Nov 30, 2011

Well we got the news event. A coordinated action by every central bank in the world to lower the cost of dollar-funding to big global banks following on yesterday’s ratings downgrade to a couple dozen of those same banks. Another kick of the can pretending that the problem is illiquidity rather than insolvency. It illustrates well how the world works now.

If you are Big M$%F$%# GlobalBank and your credit rating drops, then Big M$%^F$%^ CentralBank will lower your cost to incur additional debt. If you are anyone else and your credit rating drops to junk, you are shut off from all credit and are headed for bankruptcy. Too Big Too Fail means Just The Right Size To Subsidize.

No surprise that equity markets gapped up massively at open. Squeezing the weak shorts of the big financials who don’t realize that the world’s central banks (and most Western governments) are completely and utterly owned by those same banks. Combined with what has been a couple of surprisingly resilient economic indicators in the US, we may be in for a short/sharp rally.

Longer-term, this really is getting near the last call to get out of ALL financial assets denominated in fiat currencies. There is no safe haven fiat currency and there is ZERO safe haven for a minnow anywhere in any financial market rigged by the sharks. They will have no hesitation in stealing everything – if they aren’t already. And they are NOT subjects of the law anymore. They ARE the law. I do like food, physical PM’s, energy – but not the industrial commodities. If you are in debt, you are now screwed (unless you are one of the kleptos/cronies). If you are looking for safety within the system, you will soon be breakfast.

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Debt – like water – flows downhill

S&P is busy today announcing downgrades of businesses that either have heavy Treasury exposure or guarantees. Not a pretty day for a lot of munis and financials. Bank of America is plunging. Presumably the weakling of the big money center banks – and the guarantee of “too big too fail” is weaker now. But I wanted to focus on the negative credit watch that S&P placed on Berkshire Hathaway. Of course Moody’s won’t do the same — because Berkshire is the largest shareholder of Moodys.

I’ve read all of Warren Buffett’s shareholder letters over the years. And up to two years ago, I’ve had an enormous respect for him as one of the few CEO’s who wasn’t out to rob shareholders and who was candid (and rich) enough to be honest about a lot of things and damn the consequences. That all changed with his behavior in 2008 which was appallingly piggish and self-serving and dishonest and hypocritical. And his business partner – Charlie Munger – was repugnant (and honest) enough late last year to tell a crowd of future sharks that the bailout of billionaires (of which he/Buffett personally received benefits in the billions of dollars) was completely necessary – but that everyone who lost their jobs/savings/income because of that bailout should just “Suck it up”.

Well Charlie — Suck this. I hope you lose everything.

G7 and ECB Intervention

Not a surprise.

The ECB announced on Sunday that they would buy Spanish and Italian and other periphery bonds. The hope being that Asia will help bail out European banks which hold that debt. Kick the can. Kick the can.

The G7 Finance Ministers and Central Bank Governors also met over the weekend and released a statement before the Asia open.

We are committed to addressing the tensions stemming from the current challenges on our fiscal deficits, debt and growth, and welcome the decisive actions taken in the US and Europe. The US has adopted reforms that will deliver substantial deficit reduction over the medium term. In Europe, the Euro area Summit decided on July 21 a comprehensive package to tackle the situation in Greece and other countries facing financial tensions, notably through the flexibilisation of the EFSF. Translation — FU S&P. You are all now criminals with international arrest warrants charged with peeing in the punchbowl.

No change in fundamentals warrants the recent financial tensions faced by Spain and Italy. Translation — WTF do you people think you are? We have told you what to think for decades. And now you are disobeying us?

We welcome the additional policy measures announced by Italy and Spain to strengthen fiscal discipline and underpin the recovery in economic activity and job creation. The Euro Area Leaders have stated clearly that the involvement of the private sector in Greece is an extraordinary measure due to unique circumstances that will not be applied to any other member states of the euro area. Translation — The water is safe for you private investors to buy non-Greek debt. You won’t get screwed. We promise. Scout’s honor.

We reaffirmed our shared interest in a strong and stable international financial system, and our support for market-determined exchange rates. Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. Translation — We are making plans to centrally-plan currency interventions while uttering soothing words about market-determined exchange rates. When the centrally-planned intervention doesn’t work, we will blame it on the disorderly market since we told you all to behave but you aren’t listening and obeying.

Debt Ceiling Assessment

The jokers in DC have, unsurprisingly, managed to ensure that “business as usual” is safe and sound – while pretending to wear the newly fashionable hairshirt of fiscal responsibility. The actual spending cuts (as opposed to crossing items off of Santa’s wish list and calling them “cuts”) in the debt ceiling deal amount to roughly $30 billion. In exchange, the American people now have an additional $2.4 TRILLION worth of perpetual debt on our shoulders. In a year and a half, we will go through this nonsense again. This is a complete fraud. In a just society, the revolution would start now and a lot of people in DC would swing from a rope. It won’t happen. Those who are the most screwed by this deal (the young) are also the ones who have the most recent experience with an education system that is good only at inculcating propaganda about how great things are.

Even Bill Gross – the bailout-loving bond vigilante who has been AWOL for a couple decades – admits it is a fraud in his weekly update – Kings of the Wild Frontier. He does provide useful advice from a bond investors perspective:

He correctly states that there are only four options that the US government has (apart from outright default which won’t ever happen):
1. Balance the budget via growth — Won’t ever happen. The debt load itself now ensures that interest rates which accompany increased growth will strangle that growth and drive deficits deeper.

2. Unexpected inflation — Nice emphasis on unexpected. IOW – TIPS are garbage — as are any and all government stats re inflation. They will lie to the bitter end about what inflation actually is.

3. Currency depreciation — I disagree with Gross here. There is only a small and dwindling group of currencies against which the US$ can really depreciate. Solid, fiscally responsible nations that issue a fiat currency. None — NONE — of them are remotely large enough to take the necessary appreciation hit. And for all the world’s bitching and moaning about the dollar as a reserve currency, not one country has ever remotely considered taking the necessary penalty (gutting one’s manufacturing/export/surplus sector in order to become consumption/demand/deficit of last resort for the world) required to have the “privilege” of being the reserve currency. At best, the “fiscally responsible” are merely the last lemming rushing toward the cliff.

4. Financial repression — Gross only mentions negative real interest rates. He is correct that this is permanent. And this is the real tailwind that will drive gold and monetizable backwardated commodities higher (in purchasing power terms – not necessarily nominal terms). When gold yields zero – and Treasuries also yield zero; it is a no-brainer as to where one should put their money. That said — Gross is missing literally thousands of other means of financial repression and thievery. Most of which are now certain to be tried.

It is critical however to understand how DEFLATIONARY these sovereign debt defaults/jitters are. Monetizable commodities will do OK — but understand the difference between a monetizable commodity and a regular commodity.

June 22, 2011

Short-term: 2 green, 1 yellow, 1 red
Intermediate-term: 3 yellow, 1 red
Composite: Neutral

A poor follow-through day is not good news for this bounce. And most shares had no liquidity – high bid-ask spreads, computer/automated programs drove most of what did trade.

In more significant “under the headlines” news, word is leaking out that money market funds in the US are now heavily levered to commercial paper issued by European banks. They do not have significant business in the US that generates USD. So how are they going to generate the dollars to pay off the commercial paper? Money market funds — marketed as a “safe” cash alternative — have now become a major bet on a currency squeeze and on the balance sheet quality of European banks and on a Greece bailout. With zero rewards to be delivered to fund holders – if the bet pays off. Money markets have now become part of the Wall St scam. The Federal Reserve knows this – it was mentioned by Bernanke at his press conference yesterday.

This creates a perverse problem. There is no escape from volatile markets in “cash”. At least not if that cash is in the form of money markets. Money market fund holders are now checkmated. We are now a full participant (well not a “full” participant since we will receive no rewards/bonuses – only expenses/risks) in all the financial chicanery merely by “sitting on the sidelines” with “cash” in a “safe” money market fund. If those scare quotes scare you, they should. Because when risk is transferred to those who are merely demanding that a currency serve as a unit of account; then the currency no longer really functions as money.

This really has become a completely insane financial world. Zero-yielding money market funds now require a freaking HEDGE in order to preserve the principal. Longer-term, this means only one thing — get physical gold and silver in your possession and out of the banking system. Not futures, not leveraged, not with debt, not miners, not ANY of the financial/paper crap that has built up around everything. That doesn’t mean all your “cash” devoted to that — because, like it or not, gold/silver are NOT legal money and they never will become so. They may become de facto money if/when the entire financial/legal de jure fiat money system breaks apart. But that is solely emergency fund or EOTWAWKI.

For everything else — your long-term plans re “retirement” (a quaint 20th century notion that will soon die) or other long-term saving — you are stuck in the world of financial risk with no escape (and no reward unless you actively manage that risk). And in that world, the dollar is actually massively undervalued against other currencies — most especially against the Swiss france, the commodity currencies (A$, NZ$, C$), and to a lesser extent Yen, Euro, Pound. Unfortunately also, in that world, “value” doesn’t really drive trading strategies in shorter time horizons.

As an aside. This is perhaps another example where we will be forced to emulate the “Japanese housewife”. Who recognizing that their savings would yield nothing but still risk everything, decided to embrace the risk, learn about it, and become a currency carry-trader.

Sharks Eat Themselves Too

Every minnow understands that the investment ocean is a perilous place since we are usually the ones who are eaten by the sharks. But once in a blue moon, the sharks fight amongst themselves. Presumably only when there aren’t enough minnows around. These rare fights are the only opportunity to see behind the curtain to see the standard M.O. of sharks. Here’s one of those fights. Coca Cola is accusing Goldman Sachs of manipulating metals prices via its ownership of the metals warehouses at metals futures exchanges. I’m excerpting pieces from the links on the assumption that the linked content will disappear at some point:

Wall St Eyed in Metal Squeeze
Goldman Sachs Group Inc. and other owners of large metals warehouses are being scrutinized by the London Metal Exchange after being accused by users like Coca-Cola Co. of restricting the amount of metal they release to customers, inflating prices.

The board of the LME met on Thursday to discuss complaints from aluminum users and market traders, who say operators of warehouses, which also include J.P. Morgan Chase & Co. and Glencore International PLC, should be forced to allow the metal out more quickly to meet demand……..

Goldman, through its Metro International Trade Services unit, owns the biggest warehouse complex in the LME system, a series of 19 buildings in Detroit that house about a quarter of the aluminum stored in LME facilities…..

Coca-Cola and other consumers say that Metro in particular is allowing the minimum amount of aluminum allowed by the LME—1,500 metric tons a day—to leave its facilities, and that Metro could remove much more, erasing supply bottlenecks and lowering premiums for physical delivery in the process…..

Coca-Cola, which has complained to the LME, says it can take months to get the metal the company needs, even though warehouses are allowing aluminum to come in much more quickly. Warehouses, meantime, collect rent and other fees…..

Since Goldman bought Metro early last year, the wait time for aluminum delivery in Detroit has increased to about seven months.

Metro charges its customers 42 cents a day for storing one metric ton of aluminum in Detroit, which is about the industry average. At 900,000 tons in the warehouses, Goldman is earning $378,000 a day on rental costs, or about $79 million in seven months.

Metro, meantime, is taking in metal. Metro also offers cash incentives to producers like Rio Tinto Alcan to store their metal in Metro’s sheds for contracted periods, sometimes as much as $150 a ton, according to traders.

Once the metal is in the warehouse, the producers sell ownership to this metal on the open market. The new owner can’t collect his metal for seven months because of the bottleneck. For that period, the new owner is stuck paying rent to Metro.

In recent years, major investment banks like Goldman and J.P. Morgan and commodities houses like Glencore have been snapping up warehouses around the world, turning the industry from a disperse grouping of independent operators into another arm of Wall Street…..The transformation has raised questions about whether the investment banks, which also have big commodity-trading arms, are able to use their position as owners of warehouses to manipulate prices to their advantage.

How Goldman Sachs Created the Food Crisis

Futures markets traditionally included two kinds of players. On one side were the farmers, the millers, and the warehousemen, market players who have a real, physical stake in wheat. This group not only includes corn growers in Iowa or wheat farmers in Nebraska, but major multinational corporations like Pizza Hut, Kraft, Nestlé, Sara Lee, Tyson Foods, and McDonald’s — whose New York Stock Exchange shares rise and fall on their ability to bring food to peoples’ car windows, doorsteps, and supermarket shelves at competitive prices. These market participants are called “bona fide” hedgers, because they actually need to buy and sell cereals.

On the other side is the speculator. The speculator neither produces nor consumes corn or soy or wheat, and wouldn’t have a place to put the 20 tons of cereal he might buy at any given moment if ever it were delivered. Speculators make money through traditional market behavior, the arbitrage of buying low and selling high. And the physical stakeholders in grain futures have as a general rule welcomed traditional speculators to their market, for their endless stream of buy and sell orders gives the market its liquidity and provides bona fide hedgers a way to manage risk by allowing them to sell and buy just as they pleased.

But Goldman’s index perverted the symmetry of this system. The structure of the GSCI paid no heed to the centuries-old buy-sell/sell-buy patterns. This newfangled derivative product was “long only,” which meant the product was constructed to buy commodities, and only buy….

This imbalance undermined the innate structure of the commodities markets, requiring bankers to buy and keep buying — no matter what the price. Every time the due date of a long-only commodity index futures contract neared, bankers were required to “roll” their multi-billion dollar backlog of buy orders over into the next futures contract, two or three months down the line. And since the deflationary impact of shorting a position simply wasn’t part of the GSCI, professional grain traders could make a killing by anticipating the market fluctuations these “rolls” would inevitably cause. “I make a living off the dumb money,” commodity trader Emil van Essen told Businessweek last year. Commodity traders employed by the banks that had created the commodity index funds in the first place rode the tides of profit…..

Since the bursting of the tech bubble in 2000, there has been a 50-fold increase in dollars invested in commodity index funds. To put the phenomenon in real terms: In 2003, the commodities futures market still totaled a sleepy $13 billion. But when the global financial crisis sent investors running scared in early 2008, and as dollars, pounds, and euros evaded investor confidence, commodities — including food — seemed like the last, best place for hedge, pension, and sovereign wealth funds to park their cash…..

The result of Wall Street’s venture into grain and feed and livestock has been a shock to the global food production and delivery system. Not only does the world’s food supply have to contend with constricted supply and increased demand for real grain, but investment bankers have engineered an artificial upward pull on the price of grain futures. The result: Imaginary wheat dominates the price of real wheat, as speculators (traditionally one-fifth of the market) now outnumber bona-fide hedgers four-to-one.

Today, bankers and traders sit at the top of the food chain — the carnivores of the system, devouring everyone and everything below. Near the bottom toils the farmer. For him, the rising price of grain should have been a windfall, but speculation has also created spikes in everything the farmer must buy to grow his grain — from seed to fertilizer to diesel fuel. At the very bottom lies the consumer.

Don’t expect the US (or UK) government to do anything. The Vampire Squid owns the government and those same government bonds are what are being used to finance those warehouse operations. The bigger the deficit our government runs, the more money the squid has to do stuff like this. There is no end/reversibility to the cycle because it costs nothing to create money itself. Those warehouse operations are pure central planning — Goldman Sachs via the release of physical is deciding which metals/oil/food consumers get to live and which will die. Pretty neat — in a “those bastards should be hung” sort of way.

As a minnow, the best thing to take from this is — never assume that commodities prices are actually an expression of actual supply and/or demand.

June 16, 2011

Short-term: 1 green, 1 yellow, 1 red
Intermediate-term: 4 red
Composite: Bearish

A bit of a disconnect. The short-term indicators are close to an oversold condition (and possible technical support levels too) – but intermediate term indicators are deteriorating further. Given the overall news – and especially the complete absence of liquidity in the market – it will take a headline news event to create a bounce.

Something like “IMF and ECB agree on Greece debt package. Greece agrees to pretend it will pay the debt back. Banks agree to pretend that their balance sheets are solid. Everyone agrees that now is a great buying opportunity. Everyone wins. Sunny days are forecast.”

Interestingly, I cannot find the actual price of a Greek sovereign bond. All the news items are about the cost of a Greek credit default swap (currently 2189 basis points – 21.9% of the principal value of a 5 yr bond). But CDS’s are purely leveraged side-bets made by the peanut gallery of banks and other finance insiders — who have already proven that they get to keep all CDS profits while passing on all CDS losses to taxpayers.

As long as the price of an actual Greek sovereign bond remains completely hidden behind a wall of fraudulent and opaque accounting, then the Greek people themselves are unable to decide whether the costs of sovereign default (inability for their govt to run deficits for years, dropping out of the euro, etc) outweigh the benefits (reduction of the debt principal and future tax payments). In theory, and historically, there is another cost of sovereign default to foreign creditors — and that is war – as those creditors may try to forcibly take what is owed to them. But denying that information to the Greek people themselves means that the Greek government has already allied with foreign banks against its own people and the Greek people are no longer sovereign. Their government is no longer responsible to them.

While the particulars of what is happening in Europe are unique to their disastrous euro experiment; some of the core sovereignty issue applies to the US and other governments as well. Governments are increasingly going to become allied to the global multilateral institutions themselves and any practical notion of “government is by the consent of the governed – by a social contract” will simply vanish. And I seriously don’t think it will be challenged. We are far more addicted to the globalized mess of pottage than to the freedom/responsibility of self-governance.

History Geek Time

OK. I like history and charts/numbers — and sometimes the two show something quite interesting.

Here is the — inflation-adjusted, total return (price + reinvested dividends) chart overlay for two time periods — post-1929 and post-2000

The same chart without an inflation adjustment

One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It is simply too painful to acknowledge — even to ourselves — that we’ve been so credulous. So the old bamboozles tend to persist as the new bamboozles rise. — Carl Sagan

There is no question that inflation is one of the best bamboozles. It was Keynes who observed —
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

And, surely, the entire “inflation-adjusting” process is one that can conceal/distort as much as it reveals. But even using government-created inflation data, what is revealed is the massive deterioration of our economy and the transfers (via inflation) of wealth that have occurred since the stock market bubbletop of 2000. Not 2008. 2000. Ten years. And even at this point, Keynes is probably right that only 300 people in the US actually understand what is happening to them. For the rest, merely an inchoate anger that something is badly wrong

Where Keynes is clearly either wrong or evil is that our government has been following totally Keynesian policies during that entire time. Monetary policy was for all practical purpose near-zero for most of the time. Bush and Republican Congresses spent money like drunken sailors trying to goose the economy. And Bush/Obama and Democrat congresses have spent money like drunken sailors trying to goose the economy. And we are still now in just as bad shape in real terms as we were in the Great Depression. None of it has fixed the problem. Nor has any real honest serious open public discussion of the problem even occurred yet. Just like Japan, we have already had a lost decade. We just haven’t known it.

That is the real “value” of inflation to those who benefit from it. It – combined with a bit of social welfare around the edges to dull the senses of those who should be angry as hell and a lot of divide-and-conquer to ensure that no real agenda/discussion is allowed – is more effective than opium. A population that should, IMO, be hanging the bastards from the trees by now is instead generally simply continuing to play our acceptable role in the divide-and-conquer game. Pretending that if we elect a slightly different group of bastards that the game will change in our favor. And once that no longer works, then presumably a war will be started so that we can be riled up to go out and smote some them. Divide-and-conquer on a grander scale. That is ultimately what worked in the 1929-1945 timeframe. Pearl Harbor. We did not “solve” the underlying problems then. We just floundered until a war presented the right circumstances/conditions for the problem to be coincidentally solved.

I do wish I were one of the one-in-a-million. Sometimes I think I am. And no doubt I understand economics (without being tied to supporting the existing structures that create this problem) better than the vast vast majority of people. But I know I’m not one of the one-in-a-million. This stuff stretches me to my limits – and it is beyond those limits where understanding lies.

Enough.

Mortgage Fraud

A direct consequence of the bailout-of-the-big and the attempt by the Federal government to keep the housing bubble propped up is the growth in mortgage fraud. Two news stories today – http://www.forexyard.com/en/news/SPECIAL-REPORT-Flipping-flopping-and-booming-mortgage-fraud-2010-08-17T110245Z

http://abcnews.go.com/Business/wireStory?id=11416870

This will continue and only get worse. The solution to the housing bubble was to let banks/lenders/creditors run thru the bankruptcy process to actually resolve debt burdens and force write offs. And as a side effect, force mortgage lending back to local lenders/underwriters who would be on the hook for loans. Course that would have also meant that housing prices would have plunged even more (perhaps another 20%) in order to settle at a true market-clearing price.

We chose instead to prop prices up, socialize the debts, and ensure that only big “national” types of financing would be rapidly bailed out of their mess. The result is that fraudsters can now be certain that lenders/underwriters/appraisers/securitizers/etc are only judging loans on the basis of what appears on a computer screen since truly local knowledgeable competition has been buried. And the taxpayer is now the “deep pocket” who is defrauded.

Expect nothing to change. And don’t believe any “comps” prices for any housing. Long-term, the housing bubble will be well and truly popped when house prices fall to levels where cash buyers appear. Preferably not the same cash buyers who are busy accumulating cash via mortgage and other financial fraud — but I no longer believe the US is, at core, an honest place. Fraud pays. Honesty doesn’t. All the money that one has in a bank (times 30 because of leverage) merely funds this sort of fraud.

Frontrunning the Fed

If you don’t believe that the big Wall St dealers own/run the government via their ownership of the FRBNY and their purchase of politicians; then you haven’t been paying attention. Yesterday, the Federal Reserve did as promised a week ago. They used the proceeds of the paid-off portion of mortgages they’ve bought over the last year to monetize a part — a really really tiny part — of Treasury debt. Specifically, they monetized $2.55 billion of Treasury debt. $21 billion of debt was offered to the Fed for monetization. So how did the Fed choose which 12% of that offered debt to actually monetize?

Answer — The Fed monetized the specific CUSIP issues that the big Wall St primary dealers said should be monetized.

This is a really big story with huge implications down the road. First a bit of economics.

When the Fed monetizes long-term debt, it is attempting to both manage the slope of the entire yield curve and create inflation. The beneficiary of that specific inflation is the entity that receives the money first in exchange for the long-term bond because they get to spend that newly-created money before the impact of that additional money is felt in prices. This is not a new concept. It is THE reason that bankers created the Federal Reserve in the first place because it allows them to a)frontrun everyone else in buying stuff that is trending up in price because of capacity constraints and b)become highly liquid and thus become the ONLY buyer around for stuff that is trending down in price because of capacity excess. IOW, banks created the Federal Reserve (and got it enshrined as a legal monopoly by the govt) so they could profit from both sides of the business cycle. And the monopolization of finance is what leads to the cartelization/corporatization of the economy itself (read a bio of JP Morgan).

When the Fed only monetizes a portion of long-term debt; then not all Treasury debt is equal. Those specific issues (CUSIP’s) that are monetized now are worth more than other issues which come due at the same time in the future. Those who know what will be monetized can profit twice by buying the monetized CUSIP and shorting the non-monetized one. The mechanics of this stuff is way above my pay grade but there is something for us minnows to take away from this.

First — it is the minnows demand for “Treasury debt” in general (thus ignoring specific CUSIP’s) that allows this game and ensures that most of the profits go to the sharks. You want to stop this game? Then stop buying Treasuries — and stop funding entities (via your bank account or the stock of corporations that are hoarding Treasuries) that buy Treasuries.

Second, the specific criteria (avoid the cheapest-to-deliver) that the Fed used here is designed specifically to keep the derivatives market going. ie – to keep the big Wall St primary dealers going – even when they are shorting Treasuries. It also has the effect of making the long-term fiscal situation of the US worse — because the debt that is monetized is the lowest interest cost debt rather than the highest interest cost debt. This alone is the sort of kleptocratic insanity that is now leading me to reduce my long-term “normal” US allocation to under 20% (which includes cash). Bluntly, the US is run by a bunch of crooks and there is no reason to invest in the US. The bastards won’t change — and Americans won’t kill/overthrow them — so get out. I now understand why Jim Rogers moved his family to Singapore.

Third, now that the entire Treasury yield curve is being managed/rigged by the Fed, it is no longer an indicator of “risk-free” yield. The big Wall St houses will attempt to keep using this curve as their discount rate for valuing other assets (stocks, housing, etc) – in order to keep those asset markets propped up. And it may well work for awhile – perhaps a long long while. But that is only the source of asset bubbles (ie stock market rampup’s the day of/after every “monetization day” – upcoming days are 8/19, 8/24, 8/26, 9/1) — not of any sustainable growth. And when it reverses, it will reverse hard and fast. So raise your allocation to “real” assets that will preserve their value/utility in the event that the reversal happens. And by “real” assets, I mean REAL assets — not financial assets that are supposedly based on the price of real assets.

Finally, this little circle jerk between the derivatives market and “sovereign” bonds is telling me that upcoming sovereign debt defaults will be magnitudes larger in their effect than they have ever been in the past. Before, sovereign defaults have generally affected mainly taxes and spending by government. Now, they will affect EVERYTHING in the market. All of your assets. All of your dependence on others to provide you with daily needs. The most vulnerable countries are now precisely those where the division of labor has advanced the most and where people have benefited the most from it. Certainly there is nothing imminent to warrant fear. But neither is it going to be reasonable to expect a warning when fear is warranted. Indeed, considering that the sharks own the system; expect deceit/dishonesty from them when things do begin to deteriorate because for them that day will be a golden opportunity. So advice for minnows — get prepared, keep it simple, and don’t believe anyone from/in NYC/DC.