Zero Hedge

As part of the Fed’s latest QE iteration, it has already been made clear that despite initial disclosures that the Fed would stay in the 2-10 Year bound of Treasurys, Ben Bernanke is now also gobbling up the very long end of the curve. For all those who are, therefore, still confused why bonds continue to surge to record levels, don’t be: when there is a guaranteed bidder just below you in the face of the Fed, and who you can turn around and sell to at will, there is no pricing risk. The problem, from a bigger stand point, is what happens when the Fed is actively buying up 30 Year bonds with impunity and the much desired (by the Fed) inflation still does not appear? Well, the Fed then, in Michael Pento’s opinion, will begin to purchase stocks and real estate. And as all those who enjoy comparing the US to Japan can attest, outright purchases of securities by the Japanese government is a long-honored tradition in the ongoing fight with deflation in Japan. However, and as the recent BOJ (lack of) intervention demonstrated, Japan never could do anything with the required resolve, and bidding up one stock here and there would never achieve anything. Which is why in this interview with Eric King, Michael Pento makes the case that as opposed to the occasional market intervention via the President’s Working Group, Bernanke will soon make stock purchases an outright policy of the Federal Reserve as its last ditch attempt to engender inflation before the hundreds of billions of Commercial Real Estate and other bank debt start maturing in 2011/2012. Bernanke is running out of time and he knows it. And once the Fed becomes the bidder of last resort in stocks, all bets are off, as the Central Bank will become the defacto only market in virtually every risky category. And the only safe vehicle, once the market then begins to price in Fed driven asset-price hyperinflation, will be gold.

Pento also provides some perspectives on the Fed’s balance sheet, which he anticipates will expand in a “great fashion”, but a much bigger concern to the recent Euro Pacific Capital addition, is the possible surge in M2: “That base money can expand, M2 which is currently running around 8.5 trillion all the way up to nearly 25 to 30 trillion dollars of money supply and that’s enough obviously to send prices through the roof.” All Bernanke needs to do is light the “alternative asset purchasing” match and all those who wonder what left field hyperinflation could come out of, will get their answer.

Of course, it wouldn’t be a Pento interview without a requisite smack-down, in this case of Dennis Gartman, whose call to sell gold denominated in euros at the very bottom of the recent gold correction needs no further commentary: EUR-denom gold has jumped well over 10% since Gartman said to get out. Pento adds the following: “There is so much misinformation out there, Dennis Gartman was out there saying gold has lost its inflation hedging properties: this is just ludicrous and insane. I can tell you that gold will never lose its inflation lure, and that’s precisely why I’ve stepped up my purchases of gold., I see what the monetary base is doing, I can clearly see Bernanke’s next step to vastly increase the size of the balance sheet and the monetary base. So for me, it’s 100% an inflation hedge.”

Pento also goes into explaining why housing is facing a “deflationary depression,” and a further collapse in pricing, why inflation benefits only those closest to the money, i.e., the banks and the military complex, why it destroys the middle class (we are sure Buffett ca. 2003 could say something about that too… the current, far more senile and captured Uncle Warren, not so much), the impact on discretionary purchases, on unemployment, real incomes, and all other items which tend to “follow the money.”

Lastly, Pento concludes with an analysis of what would have happened had the government allowed the deflationary depression to occur two years ago, without the tens of trillions in bank bailouts. We protracted, and elongated the depression. But instead of having the benefit of falling prices, you have rising prices.” And if Pento is right, the price rise has only just begun.

Full King World News interview here.

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By Karl Denninger, The Market Ticker

As is my usual practice…..

Developments in Financial Markets and the Federal Reserve’s Balance Sheet
The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Committee met on June 22-23, 2010. He also reported on System open market operations during the intermeeting period, noting that the Desk at the Federal Reserve Bank of New York had engaged in coupon swap transactions in agency mortgage-backed securities (MBS) to substantially reduce the number of the Committee’s earlier agency MBS purchases that remained to be settled.

We made sure that those who sold us things they didn’t have didn’t get called on it.  Isn’t that grand?  (PS: What do you call selling something you don’t actually own – and can’t acquire?)

In addition, the Manager briefed the Committee on the System’s progress in developing tools for possible future reserve draining operations. The Federal Reserve successfully conducted two more small-value auctions of term deposits to confirm operational readiness for such auctions at the Federal Reserve and at the depository institutions that chose to participate.

Who were those that "chose to participate"?  Oh yeah, that’s right, we dont’t get actual minutes – what we get is another fraudulently-claimed load of bilge.

There were no open market operations in foreign currencies for the System’s account over the intermeeting period.

…. that we’re willing to admit to……

Staff Review of the Economic Situation
The information reviewed at the August 10 meeting indicated that the pace of the economic recovery slowed in recent months and that inflation remained subdued.

Translation: There was no recovery.  Not now, not before, and certainly not on a forward basis.

In addition, revised data for 2007 through 2009 from the Bureau of Economic Analysis showed that the recent recession was deeper than previously thought, and, as a result, the level of real gross domestic product (GDP) at the end of 2009 was noticeably lower than estimated earlier. Private employment increased slowly in June and July, and industrial production was little changed in June after a large increase in May. Consumer spending continued to rise at a modest rate in June, and business outlays for equipment and software moved up further. However, housing activity dropped back, and nonresidential construction remained weak. Additionally, the trade deficit widened sharply in May. A further decline in energy prices and unchanged prices for core goods and services led to a fall in headline consumer prices in June.

The government lied previously, and still is.  We of course used this as an excuse, and still are.

Private nonfarm employment expanded slowly in recent months. The average monthly gain in private payroll employment during the three months ending in July was small, considerably less than the average increase over the preceding three months.

When adding in the population of new entrants to the workforce, employment did not expand at all, it actually FELL.  But we won’t tell you that, because that’s would be "truth", and we’re allergic.  Severely.  Oh, we’re missing our epipens too.

The unemployment rate moved down in June from its level earlier in the year, and was unchanged in July, as declining civilian employment was accompanied by decreases in labor force participation. Initial claims for unemployment insurance remained at an elevated level over the intermeeting period.

We don’t count people who have given up on finding a job as "unemployed."

The output of high-technology items and other business equipment continued to rise.

Yeah, Intel says so too.  Oh wait….

Indicators of household net worth–such as stock prices and house prices–were little changed, on net, over the intermeeting period. Consumer confidence fell back in July, with households expressing greater concern about their personal finances and the outlook for the recovery.

Our lies are not working as well as they used to.

The housing market, which had been supported earlier in the year by activity associated with the homebuyer tax credits, was quite soft for a second consecutive month in June. Sales of new single-family homes rebounded some in June after their sharp drop in May, but they remained at a depressed level. Sales of existing homes fell for a second month in June, and the index of pending home sales suggested another decline in July.

The government cheese ran out.  Damn.

Inflation remained subdued Deflation accelerated in recent months.

Nominal hourly labor compensation–as measured by compensation per hour in the nonfarm business sector and the employment cost index–rose modestly during the year ending in the second quarter. Average hourly earnings of all employees rose slowly over the 12 months ending in July. Output per hour in the nonfarm business sector declined in the second quarter after rising rapidly in the preceding three quarters. On net, unit labor costs remained well below deflated below their level one year earlier.

In the emerging market economies (EMEs), incoming data generally pointed to a moderation of economic growth, albeit to a still-solid pace, with a notable slowing in China in the second quarter.

China has better liars than we do.  They also use bullets on truth-tellers more often.  (Those in the US telling the truth often have "heart attacks."  Funny coincidence, that….)

In contrast, Mexican indicators suggested that economic activity rebounded in the second quarter after contracting in the first quarter.

The Mexican drug gangs are shooting more people, which is leading to a pickup in demand for guns and ammunition.  This is expected to spur economic activity and reduce competition for jobs.

Over the intermeeting period, investors appeared to mark down the path for monetary policy in response to weaker-than-expected economic data releases and Federal Reserve communications that were read as suggesting that policymakers’ concerns about the economic outlook had increased.

Investors are losing confidence in our lies too.

Reflecting the same factors, yields on nominal Treasury coupon securities fell noticeably on net. Treasury auctions were generally well received, with bid-to-cover ratios mostly exceeding historical averages. Yields on investment- and speculative-grade corporate bonds decreased, and their spreads relative to yields on comparable-maturity Treasury securities declined moderately. Secondary-market bid prices on syndicated leveraged loans rose a bit, while bid-asked spreads in that market edged down.

Net-interest margin is collapsing. Incidentally, this is threatening to expose the naked swimmers among our banks – and their insolvency.

Broad U.S. equity price indexes increased slightly, on net, as generally positive corporate earnings news and an easing of investors’ worries about the potential effects of fiscal strains in Europe were partly offset by concerns about the strength of the economic recovery. Most firms in the S&P 500 reported second-quarter earnings that exceeded analysts’ forecasts.

"Work harder, get paid less, or be fired and we’ll send your job to a slave labor camp in China!" – the new mantra of American business.

Gross bond issuance by U.S. investment-grade nonfinancial corporations rebounded in July from relatively subdued levels in May and June.

There’s always a greater fool….

Prices of commercial real estate appeared to have increased in the second quarter, though the number of transactions was small.

One building sold – from Guido to Guido’, for the purpose of establishing a fraudulent mark on the price.

Nonetheless, commercial real estate markets remained under pressure. Delinquency rates for securitized commercial mortgages continued to rise in June, and commercial mortgage debt was estimated to have contracted by a sizable amount again in the second quarter. However, investor demand for high-quality commercial mortgage-backed securities (CMBS) reportedly was robust, although issuance of CMBS remained muted.

Oh crap – we printed three sentences of truth!

Consumer credit contracted again in the second quarter, as revolving credit continued to decline and nonrevolving credit edged down.

Consumers are done with this BS and are choking on debt.  Having been hosed twice in ten years, they’re refusing to do it again.

Commercial banks’ core loans–the sum of commercial and industrial (C&I), real estate, and consumer loans–continued to contract in June and July.

That’s called "default".

Securities holdings by banks increased substantially in recent weeks.

But the banks are buying stocks!  (Ed: are they using depositor funds to do that, or are they using Fed-printed money?  Either is a problem, no?)

Staff Economic Outlook
In the economic forecast prepared for the August FOMC meeting, the staff lowered its projection for the increase in real economic activity during the second half of 2010 but continued to anticipate a moderate strengthening of the expansion in 2011.

See, we still lie!  Are you going to believe us?

Overall inflation deflation was projected to remain subdued increase substantially over the next year and a half.

Fixed it for ‘ya.

Weighing the available information, participants again expected the recovery to continue and to gather strength everything to go to hell and continue toward Lucifer’s cradle in 2011. Nonetheless, most saw the incoming data as indicating that the economy was operating farther below its potential than they had thought, that the pace of recovery had slowed decline had advanced in recent months, and that growth would be more modest during the second half of 2010 Lucifer had been chortling with glee than they had anticipated at the time of the Committee’s June meeting.

Fixed it for ‘ya.

 

Committee Policy Action
In their discussion of monetary policy for the period ahead, Committee members agreed that it would be appropriate to maintain the target range of 0 to 1/4 percent for the federal funds rate.

I threatened them to get them to all fall in line - as soon as they got to Jackson Hole they started talking though.  Bastards.

Mr. Hoenig dissented because he thought it was not appropriate to indicate that economic and financial conditions were "likely to warrant exceptionally low levels of the federal funds rate for an extended period" or to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. Mr. Hoenig felt that the "extended period" expectation could limit the Committee’s flexibility to begin raising rates modestly in a timely fashion, and he believed that the recovery, which had entered its second year and was expected to continue at a moderate pace, did not require support from additional accommodation in monetary policy. Mr. Hoenig was also concerned that these accommodative policy positions could result in the buildup of future financial imbalances and increase the risks to longer-run macroeconomic and financial stability.

Mr. Hoenig has a brain, and what he really expressed is that the economy cannot stabilize until the excess debt is removed, and that can’t happen as long as the FOMC is tampering with the bond market.  Therefore, until rates rise, there will be no recovery.

We don’t dare print that, however.

Yes, this is all tongue-in-cheek. 

Maybe.

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Source: finance.yahoo.com

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Do anything for long enough and people start accepting it as reality.  Just watch any movie from the late 1980s or early 1990s and you start smiling at the “technology” they used and how advanced they thought it was.  For the time it was.  We tend to forget how quickly things can change.  When I [...]

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By Karl Denninger, The Market Ticker

for K-12 education.

We’ll operate with a few basic presumptions:

• The purpose of a K-12 education is to impart the basic knowledge necessary to succeed in society.  We will define this as "Reading, Writing, Mathematics, History and Hard Sciences."

• K-12 education is not "socialization", it is not "religious studies", it is not "babysitting" and it is not "surrogate child-rearing."  Parents perform those functions, for better or worse – it is both their responsibility and the proper exercise of their authority.

Let’s further agree that the best educational outcomes consistent with reasonable amounts of money spent are the goal.  That is, School is not a "social experiment", a means by which we perform what amount to scientific experiments on children – a barbaric practice that, were it to be put this way and understood, virtually everyone would recoil from in horror.

What would we design?

Do you know?

Are you aware that this study has already been done?

Probably not.

But it has.  The largest longitudinal validation attempt on so-called new math, whole language and other similar "new" educational paradigms was undertaken from 1968 to 1976.  Continuing study and follow-up was performed until 1995.

What did it find?

Models that emphasized basic skills succeeded better than other models in helping children gain these skills. Groups of children in Basic Skills models performed significantly better on measures of academic skills than did non-Follow Through groups. Abt evaluators concluded that a Basic Skills model would be preferable if an educator was concerned with teaching skills such as spelling, math computation, language, and word knowledge. Note that the Abt report refers to the superiority of a model type. However, it is not inclusion in a category that leads to educational effectiveness, but the particular instructional materials and procedures used. The Direct Instruction model had an unequivocally higher average effect on scores in the basic skills domain than did any other model.

Direct Instruction is what we used to call "Nuns in a Classroom."  It is the old-school model, practiced in this nation until the radicals overtook our educational system and destroyed it from within, that produced superior results.  It is the system of teaching a core concept, such as multiplication tables, sentence diagramming or parts of speech and language, then drilling them until competence is established.  Once that has occurred you build on the base you have just constructed, again, drilling and testing until competence is established.

Direct Instruction (DI), devised by Siegfried Engelmann in the early 1960′s as he taught his own children, is defined by the researcher James Baumann: "The teacher, in a face to face, reasonably formal manner, tells, shows, models, demonstrates and teaches the skill to be learned. The key word is teacher, for it is the teacher who is in command."

Yep.

Note that "self-esteem" is not on the list of goals – that is a consequence of mastery of the subject matter, not a goal in and of itself.

So first, we kill all this "FeelGoodism" BS and return to actual direct instruction.  The study has been done and the facts are in – if you can’t demonstrate, by similar longitudinal study, that your proposed "replacement" is at least as effective as Direct Instruction, and it is at least as cost-effective, you lose.  That’s all there is to it.

Now on to that cost issue.

Let’s presume that we will have 25 children per classroom.  Let’s further presume that we want to pay the teacher a reasonable middle-class salary, which means that we want to provide them a salary that is, on-balance, somewhat-better (say, 20%?) than the median household income.  That is, since median household income is about $50,000 a year, we’re going to pay teachers $60,000 – all in, benefits included.  Note that this is one level above the middle quintile – without argument "solidly middle-class."

This apportions $2,400 per student for teacher expense.

We will then look for a place to hold the class.  If each student requires a 5×5′ space for his desk, chair, and person while in class we have 625 square feet.  We will further presume that the teacher requires 15 x 30′ space for their desk, the chalkboard and similar instructional space.  We’re up to 1,100 square feet for each classroom.

At a reasonable commercial rental rate of $20/square foot, for which one can easily acquire said commercial space anywhere in the country, we have a classroom expense (annually) of $21,500, or $860 per pupil.  (Anyone who says you can’t is full of it – I rented 8,300 square feet for well under this in a Class "A" office building – 2 Prudential Plaza – in the mid 1990s on the 26th floor – all-in, taxes and common-area maintenance included, in one of the highest-cost areas of the country – downtown Chicago.  You don’t need "Class A" office space for a classroom – something "one step down" from there in commercial real estate is more than adequate.)

We also need instructional materials.  For each classroom we will allocate $500 per pupil.  This is more than sufficient to buy a new textbook every year (although that would be ridiculously wasteful, since said books have a service life of three to five years in most districts.)  After textbooks and other per-pupil expendables (but not including the things that students are expected to provide on their own, such as pencils, paper, etc) are tallied we should easily be able to achieve these numbers.

This totals to $3,760 per kid.

A school with 500 students in it (20 classrooms worth) will have a base budget of $1.88 million.

Since schools do need some sort of oversight, we’ll allocate 10% for administrative overhead.  This will provide us with another $180,000, with which we can pay a Principal (at 25% more than a teacher, or $75,000 for the year) and leave us with another $105,000 for all the other overhead and administrative functions.

This brings our total budget to $4,136 per pupil.

For those who say this is impossible, I assure you it is not.  If a school cannot provide the space that is dedicated to education for this price, then the school is a money pit and is robbing the taxpayers, since it is trivially easy to find commercial space suitable for a classroom for that cost.

If a school cannot employ teachers for $60,000 all-in, including benefit expense, when they work nine months out of the year, they all need to be fired and replaced with those who will work for those terms.  $60,000 is a solid middle-class household income, and this is for a single person in the household.  There are 2,000 hours in a standard man-year of labor, but a teacher works for 180 instructional days on average, and 20 more when students are not in the classroom.  That is, the average teacher works 1,600 hours, so that $60,000 salary is a private-sector equivalent $75,000.  If teachers think that’s underpaid, I’m willing to bet that if I set up such a school it will have a line out the door of qualified instructors who wish to apply at that salary.

So what’s left?

Nothing.  Oh sure, there are no Nintendo WIIs in the gym, there is no fancy-schmancy media lab, there are no smart boards in the classrooms.  What there are, however, is a comfortable set of desks, a direct instructional model and, I’m willing to bet, students that consistently outperform the current socialistic system – at anywhere from a half to a quarter of the price.

Incidentally, this is before all the "fundraisers", "endorsements"  ("Jack’s Gym" and similar) and other items.  Those who want a football team (and there are a lot of people who do) can pay for it.  Want to play Soccer?  My kid does – PAL is $65, which I just paid for this fall’s season, plus the cleats of course (the shirt and shorts are included in the $65.)  Intramural baseball and similar are available as well, all self-sustained and played on municipal fields operated by the city (and which the leagues lease at a modest cost.)  My daughter is in Chorus this year, and they fundraise like crazy so as to avoid assessing the kids.  It works – either pay or sell cookie dough.  Either model works for me – but the kids and parents who want it cover the check.  Those who don’t, don’t.

If you’re a teacher or other "educator" and tell me this can’t be done, I’ll take you on.  You sign over to a company I set up the total amount you get from the state for each kid, I’ll run the place as noted above, and I get to keep the excess funds (that’s called "profit", which is my motive to do it.)  I have only one condition – I get written into law protection against unionization, just as you have your unions, I’m going to be free from them.  And I get to set my own school policies with regard to instruction, qualification to teach and discipline, consistent with state law (that is, the staff cannot assault the students, obviously.)  This is part of the experiment – the place runs exactly as above with no interference – including interference by organized labor and other socialist bullshit.

If, five years hence, I don’t beat the pants off your school district’s academic achievement on balance, as determined by nationalized standard testing (E.g. ACT or SAT scores for High Schoolers – not state-specific ones that a school can teach to) I’ll give all the profit I earned doing it back to the state and you can declare victory.  If I can’t outperform you I don’t deserve a nickel for my five years of labor, and I won’t keep it.  We’ll write into the contract.

But if I do beat your academic achievement, you, and every one of the employees in your school, is fired, the district buildings and land are sold off to private interests, the money that is no longer going to be wasted is returned to the taxpayers in the county, and your pension funds and all other forms of deferred cost that you and your cronies stole from the taxpayers for your sub-standard and ridiculously overpriced underperformance are returned to the people as unearned plunder.

What say you educators?

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