By Karl Denninger, The Market Ticker

Supposedly….

Sept. 1 (Bloomberg) — JPMorgan Chase & Co. told traders who bet on commodities for the firms account that their unit will be closed as the company, the second-biggest U.S. bank by assets, starts to shut down all proprietary trading, according to a person briefed on the matter.

Uh huh. I’m supposed to believe this?

Note what comes with this "announcement"

Closing the proprietary trading desk for commodities affects fewer than 20 traders, one in the U.S. and the rest in the U.K., the person said.

20 people.  Wow, that’s a lot. 

But wait a second…. didn’t I see something earlier this year about JPM buying a commodities outfit?

LONDON -(Dow Jones)- Royal Bank of Scotland PLC (RBS: 13.63, 0, 0%) Tuesday said that JPMorgan Chase & Co. (JPM: 36.75, 0.41, 1.13%) had agreed to buy the European and Asian parts of RBS Sempra Commodities, the energy-trading business owned by RBS and Sempra Energy (SRE: 50.89, 0, 0%) for $1.7 billion.

Oh yeah, I did!  And that was February too.

So let me see….. this "acquisition" only involved 20 people eh?  Uh, I kinda doubt it.

Something smells here…… not quite sure what, but the claim that JP Morgan is "abandoning" proprietary trading in the commodities space due to the "Volcker Rule", and it will only cut 20 jobs doing so with only one of them in the US doesn’t fit so well with this recent acquisition.

Here’s my question: Is this yet another "intentional leak" of something that’s not true for the explicit purpose of trying to sway Congressional – and public – opinion?

More articles from the Market Ticker….

Kurt Cobb – Personality profile: Do you “go with the flow” or do you “stock up” just in case?

Why is it that some people believe they can really store up much of anything? Yes, it is wise to have emergency supplies in case of a power outage or other disruption that might make it difficult to get food, heat and even water. But can one really stock up for a lifetime?

The illusion that we can is given to us by money. We are told that if we save enough, we can have a comfortable old age. But what is money other than a claim on the current flow of goods and services? It’s not really a stockpile of anything. So, its value depends entirely on the smooth flow of energy and resources through the economy.

And yet, there are people who believe that money will somehow make them immune to the breakdown of this flow. Yes, enough money might make it easier for someone to get scarce goods during such a breakdown. But, ultimately a community that fails to function won’t be able to provide you with anything no matter how much money you have.

Veils, Boomerangs, and Goldilocks

I don’t have an answer to this question. I’m not sure anyone does. What I can say, however, is three things:

1. Whether from the wall or the brakes, a lot of us are going to get whiplash. There’s no scenario I see to avoid some measure of hardship. But I’ll take whiplash over broken bones. How about you?

2. I know we’re on a train here, but if you haven’t already, you might want to think about putting on a seat belt. The seat belt in this case is personal resilience and community resilience.

3. We increase our odds of stopping the train in time (and reducing casualties) if we help more and more people understand there’s a wall up ahead.

A Hell of an Anniversary

HCN’s founder, Tom Bell, marks our 40th year with a prediction: We’re all doomed

How should progressives respond to the end of the Oil Age?

This serves as a valuable reminder that like most modern people, self-described progressives are also accustomed to technological fixes for nearly every problem and challenge, and the very possibility that some breakthrough technology or solution isn’t just around the corner is scarcely fathomable; that alternative energy might not be able to replace fossil fuels is so alien and so far removed from popular consciousness that this possibility need not even be discussed or rise to the level at which it is worthy of being dismissed in “The Progressive”: apparently it “goes without saying”– the presumed untapped riches of renewable energy is, after all, “the only way”

U.S. Gulf Drilling Critical to U.S. Economy, Energy Security

The current drilling moratorium in the deepwater Gulf of Mexico and proposed legislation that would add increased regulations, costs and taxes to offshore drilling pose a threat to U.S. energy and economic security, according to energy advisors with the Deloitte Center for Energy Solutions.

Adding layers of regulation will make it more difficult to drill for and develop U.S. resources, and rules that create a punitive tax and royalty regime likely will result in companies investing in projects overseas. For smaller companies with no overseas operations, the consequence of added regulation and associated costs may mean going out of business.

Kazakh tax has Western oil firms over a barrel

This month, Britain’s BG Group and US oil giant Chevron faced a case of Hobson’s choice – either start paying Kazakhstan more than $1m (£650,000) a day in unwarranted export duties, or see their oil and gas exports stopped dead at the border. There are no prizes for guessing which option they took.

Power Hungry: Iraqis Ask ‘Where Is The Electricity?’

The country is generating almost double the amount of electricity it did immediately before the 2003 invasion, but the amount is still woefully inadequate to meet ordinary Iraqis’ needs.

“It comes for one hour although it is not for a whole hour. It goes on and off all the time. Technically we have the electricity for about 20 minutes only,” says one Baghdad resident who wished to remain anonymous.

‘Iran seeks nuclear fuel self-sufficiency’

An Iranian political analyst says the inauguration of the country’s first nuclear power plant has been a step in the direction of becoming self-sufficient in the field of nuclear energy.

Iran offers Lebanon upgrading of defence capabilities and solution to energy crisis

Beirut – The Iranian ambassador to Lebanon Ghazanfar Roknabadi declared, according to An Nahar, that his country is prepared to support the Lebanese armed forces with equipment according to their needs and Iranian capacity.

Diminishing Returns From Middle East Projects

As my fellow blogger Malini Hariharan wrote last week “the projects environment in the Middle East has irrevocably changed” and with it the rather glib and outdated assumption still being frequently made that building capacity in the region represents a licence to print money.

First of all, as Malini pointed out, further supplies of advantaged gas feedstock are no longer available with high sulphur content meaning that extra processing costs could push non-associated prices to $4/mmBTU and above.

Malaysia: Pro-coal group adds new twist to coal controversy

KOTA KINABALU: The controversial proposal to build Sabah’s first coal-fired power plant has taken a new twist with the arrival of a new pro-coal pressure group, the People’s Assembly Action Committee (PAAC).

The newly formed pro-coal lobby has incurred the wrath of anti coal-fired power plant coalition, Green SURF (Sabah Unite to Re-Power the Future), for claiming that the people in the east coast of Sabah support the project.

For green movement, a change in climate

On Thursday, some of the country’s most respected environmental groups – in the midst of their biggest political fight in two decades – sent a group of activists to Milwaukee with a message.

We’re losing.

They put on what they called a “CarnivOil” – a fake carnival with a stilt-wearing barker, free “tar balls” (chocolate doughnuts), and a suit-wearing “oil executive” punching somebody dressed like a crab. It was supposed to be satire, but there was a bitter message underneath: When we fight the oil and gas industry, they win.

Prefab home assembled in hours wins green honor

In Newport Beach, Calif., a modern factory-built home assembled in hours and finished in days has recently earned a coveted green certification.

The two-story boxy model, ideal for narrow urban lots, won the top or platinum rating from the private U.S. Green Building Council’s LEED (Leadership in Energy and Environmental Design) program.

Greenest wines? Vintners avoid heavy glass bottles

Many vintners are striving to be organic and eco-minded in their farming, but only a handful have addressed the packaging issue, according to a 2010 ranking of 25 major wineries.

Biofuels Firms Buy Up African Land, Cause Deforestation, Food Output Loss

Biofuels companies from the U.K. to Brazil and China are buying up large swaths of Africa, causing deforestation and diverting land from food to fuel production, the environmental group Friends of the Earth said.

Across the continent almost 5 million hectares of land, an area bigger than the Netherlands, have been sold to cultivate crops for biofuels since 2006, Friends of the Earth’s Brussels- based European division said today in a 36-page study.

Crude Falls From Seven-Day High on Skepticism About U.S. Economic Recovery

Oil fell from its highest price in more than a week on concern that last week’s 2.3 percent gain was optimistic, given the outlook for fuel demand in the U.S., the world’s biggest user of crude.

Futures erased earlier gains after the dollar strengthened against the euro, making dollar-priced commodities less attractive for investors in other currencies. The Commerce Department reported on Aug. 27 the U.S. economy grew at an annual rate of 1.6 percent in the second quarter, down from an estimate of 2.4 percent last month.

U.S. Gasoline Falls to $2.6979 a Gallon as Crude Declines, Lundberg Says

The average price for regular gasoline at U.S. filling stations fell to $2.6979 a gallon as supplies of the motor fuel increased and crude prices dropped.

Gasoline declined 7.43 cents in the two weeks ended Aug. 27, according to a survey of 2,500 filling stations nationwide by Trilby Lundberg, an independent gasoline analyst in Camarillo, California.

Risk-Taking Rises as Oil Rigs in Gulf Drill Deeper

In a remote reach of the Gulf of Mexico, nearly 200 miles from shore, a floating oil platform thrusts its tentacles deep into the ocean like a giant steel octopus.

The $3 billion rig, called Perdido, can pump oil from dozens of wells nearly two miles under the sea while simultaneously drilling new ones. It is part of a wave of ultra-deep platforms — all far more sophisticated than the rig that was used to drill the ill-fated BP well that blew up in April. These platforms have sprung up far from shore and have pushed the frontiers of technology in the gulf, a region that now accounts for a quarter of the nation’s oil output.

Major offshore accidents are not common. But whether through equipment failure or human error, the risks increase as the rigs get larger and more complicated.

BP’s life on ‘frontiers’ of energy industry at risk

LONDON — At a celebration of BP’s centennial last October, CEO Tony Hayward boasted to guests that the oil company “lives on the frontiers of the energy industry.”

But this week, in the first major sign that the Gulf of Mexico oil spill may have caused lasting damage to the company’s long-term strategy of embracing projects with high risks, BP was frozen out of a potentially lucrative license to drill for oil off the coast of Greenland.

In Oil Inquiry, Panel Sees No Single Smoking Gun

HOUSTON — More than four months after the Deepwater Horizon oil rig explosion, there appears to be no single smoking gun that implicates one person or company in the disaster. Instead, several missteps and oversights by the crew are being explored by federal investigators as possible triggers of the emergency.

Mr. Feinberg and the Gulf Settlement

Mr. Feinberg’s plans for distributing BP’s money, announced last Monday, seem magnanimous and fair. They would provide swift, short-term relief for Gulf Coast residents, and a process for measuring — and appropriately compensating — long-term losses. Mr. Feinberg must be willing to make adjustments along the way. But everyone will get a hearing, and his fund is sure to be vastly better than the BP operation it replaces.

RWE joins Kurdistan’s gas effort

Kurdish hopes of exporting natural gas from northern Iraq have been bolstered by a German company’s offer of assistance.

On Friday, the big German gas and power company RWE signed a co-operation agreement with the regional government of the semi-autonomous Iraqi Kurdistan. The object is to create pipeline routes and other infrastructure for marketing Kurdish gas.

Russia Will Boost Oil Exports to China With New Pipeline From East Siberia

Prime Minister Vladimir Putin opened the Russian section of an oil pipeline that will boost oil exports to China from East Siberia.

“This is an important project because we are beginning to diversify the delivery of our energy resources,” Putin said at today’s opening of the pipeline in Skovorodino in Russia’s Far Eastern Amur region, in comments posted on his official website. “Thus far, shipments were made to our European partners.”

Shell near finishing new Nigeria pipe

Supermajor Shell said today its Nigerian joint venture, Shell Petroleum Development Company of Nigeria (SPDC), was close to completing a new $1.1 billion pipeline to the Bonny export terminal which will have a capacity of 600,000 barrels per day.

Chevron to explore for oil off Liberia

Reuters) – Chevron Corp has signed a deal with Liberia to explore for oil and gas in three deepwater blocks off the West African country’s coast, an official in the president’s office said.

Italian energy agency asks for ENI gas rule change

(Reuters) – Italian energy authorities want the government to amend gas market rules approved earlier this month that would let ENI (ENI.MI) control up to 65 percent of the Italian market, the Authority for Electrical Energy and Gas said on Monday.

Saudi and Kuwait make Khafji gas plans

A joint venture between Saudi Arabia and Kuwait plans to build gas and natural gas liquids collection and distribution facilities at the Khafji oilfield, according to reports.

‘Lukoil must stay public’

Russia’s Lukoil should not buy back its remaining shares from ConocoPhillips according to the company’s chief executive Vagit Alekperov.

Alekperov, who had said the same before Lukoil decided to proceed with the first part of the buyback earlier this month, said that it would be hugely beneficial for Lukoil if the remaining stake were sold on an open market, the business daily Vedomosti reported.

Norway’s natural gas production down in July

(Reuters) – Norway’s natural gas production fell to a preliminary 7.5 billion cubic metres in July from actual production of 8.5 billion cubic metres in June, the Norwegian Petroleum Directorate said.

With Neighbors Unaware, Toxic Spill at a BP Plant

TEXAS CITY, Tex. — While the world was focused on the oil spill in the Gulf of Mexico, a BP refinery here released huge amounts of toxic chemicals into the air that went unnoticed by residents until many saw their children come down with respiratory problems.

For 40 days after a piece of equipment critical to the refinery’s operation broke down, a total of 538,000 pounds of toxic chemicals, including the carcinogen benzene, poured out of the refinery.

Rather than taking the costly step of shutting down the refinery to make repairs, the engineers at the plant diverted gases to a smokestack and tried to burn them off, but hundreds of thousands of pounds still escaped into the air, according to state environmental officials.

‘Central banks, governments can’t print barrels of oil and shale gas is no game changer’

In our view, shale gas is not a game changer.First and foremost, shale gas suffers from very high depletion rates.

The Republican Who Dared Tell the Truth About Oil

Matt Simmons understood the wages of addiction and wasn’t afraid to sound warnings, even to George W. Bush.

Sign of the Times

Cook argued that even if we could buy ourselves a few more decades or even a century, a crisis was inevitable–one that would threaten the lives of billions around the world. Although people today tend to think mainly of how a declining oil supply would affect the economy, Cook was more concerned that without abundant fossil fuel or a renewable replacement for it, the global population would be unsustainable.

Losing our way on roads

Everyone pays for public transport, first through taxes and then through fares, and it is time everyone had access to it, just as they do to roads. Instead, Melbourne’s transport planning has for decades been focused on building more roads while applying pain-killing injections to a moribund public transport network.

Transition movement eyes bleak future and sees opportunity to plan for change

Climate change. Dwindling oil supplies. A precarious economy. Disruptions to the national food supply.

The future, some believe, is likely to throw a large wrench into life as we know it. The assumptions that we make – that there will be food at the grocery store, gas at the filling station, a regular job to go to on Monday morning – may be tested in a way that’s hard to imagine. And there could be considerable hardship if we don’t put those assumptions aside and begin planning for change.

Environmental Sustainability, Peak Oil and World Hunger

Last year, The United Nations reported that over one billion people in the world are starving. That’s more than 16% of the world population that are in extreme want for food; meanwhile industrialized nations waste almost equal to their consumption. And considering the general girth of industrial waistlines, that’s a lot of food.

What’s the value of home-grown food?

While my garden has so far been unprofitable, at least in financial terms, there are apparently people out there — even in space-scarce cities — who grow lots and lots of food in their backyards. Like enough to feed their families, or to make a significant dent in their grocery bills.

Curious how they do it, I set out to find someone whose backyard vegetable garden was a substantial source of food and a real money-saving venture.

European Commission Receives 19 National Renewable-Energy Plans, 8 Missing

The European Union’s regulatory body has received 19 national renewable-energy action plans and will prepare legal action against the remaining eight EU countries if their strategies aren’t submitted “very soon.”

German Solar-Power Capacity May Exceed Wind by 2020, State Adviser Says

Germany probably will have more production capacity at solar power plants than from wind-energy turbines within a decade, a government energy adviser said.

Europe’s biggest electricity producer by the end of the decade will likely have about 42 gigawatts of installed capacity from photovoltaic panels that turn sunlight into power, compared with 41.9 gigawatts of wind power, both onshore and offshore, Stefan Kohler, chairman of the DENA agency, an energy adviser to the government, said today at a briefing in Berlin.

Scale down industry call from climate change expert

SCALE down industry, strengthen local resilience and “include nature” in all development models.

That is the call from retired industrial chemist Hugh Laue, now a green business consultant, chairman of the Zwartkops Trust and a leading campaigner in Nelson Mandela Bay against climate change.

Japan plans to bind large firms to CO2 caps: draft

Japan’s compulsory emissions trading scheme is set to start in April 2013 and cover large CO2 emitting companies, a draft of the government’s proposals showed on Monday, but several issues are still open to debate.

UN climate change panel to face Himalaya error verdict

An international committee reviewing the “processes and procedures” of the UN’s climate science panel is set to report on Monday.

The Intergovernmental Panel on Climate Change (IPCC) has faced mounting pressure over errors in its last major assessment of climate science in 2007.

The review was overseen by the Inter-Academy Council, which brings together bodies such as the UK’s Royal Society.

The findings are to be unveiled at a news conference in New York.

FACTBOX – Errors, findings by UN panel of climate scientists

Following is an overview of errors and overall findings in a 2007 IPCC report:

Greenhouse-Gas Regulation Backed by a Majority in Defense Council’s Poll

A majority of U.S. voters say the government should regulate greenhouse gases linked to global warming and that the Environmental Protection Agency is up to the job, a poll for the Natural Resources Defense Council found.

The Urgent Islands

If a country sinks beneath the sea, is it still a country? That is a question about which the Republic of the Marshall Islands — a Micronesian nation of 29 low-lying coral atolls — is now seeking expert legal advice. It is also a question the United States Senate might ask itself the next time it refuses to deal with climate change.

The Speech by Federal Reserve Chief Ben Bernanke boosted market sentiments in equities and major commodity markets last week with base metals energy and precious metals gaining as a result

Read more….

The Daily Reckoning

Another week in Australia without a new government. Not bad for a Monday. The current Prime Minister is set to meet with three so-called independent members of Parliament to discuss forming a minority government. This gives us a chance to correct an error we made awhile back.

“Every election is a sort of advance auction sale of stolen goods,” wrote HL Mencken. We misattributed that quote to Mark Twain, another great American wit. But the observation seems especially apt right now.

With Australia’s election not yet over, the auctioning of future stolen goods continues is on display for all to see in Canberra. The independent MPs each have their own Christmas list of things you must buy them. Paul Hogan must be gratified to know that his large late fee on unpaid taxes will go to making Australia a safer, better-governed, freer, and more prosperous country.

But really the big news since Friday is that the media are still taking Ben Bernanke seriously. The Fed Chairman gave a much-anticipated speech last week in which he assured the naive and the hopeful that the Fed would do whatever it takes to support the U.S. economy.

Here’s a suggestion Mr. Bernanke: fire everyone one that works for you and then resign. That would do more to promote U.S. growth and sound money that anything else you could possibly do.

But assuming that doesn’t happen, how will the Fed support an economy whose second quarter growth was revised downward last week from 2.4% to 1.6%? Buy everyone ice cream?

We’re being flippant because it should be obvious to anyone with two neurons firing in the brain that you cannot support growth by adding to the stock of debt. The Fed’s quantitative easing programs can fund higher government deficits. And higher government deficits can fund more “stimulus” even as households and businesses hunker down and deleverage.

Yet all that stimulus does is seem to support exports and manufacturing growth in places like Germany and China – where the cars and goods Americans by are made. The stimulus stimulates. Just not where you’d expect, like having your feet tickled but feeling it in your ear.

This is a critical issue for Australia. The chart we showed you last week clearly demonstrates that Australia’s stock market tracks the U.S. That means bad U.S. earnings and a weak economy would be bearish for Aussie stocks. But what about China?

The argument is made that Australia’s economic growth correlates more with Asia than America. “Our national income will soon be growing at a China-like rate, underpinning a boom investment that is already underway,” writes RBS chief economist Kieran Davies in today’s Australian Financial Review. “Iron ore is now our largest export, accounting for almost four per cent of the economy, while coal is not far behind at 3.5%.”

The argument is that strong coal and iron ore prices – even though they may fall in the next quarter as contract prices are correlated with the spot market – support national income, which supports national investment ($112 billion in projects in the mining sector alone, according to RBS), which supports national employment, which supports national spending, which supports national taxes which support all the promises made by politicians who support themselves at your expense.

This all sounds mostly true. But it all hinges on the boom in China having nothing to do with the credit boom in America – you know…the one that’s deflating and causing the world’s nastiest economic hangover in seventy years.

Here’s what worries us, though. What if China’s great economic growth story really is just a derivative or manifestation of the world’s greatest credit bubble ever? Writing about this phenomenon at Zero Hedge, Tyler Durden hits close to home:

Gulp.

So what’s our solution? We don’t really have one, at least in terms of correcting the errors of the boom. That happens naturally if you let it. The key is to let it and not fight it. Fighting it only makes it worse. But once it’s happened, the return to normalcy is painful. There’s no easy way out, like spending someone else’s money.

This, by the way, is probably why so many people don’t like Austrian Theory. Its main prescription is that prevention is the cure to monetary madness. With sound money, the rule of law, free trade, and low taxes, you generally promote liberty and prosperity without going into massive government debt. But once you have a credit bubble on your hands, the only way out is liquidating the bad investments, not preserving them.

It was interesting that on Friday, while the Dow first fell and then rallied, copper, coffee and corn all rose. The commodities markets see the Fed’s QEII program as being inflationary. Either that, or people are starting to think about trading Federal Reserve Notes for things that are actually useful…while they still can.

Come to think of it, we like the idea. In a few weeks, we’re headed back to America for some business. Earlier in the year we looked at house prices and found they were still falling, so we stayed out of the market.

This time, our plan is to hire a storage unit and fill it with the sorts of things that disappear from shelves when people begin to lose confidence in paper money. On our list: coffee, vodka, cigarettes, petrol, vitamins, over-the-counter pain killers, petrol, batteries, bullets, a hatchet, maps, a non-North Melbourne scarf, etc.

Not on our list: U.S. government bonds.

What’s on your list? You can let us know with an email to dr@dailyreckoning.com.au . Investors who take the Fed at its word or who actually still believe the Fed can support the U.S. economy with asset purchases deserve what they get. You have been warned by these morons what they intend to do. Now is the time to get your wealth out of the places where it is likely to be destroyed.

All that said, it looks like U.S. bonds are becoming a kind of Noah’s ark for people who believe in central banking. Everybody on board the Bernanke Boat if you believe making more credit available is the solution to a world that already has too much debt. All aboard!

Judging by vanishing U.S. bond yields, there appears to be quite a few people willing to get on the good ship Death Trap, captained by Helicopter Ben. If you’re going to stay out of this trade, just keep in mind that it can run longer than it should or than you might believe is possible, which is fine with us. It gives us more time to stock up on vitamins at Wal-Mart.

Iceberg. Hindenburg. Call it what you will. Here’s a note from our friend Ron Kitching on what’s really going on.

Stimulations, Booms and Busts.

History shows that freedom of the individual, and the open, competitive spontaneous organizations, customs, and procedures in a free market, secure private-property system, is much more efficient than centralised consciously rational-directed systems of organising the human economic activity.

The mystery for any economy, is how people’s actions are impersonally coordinated by the market. All classical liberal monetary theorists noticed, that the price system – free markets – does a remarkable job of co-ordinating people’s actions, even though that coordination is not part of anyone’s intent.

The market, wrote F. A. Hayek, is a spontaneous order. By spontaneous Hayek meant unplanned – the market was not designed by anyone, but evolved slowly as the result of human actions. But the market does not always work perfectly.

The main cause of market distortions is increases in the money supply by the central bank. Such increases make credit artificially cheap.

Entrepreneurs then make capital investments that they would not have made had they understood that they were getting a distorted price signal from the credit market.

Artificially low interest rates cause investment to be artificially high, and cause mal-investment and the boom turns into a bust. As readjustment to reality occurs many people are thrown into temporary unemployment.

Monetary theorists see the bust as a healthy and necessary readjustment. The way to avoid the busts, they argue, is to avoid the artificial booms that cause them.

The “stimulation” commended by many was and remains an artificial boom. Bernanke is getting ready for another one.

Dan Denning
for The Daily Reckoning Australia

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The Daily Reckoning

According to an article that appeared in The New York Times, written by Norihiro Kato, the Japanese have gotten good at sloughing off their worldly cares. Japan is no longer the world’s number two economy; it was eclipsed this summer by China. But the Japanese are used to slippage. We all know the story of their 20-year economic decline; Japan’s GDP actually peaked out about 15 years ago. It has been sliding ever since. That is only a part of the story. In terms of rice production, the Japanese have been downsizing for more than 40 years. Japan’s population, too, grew by 1% per year from 1917 to 1977. It peaked out in 2005. There are fewer Japanese now than there were 5 years ago. If the trend continues, eventually there will be none.

Our back page dictum: people come to think what they must think when they must think it. What do people on the road to extinction think? Ask the Japanese. According to Kato, they become less competitive and more reflective, almost zen-like, turning an eye inward, away from striving, fighting, jostling and whacking…gracefully accepting whatever the economic gods send their way. In the meantime, they stay at home and save their money; like a lap dancer in retirement, they know it is all downhill from here.

Over in the developed West on the other hand, resignation and capitulation have not yet caught on. People still rage against the dying light of the Bubble Epoque and count on quantitative easing to get it going again.

In the US, half a million Americans filed for jobless benefits last week – the highest number in 9 months. At this point in a typical recovery, job growth should be strong. Instead, it is shockingly weak. As for house sales, the drop in July was the greatest one-month decrease since 1968. Again, the direction is all wrong. Housing led the US out of 7 of the last 8 recessions. Now, it is holding it back! One out of every 7 mortgages is delinquent or in foreclosure. The nation is on target to foreclose on more than a million houses this year – a new record.

So let us take up a serious question. If an economy cannot trot out of recession, what becomes of it? To Japan or not to Japan? There are so many economists voicing an opinion on the subject that if you spent 5 minutes listening to each one you would have to be an idiot. There are those who think Europe and America will follow in Japan’s footsteps. And those who think it will not. Taking no chances, our Daily Reckoning has firmly held both opinions at one time or another.

The US is not Japan, say many. Japan’s 20-year slump was made possible by three unique circumstances: deflation imported from China, falling commodity prices and a current account surplus. The US is confronted with the opposite situation: commodities prices are strong, its current account is in deficit, and China is raising prices. These differences will bring on a crisis Japan never had to face. Interest rates will rise. The dollar will fall. Unable to finance its deficits at low rates, the US will unable to stay on the road to Tokyo. Instead, it will soon be detoured to Buenos Aires. Or Harare. The resulting panic will have nothing in common with Japan’s orderly ruination.

Those who think the US and Europe are following on Japan’s heels have at least the flow of current news to support them. Japan fell into a slump. Rather than let its markets clear, its government supported zombie banks and businesses with money borrowed from the public. This effectively transferred the burden of debt from the private sector to the public sector, while holding the economy in a state of suspended animation for two decades. Meanwhile, Japan’s people were getting older…more cautious…and more resigned to slippage.

This seems to be what is happening in America too. The private sector is de-leveraging. The latest report shows credit card debt at an 8-year low. Mortgage debt is dropping sharply too – thanks to defaults and foreclosures. Banks and private companies are stockpiling cash in anticipation of a cold winter. Households are playing it cool too.

Ben Bernanke must have gotten the message sometime between the 4th of July and the Assumption of the Virgin. On the 11th of August, the Fed announced another round of quantitative easing designed to fight against the decline. Of course, Japan tried quantitative easing too. It failed, just as monetary and fiscal stimulus had failed.

But who knows? Maybe the Japanese are just losers. They are the only people on earth to have atomic weapons dropped on them. Then again, that only seemed to encourage them. After 1945, the Japanese and the Germans picked themselves up and went from absolute ruin to become the world’s most admired economies. Let us hope the authorities don’t draw the obvious lesson: on the evidence, nuking may pack more stimulus punch than quantitative easing.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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China is being built from the ground up and consuming massive amounts of commodities on the way, but where is it all going?

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Zero Hedge

When Zero Hedge first admonished our readers in June of 2009 to stay away from markets in light of a general deterioration in market structure, which included a regulator-authorized form of structural frontrunning in the form Flash trading (not to be confused with the imminently following Flash crash), an unprecedented mismatch between stock valuations and economic reality, and Wall Street continued attempts to reflate the ponzi merely for the sake of proving that it can be done, we never expected that retail would take to our warning with the ensuing solemnity. Yet with 16 consecutive outflows from domestic equity mutual funds, shut downs by legendary hedge fund managers such as Druckenmiller and Pellegrini (and many more Tiger derivative blows up to be disclosed soon, once the full extent of the carnage of the flattening of the steepener bandwagon trade is fully appreciated), virtually everyone is asking themselves how did Wall Street not only get it all so wrong, but how on earth is the primary business of the post-facelift Wall Street, which is no longer investment banking, but merely trading (with or without flow-facilitated prop frontrunning) going to sustain the recent record headcount levels (hint: it won’t, and many more banks will soon let go thousands of additional staffers as key revenue sources have now disappeared forever), and most importantly, why is this time different? Why did the “dumb money” for the first time ever, not bite on the Wall Street siren song lure of an economic “rebound”, but instead has hunkered down, proving that not only is Wall Street nothing more than a pure-play enabler of the ponzi regime’s status quo, but that all those who were warning that the economy is far more dire than Wall Street represents, were proven right. These same individuals (and bloggers), first validated in predicting the downward direction of the economy, will see their pessimistic forecasts about stocks validated next. Yet while that happens, all those who still somehow find this a surprising development, are now left proposing hypothesis as to what went wrong. Such as the following piece by the Financial Times.

Deep into the dog days of August, a rather unpleasant scenario is unfolding among the ranks of professional investors on Wall Street.

Against the backdrop of unusually low equity trading volumes, even for a typically sleepy August, continued strong flows out of equities into bonds, and high-profile hedge funds shutting down, a bitter truth is dawning for investment professionals.

Namely, that the ranks of retail investors, commonly derided as “dumb money” by the Street, have made the right call on US equity and bond markets in 2010.

As recently as July, much of Wall Street was awash with bullish research notes for the second half of 2010 calling for higher stocks and warning about low government bond yields.

Such bullish research is a staple of the industry and, flush with their bonuses from 2009, the Street simply thought the massive stimulus from the Federal Reserve and US government would translate into a sustainable recovery this year.

But since the eruption of the financial crisis in 2008, retail investors, like Odysseus, have stuffed their ears with wax so as to silence the allure of such sirens.

Like Odysseus, the successful return to the Ithaca of market efficiency (i.e., the purging of Wall Street’s siren songs of capital destruction), will ultimately require continued resistance to the temptation of a relapse into the Ponzi. Yet we are rather confident that having gone far beyond merely a contrarian indicator, the recent divergence of fund flows out of equities and into money markets (to a small extent, and a 180 degree shift from patterns established earlier in the year), but mostly in fixed income, the case is now that with the demographic shift accelerating to the point where few if any are hoping for “double baggers” (and are willing to allocate capital to trades which have worse odds than playing blackjack in Las Vegas), the attempt to front run the dumb money has failed. What this means is that the proverbial bagholder is now Wall Street itself, namely the various prop trading desks, and assorted HFT non-overnight holding strategies (and yes, there are thousands of these). Thus instead of slowly, calmly and methodically selling to the last money in, Wall Street is now stuck in a Catch 22 of how much higher beyond fair value can the “Pig Farmers” (as defined by David Rosenberg) push stocks, before defection becomes the normative game theory mode, and the market crashes to unseen before levels, especially since prevalent short selling levels are now at near record lows, eliminating the natural buffer to a downside acceleration.

More from the FT:

Beyond the two big equity bear markets of the past decade, it’s no surprise that Main Street has soured on equities thanks to the Madoff scandal and the bail-out of Wall Street banks, followed by high bonuses paid out to bankers last year, all crowned by May’s “flash crash”.

While retail investors ran from equities and piled record amounts of their cash into money market funds in 2008, what really hurts the Street is their failure to forget and come back.

The common punchline on Wall Street is that once the markets have rallied for a while, you wait for the “dumb money” to rush in for a slice of the action. Then the “smart money” sells out and sit backs as retail investors get hosed when the market falters.

Except this year, the dumb money has resolutely stayed away and kept buying bonds and foreign equities, leaving the professionals twisting in the wind. So far in 2010, $50.2bn has been pulled from US equity funds on top of the $74.6bn in outflows during 2009, while $152bn has flooded into US bond funds, according to EPFR Global.

Such flows aptly illustrate Wall Street’s sour mood. Talk to people in prime brokerage at big banks and they mutter darkly that many hedge funds are struggling to make money and risk big redemptions later this year. The recent decision by Stanley Druckenmiller to wind down his Duquesne hedge fund is the type of shot across the bow that people in the industry could well look back upon as a foreboding omen.

Of course, this is verbatim what we have been warning about for months and months and months. And just as we have warned about the economy tanking, which is now confirmed by even the biggest permabulls on Wall Street (and we note with a deliberate dose of gloating the even Morgan Stanley’s “economists” have now stepped away from the Kool Aid punchbowl to their unquantifiable chagrin…and derision), the next leg down is stocks themselves, first as multiples collapse, and second, as all those corporate decisions to conserve cash (absent a few idiotic decisions by corp fin department ostensibly populated by crystal meth snorting monkeys such as those of HP and Dell), are finally seen for what they have been all along – prudent capital management in light of the next major downleg in the economy (and, yes, a major rise in corporation taxation) seen all too clearly by corporate Treasurers and CFOs, are all effectuated.

As for the winner out of this?

For many on Wall Street, the pain has been minimal, which perhaps
underpins their usually bullish take on stocks and why they think the
economy is currently experiencing a soft patch. The reality for Main
Street, however, has been and remains a lot harsher. Unless the economy
starts picking up speed, housing stabilises and unemployment abates,
Wall Street stands to learn that the “dumb money” has a much better
handle on the outlook for the economy and stocks.

The dumb money also knows one other thing – that the Fed has now run out of all options to restimulate the economy (and prepare for the Fed’s escalating appeal of the Pittman decision to the Supreme Court in the week before mid-term elections to take on a very contentious gravity from a political angle), absent for the nuclear option. That option, as Bernanke knows all too well, will do nothing to reflate leverage-heavy assets, and will merely shoot critical commodities like wheat, oil, cocoa (as recently demonstrated by deranged speculation) into the stratosphere, finally ending the lie of the Core-CPI “disinflation.” Wall Street has yet to realize just how ahead of it the “dumb money” finally is – we have long said that Americans, especially those of financial decision-making relevance, are nowhere near as dumb as Wall Street would like to believe, and they just need the right pointers now and then.

Zero Hedge will continue to provide such “pointers”, and will be more than happy to read additional validation as this particular FT article, which also confirms that unlike even moderately wise people, who are all too aware that they know nothing at all, Wall Street, being at the other end of this spectrum, believes it knows everything, when the reality is precisely the opposite. And now that the majority has finally been awakened to Wall Street’s simplistic ploy to control capital markets, and the general economy, with nothing else up its sleeve than a confidence game, it will be time to finally pay for decades of outright lies to those whose interests Wall Street should have held in highest regard all these years.

More articles from Zero Hedge….

This week the gold market encompassed a range of $34.30 trading between $1211.70 and $1246.00. The current economic climate has sent savvier investors into safer investments primarily gold and Silver. Historically gold and Silver retain their value better than most other commodities.

gold-report27.htm>Read more….

The Daily Reckoning

“So how was it down there? Was it insane,” a friend asked your editor on the phone this morning.

“You mean here in Australia? Are you talking about the election?”

“No you moron. I’m talking about the Deep End.”

“Huh?”

“Your Daily Reckoning yesterday. You went off the deep end. Did someone slap you upside the head and get your mind right? What was that all about?”

We probably could have saved a lot of trouble by just writing: people tend to overestimate what they think they know and underestimate what they don’t know. It’s best to be modest, work hard, and recognise that sometimes what you get in life is neither what you expect nor what you deserve.

But let’s talk about markets and cycles first today before we get on the crazy train. And since yesterday was all about words (even though words can change worlds), let’s look at some pictures. First up is the proof that no matter how much you hate reading about it, what happens in the American market is usually what determines what happens in the Aussie market.

Click here to enlarge

The chart above shows that despite different economies, different key industries, and different names, the Dow and the All Ordinaries have pretty much moved in lock step with one another. So what does it mean that on Thursday the Dow closed below 10,000?

Well, according to Dawes (a sample of whose work we’re sending out this weekend) it means the Aussie indexes have entered the “sell zone.” You can see from the chart that the July lows have yet to be taken out. But that’s the level our friend Phil Anderson said to watch for earlier this week. If the markets don’t take out the July lows, Phil reckons it would be “exceedingly bullish.”

We realise we pretty much butchered the explanation for what a Kondratieff cycle (or wave) is. So today we resort to a simpler explanation: a picture. In Phil’s presentation the other night he concluded that rather than being in the middle of the Kondratieff “long winter” we’re still on the upswing in the cycle. If true, this would be bullish for commodities. But let’s look at the wave before we get to the metals and grains.

Full disclosure: your editor knows very little about this very exclusive domain of cycle theory. And this particular chart illustrating the waves a bit prejudiced in that it suggests we are closer to the top of the cycle than the bottom. But when you’re talking long cycles, being “near” the top means that a powerful trend could have several years to run.

That, in fact, is what Phil suggested the other night about commodity prices. It would mean that gold, oil, and some of the grains – all for their own reasons – would make higher highs in the coming years. But do other charts bear that prediction out?

Doing a little research of our own this morning, you can see that commodities have yet to make a new high in U.S. dollar terms. But in terms of the British Pound and the Euro, commodities have in fact eclipsed their 2008 levels. Should you be bullish, or terrified?

The alluring way to look the charts above is that the huge sovereign debt problems in Europe, the UK, and America are again making tangible assets popular. In 2008, we recall a lot of people saying – ourselves included – that real assets would be a better hedge against inflation and/or a market crash than stock and bonds.

The trouble is, there turned out to be just as much leverage in the commodities markets in 2008 as there was in stocks. When the credit crunch hit, commodities crashed hard. And commodity stocks crashed even harder. So now, are commodities again making a high as equity markets turn down?

That’s the $64 trillion question.

The big deleveraging and asset deflation of 2008 was sparked by the failure of Lehman Brothers. That terrified plenty of people. Since then, the debt problem has migrated to the balance sheets of sovereign governments. That suggests the next failure – if one is required to kick off a big deflation – would have to be a sovereign one and not a corporate one.

But we reckon that this time the trigger to a big move in the markets will by psychological and not mechanical. That is, investors in the Western world are already adapting to a world with lower corporate earnings and less private and household debt. It’s the people running monetary and fiscal policy – central bankers and elected officials – that haven’t adapted yet. And you know what happens to species incapable of adapting to new circumstances.

In the meantime, it’s wise to remember, as the great Blue Oyster Cult tells us, that the seasons don’t fear the reaper. Cycles aren’t anything to fear. It’s just something we have to learn to live (and die) with.

And economically speaking, we may just be in the middle of a cycle where wealth and power are migrating from the West to the East. It’s an argument we began making in 2003. If you’re in the West, the bad news is that it’s probably winter time for asset markets. But the good news is that there’s a place where honest-to-goodness green shoots may come again. We’ll visit that place next week. Until then!

Dan Denning
for The Daily Reckoning Australia

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The Daily Reckoning

Want to know what is really going on?

Investors are waking up. They are wiping the sleep from their eyes. Behold! No recovery.

Analysts and the commentariat are struggling to make sense of it. With record low mortgage rates, and after eight programs designed to boost up housing, for example, sales are still plummeting. July saw the biggest monthly drop in existing house sales since the Johnson Administration.

The supply of houses for sales is growing – thanks to record foreclosures. The demand is falling. Prices will come down too.

It’s a Great Recession, say some.

It’s not a recession, it’s a depression, says David Rosenberg.

It’s a “Contained Depression,” says one headline at Seeking Alpha.

The recession never ended, says another headline.

Stocks will sink to 5,000, says a headline at CNBC.

Bloomberg takes a more moderate tone:

“Durables, Housing Signal Recession Risk.”

But you, dear reader, you want to know what is really going on. So we will tell you.

We begin with a detail from yesterday’s news: credit card debt has dropped to its lowest level in eight years. This tells us that the de- leveraging of the private sector is real…and on-going. And as long as it lasts, you can forget about a “recovery.”

Instead, you should expect more on-again, off-again recession…with high unemployment, falling asset prices (stocks and real estate), weak sales and declining incomes.

This correction is a good thing. Consumers have too much debt. They’ll be better off when they get rid of half of it. But the feds want to fight this correction in the worst possible way. What’s the worst possible way? Adding more debt!

While the private sector de-leverages, the public sector leverages up. Eventually, this will have the result that everyone expects…bonds will crash, and the dollar will collapse…BUT PROBABLY ONLY AFTER PEOPLE STOP EXPECTING IT.

In the near term, the stock market is probably going down…it seems to be rolling over now. Yesterday, the Dow rose 19 points – a very weak bounce after so many down days.

When stocks go down, they will drag inflationary expectations. It will probably bring down stock markets in the emerging economies…possibly causing the Chinese economy to blow up…and bring falling commodities prices and deflation too. The idea of a “bond bubble” will disappear. People will see the “depression/Great Recession” as real…and permanent. They will try to protect themselves by buying US Treasury bonds. This will permit the feds to go further and further into debt.

Thus begins the world’s long day’s journey into night.

The US economy will become a Zombie Economy, with more and more activity dependent on government spending and government support. Banks are already Zombie Investors. Rather than lend to viable businesses that expand the world’s wealth, they borrow from the feds and lend the money back to them. We’ll see private investors become Zombie Investors too – putting nearly all their savings into US Treasury paper, just as the Japanese did.

The Dow will sink down towards 5,000. The feds will announce program after program to boost up the economy. Household savings rates will head to 10%. Unemployment will go to 12%…maybe 15%. Bond yields will collapse to new record lows. Ben Bernanke will threaten to drop money from helicopters…but as long as the US remains in an orderly decline, he will not dare to do it.

Eventually, the whole system will blow up in a spectacular fireball. But not until America’s investors are fully committed to US paper. Then, after having suffered huge losses in stocks and real estate, they can be finally ruined in what they thought were the safest investments in the world – dollar-based US Treasury bonds.

And more thoughts…

No discussion of the upcoming collapse of the bond market would be complete without a mention of Social Security.

At least, after they’ve lost their money in stocks, real estate and bonds, Americans will at least have Social Security to live on, right? Wrong!

You know all that money you pay in Social Security taxes? Where do you think it goes? Into current expenses and US bonds!

That’s right, the feds just use the money to finance whatever fool scheme they’ve got going at the moment…and give the Social Security Administration a bond in return. In theory, the SSA has assets. In practice, all they’ve got is the hope that the feds can squeeze enough money out of taxpayers to meet their obligations.

Can they?

Professor Laurence Kotlikoff:

Social Security has also played a central role in the massive, six- decade Ponzi scheme known as US fiscal policy, which transfers ever- larger sums from the young to the old.

In so doing, Uncle Sam has assured successive young contributors that they would have their turn, in retirement, to get back much more than they put in. But all chain letters end, and the US’s is now collapsing.

The letter’s last purchasers – today’s and tomorrow’s youngsters – face enormous increases in taxes and cuts in benefits. This fiscal child abuse, which will turn the American dream into a nightmare, is best summarized by the $202 trillion fiscal gap discussed in my last column.

The gap is the present value difference between future federal spending and revenue. Closing this gap via taxes requires doubling every tax we pay, starting now. Such a policy would hurt younger people much more than older ones because wages constitute most of the tax base.

What about cutting defense instead? Sadly, there’s no room there. The defense budget’s 5 percent share of gross domestic product is historically low and is projected to decline to 3 percent by 2020. And the $202 trillion figure already incorporates this huge defense cut.

Reducing current benefits, most of which go to the elderly, is another option. But such a policy is highly unlikely. The elderly vote and are well-organized, whereas 3-year-olds can neither vote, nor buy Congressmen.

In contrast, cutting future benefits is politically feasible because it hits the young. And that’s where Congress is heading, starting with Social Security. The president’s fiscal commission will probably recommend raising Social Security’s full retirement age to 70 from 67, for those who are now younger than 45. This won’t change the ages at which future retirees can start collecting benefits. It will simply cut by one-fifth what they get.

In other words, there is no question about whether the US government will default or not. It will default. The only question is how. Will it manage to slip out of its obligations by raising the inflation rate enough to slough them off? Or will it have to officially renounce them? Will it refuse to pay retirees? Or bondholders?

Any way you look at it, the situation is interesting. Retirees, employees, loafers and chiselers – all are stakeholders in the US government. They have something to lose and will fight to hold onto what they’ve been promised. Bondholders have something to lose too.

So far, the bondholders have been largely protected – even enriched. Stakeholders in Greece, Ireland and other countries have begun to feel the pain. In America, the class of stakeholders is actually increasing, as the public sector spends more and the private sector spends less.

Best guess: stakeholders, bondholders, placeholders, cupholders, napkin holders – they’ll all take a loss.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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