Price of Everything and the Value of Nothing
 PREVIEW by Chris Martenson

The title of this piece is The Price of Everything and the Value of Nothing.  The subtitle is Why Your Bread Is Going to Cost More.  I connect these two in reflecting on my recent podcast with David Collum, in which he stated that our money has no value and that this fact is distorting everything.

What he meant was, if you take your money to the bank to deposit it, the bank offers no interest on that money, implying that money has no value to them.  If they valued it or had a legitimate use for it, they would offer you something for its use.  Obviously, money doesn't have zero value to the banks; they can place it on deposit with the Fed for 0.25% yearly interest.  But by any historical measure, money has no value right now.

That's just what happens when any commodity – which money happens to be – becomes too abundant.  It drops in price.  What 0% rates on money tell us is that there's just an enormous amount of it sloshing around – and that, my dear friends, distorts everything else.

As I have said many times, when you misprice money itself, everything else becomes mispriced, too. 

Image | The Fiscal Cliff Fiasco
The Fiscal Cliff Fiasco
 PREVIEW
by Chris Martenson

Well, as expected, some sort of a last minute, sausage-like deal was struck at the eleventh hour.  Well, actually, the twelfth hour, given that only the tax side of the equation was "solved," leaving $109 billion in immediate spending cuts still on the table.

Actually, it's even murkier than that.  The deal that was struck was a Senate deal and the House could do more, less, or even just scuttle the whole thing.  So let's call it a first step on the path to a deal.
The Fiscal Cliff Fiasco
 PREVIEW by Chris Martenson

Well, as expected, some sort of a last minute, sausage-like deal was struck at the eleventh hour.  Well, actually, the twelfth hour, given that only the tax side of the equation was "solved," leaving $109 billion in immediate spending cuts still on the table.

Actually, it's even murkier than that.  The deal that was struck was a Senate deal and the House could do more, less, or even just scuttle the whole thing.  So let's call it a first step on the path to a deal.
Image | What Will Happen When We Hit the Cliff
What Will Happen When We Hit the Cliff
 PREVIEW
by charleshughsmith

Executive Summary

  • A rising dollar would negatively impact stock market profits and valuations
  • Interest rates ultimately will rise, and that will be a game-changer
  • Investors will eventually realize that "risk-free" assets (e.g., U.S. Treasurys) are NOT safe havens
  • Why there will be few places for financial capital to find shelter in 2013

If you have not yet read Part I: The Structural Endgame of the Fiscal Cliff, available free to all readers, please click here to read it first.

In Part I, we covered the basics of wealth and political power in the U.S. and found that the Fiscal Cliff is only a symptom of a structural endgame in which the imbalance between what has been promised and what can be collected in taxes will continue growing until it triggers a financially driven political crisis that I believe will inevitably become a full-blown Constitutional crisis.

Though there are many facets of this long-term political crisis that are worthy of further exploration, we will to start with three financial aspects that could start impacting households in 2013: a rise in interest rates and a resultant destruction of bond valuations, a rise in the U.S. dollar that negatively impacts U.S. corporate profits and thus stock market valuations, and a reduction in upper-income households’ spending as a result of higher taxes that depress discretionary consumer spending.

A Rising Dollar Negatively Impacts Stock Market Profits and Valuations

Let’s start with a topic that I have covered in depth over the past year, the structural reasons behind the rise of the U.S. dollar (USD).  The recurring fantasy that Europe’s fiscal and debt crises are “fixed” and the Federal Reserve’s money-printing/Treasury bond purchases have recently depressed the USD, but in the longer term, the USD has been tracing out an unmistakably bullish pattern of higher highs and higher lows since May 2011…

What Will Happen When We Hit the Cliff
 PREVIEW by charleshughsmith

Executive Summary

  • A rising dollar would negatively impact stock market profits and valuations
  • Interest rates ultimately will rise, and that will be a game-changer
  • Investors will eventually realize that "risk-free" assets (e.g., U.S. Treasurys) are NOT safe havens
  • Why there will be few places for financial capital to find shelter in 2013

If you have not yet read Part I: The Structural Endgame of the Fiscal Cliff, available free to all readers, please click here to read it first.

In Part I, we covered the basics of wealth and political power in the U.S. and found that the Fiscal Cliff is only a symptom of a structural endgame in which the imbalance between what has been promised and what can be collected in taxes will continue growing until it triggers a financially driven political crisis that I believe will inevitably become a full-blown Constitutional crisis.

Though there are many facets of this long-term political crisis that are worthy of further exploration, we will to start with three financial aspects that could start impacting households in 2013: a rise in interest rates and a resultant destruction of bond valuations, a rise in the U.S. dollar that negatively impacts U.S. corporate profits and thus stock market valuations, and a reduction in upper-income households’ spending as a result of higher taxes that depress discretionary consumer spending.

A Rising Dollar Negatively Impacts Stock Market Profits and Valuations

Let’s start with a topic that I have covered in depth over the past year, the structural reasons behind the rise of the U.S. dollar (USD).  The recurring fantasy that Europe’s fiscal and debt crises are “fixed” and the Federal Reserve’s money-printing/Treasury bond purchases have recently depressed the USD, but in the longer term, the USD has been tracing out an unmistakably bullish pattern of higher highs and higher lows since May 2011…

Image | Dissecting the Energy “Boom” Story
Dissecting the Energy “Boom” Story
 PREVIEW
by Gregor Macdonald

Executive Summary

  • Peak Oil is a multifactorial concept 
  • Why the IEA forecasts aren't credible
  • Why the data shows Peak Oil is alive & well
  • Where oil prices will head in 2013

If you have not yet read A Tale of Two Forecasts, available free to all readers, please click here to read it first.

The U.S. is currently experiencing its second oil production recovery since 1971, when its supply peaked over 9.5 mbpd.

The first recovery took place over a nine-year period from 1976-1985. That renaissance took U.S. production back up from a low of 8.0 mbpd to nearly 9.0 mbpd. And then, over the next twenty years, U.S. production would fall steadily to its recent nadir of 5 mbpd in 2008. Over the past four years (owing to onshore production in North Dakota and Texas), the U.S. has built back an impressive 1.5 mbpd and is currently producing over 6.5 mbpd of crude oil.

Before we get to the IEA Paris forecast for the future U.S. production, let's take a look at our own Energy Information Administration (EIA) Washington forecast. The IEA Paris forecast is more difficult to understand, as it conflates oil and natural gas liquids. By contrast, the EIA Washington forecast is more specifically focused on oil production, which is easier to compare to U.S. production history. (Remember: Natural gas liquids (NGLs) are not oil. More importantly, they do not contain the same energy as oil. A barrel of oil contains 6 GJ (gigajoules) of energy, but a barrel of NGL contains just 4 GJ.)

Here is the forecast to 2040, from the EIA's (Washington) recent Annual Energy Outlook:

Dissecting the Energy “Boom” Story
 PREVIEW by Gregor Macdonald

Executive Summary

  • Peak Oil is a multifactorial concept 
  • Why the IEA forecasts aren't credible
  • Why the data shows Peak Oil is alive & well
  • Where oil prices will head in 2013

If you have not yet read A Tale of Two Forecasts, available free to all readers, please click here to read it first.

The U.S. is currently experiencing its second oil production recovery since 1971, when its supply peaked over 9.5 mbpd.

The first recovery took place over a nine-year period from 1976-1985. That renaissance took U.S. production back up from a low of 8.0 mbpd to nearly 9.0 mbpd. And then, over the next twenty years, U.S. production would fall steadily to its recent nadir of 5 mbpd in 2008. Over the past four years (owing to onshore production in North Dakota and Texas), the U.S. has built back an impressive 1.5 mbpd and is currently producing over 6.5 mbpd of crude oil.

Before we get to the IEA Paris forecast for the future U.S. production, let's take a look at our own Energy Information Administration (EIA) Washington forecast. The IEA Paris forecast is more difficult to understand, as it conflates oil and natural gas liquids. By contrast, the EIA Washington forecast is more specifically focused on oil production, which is easier to compare to U.S. production history. (Remember: Natural gas liquids (NGLs) are not oil. More importantly, they do not contain the same energy as oil. A barrel of oil contains 6 GJ (gigajoules) of energy, but a barrel of NGL contains just 4 GJ.)

Here is the forecast to 2040, from the EIA's (Washington) recent Annual Energy Outlook:

Image | It’s Better to Be a Year Early Than a Day Late
It’s Better to Be a Year Early Than a Day Late
 PREVIEW
by Chris Martenson

Executive Summary

  • Don't bet against gold, especially right now
  • Collective thinking and shifting baselines are putting us in great danger of a surprise we're not prepared for
  • When the next disruptive event happens, it will happen faster than the system can react
  • Where I recommend allocating capital right now

If you have not yet read QE 4: Folks This Ain't Normal, available free to all readers, please click here to read it first.

My Thoughts on Gold

Bluntly, anybody selling their gold here does not understand what is happening.  These are the most extraordinary and unique times that anybody has witnessed because the entire world is engaged in an attempt to print our way to prosperity.

Maybe that will come to pass, but the odds very much do not favor that outcome.  It's never worked before, and I really have not yet seen any articulate description of why it might work this time.  From a betting perspective, it's like facing a roulette wheel where every slot is black except for that solitary green bin.  People selling gold here are placing their chips on green.

But I don't really think that gold's current market price or recent behaviors have anything useful to do with gold's value here.  As I noted in a recent Insider, in the run up to the QE4 announcement and then in the days right after, some entity has been selling literally thousands and thousands of gold contracts into the thinly traded overnight markets so rapidly that we have to use millisecond charting to see it for what it is.  Again, there is no other legitimate explanation for this activity of which I am aware besides having an intent of pushing the price down.

Whether there is some motivation for this activity besides 'making money,' I remain convinced that the gold market, like many others, is no longer sending useful price signals. Instead it is telling us that some entity has found it useful to sell thousands of gold contracts all at once.

The interesting part of this story is that this has been the most sustained, intensive, and yet ineffective gold-selling that I have yet seen.  In the past, such bear raids, as they are called, would have resulted in a sharply lower gold price.  Right now, that has not yet really happened. 

I am wondering if a big up move is not right around the corner for gold.  I can tell you that if even one fourth of the recent QE effort was announced five years ago, markets would have exploded and gold would have absolutely launched…

It’s Better to Be a Year Early Than a Day Late
 PREVIEW by Chris Martenson

Executive Summary

  • Don't bet against gold, especially right now
  • Collective thinking and shifting baselines are putting us in great danger of a surprise we're not prepared for
  • When the next disruptive event happens, it will happen faster than the system can react
  • Where I recommend allocating capital right now

If you have not yet read QE 4: Folks This Ain't Normal, available free to all readers, please click here to read it first.

My Thoughts on Gold

Bluntly, anybody selling their gold here does not understand what is happening.  These are the most extraordinary and unique times that anybody has witnessed because the entire world is engaged in an attempt to print our way to prosperity.

Maybe that will come to pass, but the odds very much do not favor that outcome.  It's never worked before, and I really have not yet seen any articulate description of why it might work this time.  From a betting perspective, it's like facing a roulette wheel where every slot is black except for that solitary green bin.  People selling gold here are placing their chips on green.

But I don't really think that gold's current market price or recent behaviors have anything useful to do with gold's value here.  As I noted in a recent Insider, in the run up to the QE4 announcement and then in the days right after, some entity has been selling literally thousands and thousands of gold contracts into the thinly traded overnight markets so rapidly that we have to use millisecond charting to see it for what it is.  Again, there is no other legitimate explanation for this activity of which I am aware besides having an intent of pushing the price down.

Whether there is some motivation for this activity besides 'making money,' I remain convinced that the gold market, like many others, is no longer sending useful price signals. Instead it is telling us that some entity has found it useful to sell thousands of gold contracts all at once.

The interesting part of this story is that this has been the most sustained, intensive, and yet ineffective gold-selling that I have yet seen.  In the past, such bear raids, as they are called, would have resulted in a sharply lower gold price.  Right now, that has not yet really happened. 

I am wondering if a big up move is not right around the corner for gold.  I can tell you that if even one fourth of the recent QE effort was announced five years ago, markets would have exploded and gold would have absolutely launched…

Image | A Couple of Bad Ideas
A Couple of Bad Ideas
 PREVIEW
by Chris Martenson

This week a couple of very bad ideas were floated, one having to do with U.S. natural gas (NG) supply, and the other a proposal for how the U.S. president could avoid having to deal with the pesky debt ceiling.

Throughout the entire unfolding of the crisis, we have all been patiently waiting (if not agitating) for reality to gain a place at the table of ideas.  Instead, we still have the usual fare of the absurd and the ridiculous, indicating that we are not quite ready yet to entertain the serious business of negotiating the various predicaments that we face.
A Couple of Bad Ideas
 PREVIEW by Chris Martenson

This week a couple of very bad ideas were floated, one having to do with U.S. natural gas (NG) supply, and the other a proposal for how the U.S. president could avoid having to deal with the pesky debt ceiling.

Throughout the entire unfolding of the crisis, we have all been patiently waiting (if not agitating) for reality to gain a place at the table of ideas.  Instead, we still have the usual fare of the absurd and the ridiculous, indicating that we are not quite ready yet to entertain the serious business of negotiating the various predicaments that we face.
Image | Forecasting the Future of Rental Housing and Home Valuations
Forecasting the Future of Rental Housing and Home Valuations
 PREVIEW
by charleshughsmith

Executive Summary

  • Why the momentum for household formation is still downwards, despite the gains in recent years
  • Why "rental price fatigue" is putting today's increasingly rosy housing valuations at jeopardy
  • Why the fiscal and monetary stimulus that has boosted the housing market in recent years cannot continue further
  • How housing may turn from the “can’t lose” investment into an anchor of debt and a “now I can’t move to a better job” debacle

If you have not yet read Real Estate: Is the Bottom In, or Is This a Head-Fake?, available free to all readers, please click here to read it first.

In Part I, we reviewed the fundamentals that have been pushing housing prices higher in 2012. Many of these forces are the result of explicit real estate-supportive Federal and Federal Reserve policies, while others, such as restricting the number of defaulted properties on the market, are implicit policies of the financial cartel that has much to gain from a recovery in housing.

What, if anything, could derail this manufactured housing recovery?

Before we get to specifics, we should start by discussing unintended consequences. What happens when politically expedient policies are imposed with a simplistic goal?

Exhibit #1 is the Federal Reserve policy of lowering interest rates and increasing liquidity to boost “risk assets” such as stocks. This had the unintended consequence of inflating a stock bubble that burst with painful consequences in 2000-02.

Like all central-planning agencies, the Fed followed this policy error by doing more of what had failed: It lowered rates even more, enabling an unprecedented bubble in housing, which subsequently burst in 2007-08 with even more devastating consequences, as that implosion nearly took down the global financial system.

With FHA having replaced the bankrupt Fannie Mae and Freddie Mac agencies as the mortgage-guarantor of last resort, the Federal government has also doubled down on the failed subsidies that enabled the housing bubble.

What are the unintended consequences of pushing investors into the “crowded trade” of rental housing?  If we answer this, we will be closer to understanding whether housing has bottomed or not.

Let’s start by reviewing the fundamentals of supply and demand that influence housing and rentals.

Forecasting the Future of Rental Housing and Home Valuations
 PREVIEW by charleshughsmith

Executive Summary

  • Why the momentum for household formation is still downwards, despite the gains in recent years
  • Why "rental price fatigue" is putting today's increasingly rosy housing valuations at jeopardy
  • Why the fiscal and monetary stimulus that has boosted the housing market in recent years cannot continue further
  • How housing may turn from the “can’t lose” investment into an anchor of debt and a “now I can’t move to a better job” debacle

If you have not yet read Real Estate: Is the Bottom In, or Is This a Head-Fake?, available free to all readers, please click here to read it first.

In Part I, we reviewed the fundamentals that have been pushing housing prices higher in 2012. Many of these forces are the result of explicit real estate-supportive Federal and Federal Reserve policies, while others, such as restricting the number of defaulted properties on the market, are implicit policies of the financial cartel that has much to gain from a recovery in housing.

What, if anything, could derail this manufactured housing recovery?

Before we get to specifics, we should start by discussing unintended consequences. What happens when politically expedient policies are imposed with a simplistic goal?

Exhibit #1 is the Federal Reserve policy of lowering interest rates and increasing liquidity to boost “risk assets” such as stocks. This had the unintended consequence of inflating a stock bubble that burst with painful consequences in 2000-02.

Like all central-planning agencies, the Fed followed this policy error by doing more of what had failed: It lowered rates even more, enabling an unprecedented bubble in housing, which subsequently burst in 2007-08 with even more devastating consequences, as that implosion nearly took down the global financial system.

With FHA having replaced the bankrupt Fannie Mae and Freddie Mac agencies as the mortgage-guarantor of last resort, the Federal government has also doubled down on the failed subsidies that enabled the housing bubble.

What are the unintended consequences of pushing investors into the “crowded trade” of rental housing?  If we answer this, we will be closer to understanding whether housing has bottomed or not.

Let’s start by reviewing the fundamentals of supply and demand that influence housing and rentals.

Image | Last Night’s Gold Manipulation Event
Last Night’s Gold Manipulation Event
 PREVIEW
by Chris Martenson

We have another certified manipulation event happening in gold and silver right now.  It began last night.

I was talking with one of our financial advisers yesterday and was queried about the near-term direction of gold and silver.  I noted that the commercials had built up one of the largest short positions ever.

When they do this, it is a guarantee that prices will be subjected to a hard and fast bear raid at some point.  I've personally seen this trick about a dozen times, so I am quite familiar with it. It goes like this…
Last Night’s Gold Manipulation Event
 PREVIEW by Chris Martenson

We have another certified manipulation event happening in gold and silver right now.  It began last night.

I was talking with one of our financial advisers yesterday and was queried about the near-term direction of gold and silver.  I noted that the commercials had built up one of the largest short positions ever.

When they do this, it is a guarantee that prices will be subjected to a hard and fast bear raid at some point.  I've personally seen this trick about a dozen times, so I am quite familiar with it. It goes like this…
Image | Mixed Messages
Mixed Messages
 PREVIEW
by Chris Martenson

We are surrounded by mixed messages.  Is the economy recovering or stumbling?  Are we are at the edge of a new energy bonanza or not?

One of the particular difficulties about trying to make sense of things these days is the shameless amount of statistical manipulation (i.e., official lying) for political purposes and for shaping market reactions — as well as the amount of paid PR material that is masquerading as real news from unbiased sources.

The level of sophistication in controlling messages is really something to admire, as long as one is unconcerned with the damage such spins and distortions are dong to our collective futures…
Mixed Messages
 PREVIEW by Chris Martenson

We are surrounded by mixed messages.  Is the economy recovering or stumbling?  Are we are at the edge of a new energy bonanza or not?

One of the particular difficulties about trying to make sense of things these days is the shameless amount of statistical manipulation (i.e., official lying) for political purposes and for shaping market reactions — as well as the amount of paid PR material that is masquerading as real news from unbiased sources.

The level of sophistication in controlling messages is really something to admire, as long as one is unconcerned with the damage such spins and distortions are dong to our collective futures…
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