By Robert Reich, Robert Reich

What passes for business reporting in the United States is too often a series of breathless reports about the stock market. When the Dow rises precipitously, as it did today (Wednesday), the business press predicts an end to the Great Recession. When the stock market plummets, as it did last week, the Great Recession is said to be worsening.

Pay no attention. The stock market has as much to do with the real economy as the weather has to do with geology. Day by day there’s no relationship at all. Over time, weather and geology interact but the results aren’t evident for many years. The biggest impact of the weather is on peoples’ moods, as are the daily ups and downs of the market.

The real economy is jobs and paychecks, what people buy and what they sell. And the real economy — even viewed from a worldwide perspective — is as precarious as ever, perhaps more so.

Today’s rally was triggered by news that one of China’s official measures of its growth – its Purchasing Managers Index – rose. The index had been in decline for three straight months.

Why should an obscure measurement on the other side of the world cause stock markets in New York, London, and Frankfurt to rally? Because China is so large and its needs seemingly limitless that its growth has been about the only reliable source of global demand.

Many big American companies have been showing profits because they’re doing ever more business in China while cutting payrolls at home. American consumers aren’t buying much of anything because they’ve lost their jobs or are worried about losing them, and are still trying to get out from under a huge debt load (the latest figures show more consumer debt delinquent now than last year and a surge in personal bankruptcies). The U.S. housing market is growing worse, auto and retail sales are dropping, and the ranks of the jobless continue to swell.

Europe is in almost as much a mess. The problem there isn’t just or even mainly that Greece and other nations on the “periphery” have too much public debt. A bigger problem is European consumers aren’t buying nearly enough to generate more jobs. Unemployment remains high, and the trend is bad. Manufacturing growth there has slowed to its weakest pace in six months. Yet bizarrely, Europe’s large economies – Britain, Germany, and France – are paring back their public budgets. It’s exactly the wrong time, and a recipe for disaster.

Germany’s so-called “job miracle” (as Chancellor Angela Merkel calls it) is more mirage than miracle. Most of the gains in employment there have come from part-time jobs, often at low pay. Average annual net income per German employee continues to drop. This explains why domestic demand there is so sluggish and why Germany is desperately dependent on its exports of machinery and manufacturing components to Asia, especially China.

Meanwhile, Japan, now the world’s third-largest economy, is a basket case. Japanese consumers aren’t buying much of anything, and why would they? The country is still in the grip of a deflationary cycle that shows no end. Japanese consumers reason if they can buy it cheaper next week there’s no reason to buy now. Basically the only thing keeping Japan’s economy going are its exports of cars and electronic components to China.

Australia is booming, but look closely and you see the same buyer. Australia is making a boatload of money selling its minerals and raw materials to China (Australia is fast becoming one big Chinese mine shaft). The Brazilian economy is soaring. Why? Exports of wheat and cattle to China. Middle East oil producers are getting richer. Why? China’s insatiable thirst for oil.

Elsewhere around the globe the picture is as uncertain. Much of Pakistan is under water. Much of the rest of the Middle East is under tyrannical or corrupt regimes. Russia has suffered such a dry spell it’s hoarding wheat. Despite its wealthy few, India’s masses are still terribly poor.

The stock market could plunge tomorrow or the next day because the world’s economic fundamentals are so precarious.

The global economy cannot be sustained by one big, voracious nation – especially one that’s suffering bouts of civil unrest, actively repressing dissent, suffocating under a blanket of pollution and coping with other environmental hazards, and whose biggest companies are run by the state.

More articles from Robert Reich….

The Daily Reckoning

Labor Greens Unite!

Change climate with carbon price

Parasitic kids

Well that’s a good sign. Not twelve hours after we went to press with our latest newsletter – highlighting how September is historically the market’s worst month – and describing a Long Depression, stocks in New York rally by almost three percent. How is that good sign?

The Bear had everyone feeling pretty bearish about him. You can measure this in the number of put option buyers or in surveys. But this morning, we went to Google Trends to see how many people were searching for what you might describe as bearish topics like, say, economic collapse.

Click here to enlarge

You can see that thanks to the publication of two fairly high profile stories that went live late in August by Forbes and CNN, the conversation on collapse got a whole lot louder in the echo chamber that is the internet.

This more or less proves that if you wait on the mainstream press to validate your own thinking, you’ll always be late. It’s only safe for the papers to report on something once everyone’s thinking about it, and by then it’s too late to trade it.

But just to be safe, we asked our own in-house trading guru Murray Dawes what he thought. He wrote back that, “There is the possibility that the market has been ‘caught short’. By that I mean that traders could be overly bearish and short the market as a whole. The good GDP data could be squeezing them out of those positions and causing a short, sharp rally.”

“If this is the case,” he continued, “then you will see the market fall over again soon. If we see the ASX 200 close under the Point of Control of 4,400 in the next week or so then I would be confident that this current buying was a short squeeze and I would expect to see much lower prices in the near future. But until that occurs, this surprise rally should be respected.”

Murray’s article, by the way, was called, “Beware the false break out.” That term, “the false break out,” along with “the point of control” is key to his method of trading the markets. You can find out more by reading about Slipstream Trader.

Now we have to do something that’s required from time to time if you’re not familiar with our business model. We don’t like talking about our business model because you’d probably rather be reading about the stock market or the economy. So we’ll be quick about it!

The Daily Reckoning is free. So is the other e-letter which we publish, Money Morning. In them, you read independent and provocative ideas about the share market and the world that we hope are useful and maybe even profitable. A whole back office team supports getting these e-mails out to about 100,000 people combined each day.

The Daily Reckoning and Money Morning also contain the views of our independent analysts, Kris Sayce, Alex Cowie, Murray Dawes, and Greg Canavan. All of these analysts have chosen to work with us because, like you I suspect, they value a perspective that’s not compromised by any other agendas. They’re free to research and write about whatever they think will make you money, or keep you from losing it.

The newsletters which all of those analysts write cost money. The subscription fee supports the whole operation, including keeping the free e-letters free. To sell subscriptions, we include advertisements. Without the advertisements – which usually feature our latest and best ideas – we find it’s hard to sell subscriptions.

Of course not everybody likes advertising. Not everybody likes vegemite either. But nearly everyone likes free. Of course nothing is ever free. So the price of you receiving a free e-letter that you may occasionally find value from is that you’ll see advertisements for products to which you may already subscribe or to which you have no intention of ever subscribing.

We hope it’s not asking too much that even if you don’t like the ads and don’t want to subscribe, you recognise that we’re in a business and this is how we can provide the e-letters for free. And if you recently received a note from Alex talking about a resource stock that Kris was recommending and wondered why Alex didn’t’ recommend it, the simplest answer is that Alex is not Kris.

That is, Alex writes about resource stocks exclusively and does he research in his own way. It starts with a lot of spreadsheets and lately has included a lot mine site visits and phone conversations with geologists. Alex is well-versed in the resource sector and its nuances.

Kris is a small-cap specialist. There are a lot of small-cap stocks in Australia. There are also a lot of resource stocks in Australia. Many of the small-cap stocks are also resource stocks. Thus, Kris will, from time to time, recommend a small-cap stock that is also a resource stock.

We’ve found that some readers prefer Kris. Some prefer Alex. And some value what both are doing and realise that both are doing their own thing in their own way. If that troubles you…well…it shouldn’t. And if it realllly troubles you, we invite you to take up our offer and request a refund.

Finally, we see that the Greens and Labor have made a deal and that U.S. police have shot an armed man at the headquarters of the Discovery Channel in Maryland after he took people inside the building hostage. And we see that in some strange way, the events are not unrelated. Not causally, mind you, but philosophically.

Part of the big agreement yesterday announced by Labor and Green honchos was the set-up of a multi-party parliamentary committee to put a price on carbon. You can read about it here. But when you read about it, it’s clear that it’s a pretty undemocratic way of pretending to have a debate without having a debate. Typical, but pretty cynical. And as ever with the political class, it defers to the exalted power of “experts.”

Green’s Senator Christine Milne says that this very European process will, “Set up a parliamentary committee representing all the interests in the parliament committed to a certain idea and then enabling the appointment of experts to that committee. So the experts are not just to give evidence to the committee. The experts are part of the deliberations of that committee and that way you create the space in a parliament for people to talk through their own perspectives, nuance those perspectives and try to come up with a parliamentary consensus which has the support of everyone around the idea. “

Emphasis added is our own. But really, how much nuance can you have when everyone on the committee can only be on the committee if they are already committed to a certain idea? How hard is it to build consensus when you exclude everyone who might disagree from participating?

Milne continued: “You will note in the agreement the proviso for membership of the committee is that the people going onto it are committed to a carbon price. They may not all agree with the mechanism of achieving a carbon price but they all want to a carbon price and the idea is to invite everyone to it and the Coalition clearly if they were in opposition would be invited to join it on that proviso. So, it really is about grown up politics in Australia. It’s about ending the all or nothing, it’s about ending the accusations of back flips and sell outs and back downs and so on.”

In order to end the all or nothing false choice, it was necessary to create an all or nothing committee. Everyone who’s on it has to be all for a carbon price. No one who’s against a carbon price can be on it. That really is an effective way to end the argument. By not having it all and excluding other points of view.

Of course the justification for this is that the people against a carbon price are really whack jobs who don’t believe in global warming OR climate change. What’s more, they aren’t even experts. They’re just people, people who believe that common sense is more valuable than credentials. They’re just people. Very little people.

Milne says, “It’s a process we adopted in Tasmania to a very small degree when we achieved gay law reform by bringing in experts from the university, the justice department and so on to work with the parliamentarians. This I think can resolve this issue of a carbon price. It’s very important to us. We want one as soon as possible and we think this mechanism is the best way of delivering it.”

In other words, the best mechanism of delivering an outcome that the public hasn’t clearly endorsed is to use a non-democratic process that only includes people committed to the desired outcome. And that’s democratic how?

Honestly, we have to give credit where credit was due on this one. Julia Gillard had it right. Get a phone book from each city of 10,000 people or more in Australia. Pick ten people at random from each phone book. Put them on a Climate Change Committee. Put them in a three-star hotel outside the airport in Adelaide and give them six days to debate the issue and, if they decide, come up with a law.

What could be more democratic than that? If a random jury of your peers is good enough to deliver equal justice under law in the criminal justice system – where judges and juries must deal with complex evidence and experts – why is it not good enough to for public policy too?

In fact, the more we think about it, legislative conscription may be the best way to run the country after all. Each term, a new randomly selected group of conscripts is drafted to serve in Canberra. They are paid the minimum wage. You can be sure Parliament wouldn’t sit for long and that the government would generally stay out of most people’s lives and wallets, affording Australians the time and money to be good parents and neighbours.

Let’s have a vote! All in favour? All opposed?

But wait, what does this have to do with eco-terrorist James Lee’s bizarre actions and manifesto earlier today? Well, in point one of Lee’s manifesto, he seems to endorse Senator Milne’s committee of experts idea. We’ve reproduced the whole point here so we’re not selectively quoting, although the emphasis added is ours and not Lee’s:

The Discovery Channel and its affiliate channels MUST have daily television programs at prime time slots based on Daniel Quinn’s “My Ishmael” pages 207-212 where solutions to save the planet would be done in the same way as the Industrial Revolution was done, by people building on each other’s inventive ideas. Focus must be given on how people can live WITHOUT giving birth to more filthy human children since those new additions continue pollution and are pollution. A game show format contest would be in order. Perhaps also forums of leading scientists who understand and agree with the Malthus-Darwin science and the problem of human overpopulation. Do both. Do all until something WORKS and the natural world starts improving and human civilisation building STOPS and is reversed! MAKE IT INTERESTING SO PEOPLE WATCH AND APPLY SOLUTIONS!!!!

If poor Mr. Lee had just decided to run for office in Australia, he could be earning a public wage now instead of cooling in a morgue somewhere. He certainly has the right instincts to be in politics. He believes in coercion. He believes in State control of the media. He thinks “top down” solutions imposed from above should trump individual choices. He believes in expert scientists of a certain point of view. He’s against human civilisation and believes that children are filthy pollution.

Point four of his manifesto gets to the heart of his pro-planet, anti-human life message. He writes that, “Civilisation must be exposed for the filth it is. That, and all its disgusting religious-cultural roots and greed. Broadcast this message until the population of the planet is reversed and the human population goes down! This is your obligation. If you think it isn’t, then get the hell off the planet! Breathe Oil! It is the moral obligation of everyone living otherwise what good are they??”

Gee. That’s pretty much straight out of the tyrant’s modern political play book, isn’t it? Civilisation is filth? Check! Religion and culture and tradition are disgusting? Check! Human population should go down because it’s a pestilence? Check! Your obliged to agree? Check! If you disagree, go to hell? Check! If you disagree, you’re immoral? Check!

You get the feeling that some people just don’t like humanity. You get the feeling that some people view human life as a problem to be solved. That solution is vague, but usually involves somebody else dying without being killed. You get the feeling that deep down, some people view human beings as parasites on the planet. You get the feeling some people don’t feel very good about themselves but would like to take it out on the rest of us.

We also get the feeling that some people don’t view human life as the Ultimate Resource, as economist Julian Simon put it. Our view is that these people are themselves very selfish. They can’t imagine the world they live in coping with all the problems they perceive. So they want to destroy the world as it is and remake it into the world they want to live in, even if that world doesn’t include you and me.

It’s all very self-centred, moralistic, and unimaginative. And of course, Lee was plain crazy. He wrote, as this paragraph proves:

The world needs TV shows that DEVELOP solutions to the problems that humans are causing, not stupefy the people into destroying the world. Not encouraging them to breed more environmentally harmful humans. Saving the environment and the remaining species diversity of the planet is now your mindset. Nothing is more important than saving them. The Lions, Tigers, Giraffes, Elephants, Froggies, Turtles, Apes, Raccoons, Beetles, Ants, Sharks, Bears, and, of course, the Squirrels.

Of course the Squirrels!

TV will save us!

Save the froggies.

It would all be absurd and sad if there weren’t real live crazy people trying to run the government who didn’t’ share more or less the same anti-human, anti-civilisation worldview.

Dan Denning
for The Daily Reckoning Australia

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• If Market Keeps this Way, There May Be More Beaten Down Stocks
• Why is 5,000 a Key Psychological Level?
• Algoholics Anonymous
• Small Caps to Lead the Way in 2009
• Biased Lenders

More articles from The Daily Reckoning….

The Daily Reckoning

Since I am known as something of a gold bug, a lot of people write to me about gold, but since I am a paranoid lunatic, I don’t read their letters, mostly because I now call myself Marvelous Macho Grande (MMG), figuring that an established alias could potentially come in handy when the prices of gold, silver and oil shoot higher and higher as inflation in consumer prices starts going parabolic as a result of the despicable Federal Reserve creating so, so, so much money, especially so that the despicable federal government can borrow and spend that selfsame so, so, so much money.

So, you can see how a dramatic, romantic new name like Marvelous Macho Grande (MMG) would perfectly suit a guy like me, which is a guy with a theoretical massive coming increase in wealth from investing according to The Mogambo Perfect Portfolio (TMPP), which uses the Austrian school of economics (see Mises.org) and the last few thousands of years of history as Absolutely Compelling Reasons (ACR) to invest in gold, silver and oil when the government is acting so insanely bizarre, as does ours now, blithely deficit-spending a monstrous 11% of GDP, now with a national debt nearing a heart-stopping 100% of GDP, and allowing the Federal Reserve to continue to create So Freaking Much (SFM) money that, like creating too much money always does, it creates booms and bubbles that predictably, inevitably, unstoppably, disastrously go bust, leaving you, sadly, worse off than before.

So, you can see how I am not in the mood to answer emails from people who, deep down in their hearts, are pleading, “Oh, please help me, Masterful Mogambo Guru, or Marvelous Macho Grande (MMG), or whatever in the hell your name is this week: Sadly, I have not been following your terrific advice to buy gold, silver and oil as the One True Way (OTW) to end up with a lot of money without working for it, and now I need one of your famous Secret Investment Plans (SIP) to make up for lost time, else I am reduced to being the widow of a rich Nigerian banker who needs to sneak $100 million out of Nigeria and into your country. In that case, I will give you $50 million after you give me your bank account number and $5,000 in cash to pay various fees, expenses and bribes.”

Alas, I don’t have $5,000 to invest in this terrific opportunity to make a quick $50 million, as likewise there are no Secret Investment Plans (SIP), although I have spent a lifetime looking for one.

Fortunately, constantly buying gold, silver and oil is always the smart thing to do when your stupid, desperate, half-witted, corrupt, clutching-at-straws government is acting like all the other stupid, desperate, half-witted, corrupt, clutching-at-straws governments that created too much money and destroyed themselves over the last 4,500 years.

And if you don’t believe me, then maybe you will listen to the famous Richard Russell of the Dow Theory Letters, who writes, “Investors sometimes get caught up in the day to day and week to week movements in gold and silver. Don’t waste your time or energy on that, just accumulate. Standing in front of us is the greatest transfer of wealth in history. When the dust settles, those holding the gold will make the rules.”

And “just accumulate” sounds so easy because it is so easy, which is why I say, as I always say until you are tired of hearing me say it, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning Australia

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• Silver and its Large Short Position
• Gold is the Only Place to Turn in Times of Inflation
• Two Good Reasons to Own Gold
• Borrowing Money is no Longer in Fashion
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More articles from The Daily Reckoning….

Zero Hedge

Seeing Past The Hologram, by Mike Krieger of KAM LP

There is no distinctly American criminal class – except Congress.

- All quotes by Mark Twain

We Need Real Confidence to Return, Not Confidence in a Ponzi Scheme

Last week I pointed out that what I got from Banana Ben’s speech in Jackson Hole was that he realized any major public statement of interference in markets was too risky at this point following his announcement at the last meeting to keep the balance sheet steady by reinvesting MBS proceeds into treasury securities.  The operative word in this sentence being “public.”  Anyone that believes this means the Fed and government will just take a back seat and do nothing behind the scenes is deluding themselves.  Washington D.C. and the Fed still fail to comprehend how to increase standards of living in the real world, rather they remain completely addicted to the short-term buzz of printed money heroin as it flows through the house of cards they have created.  They also think that the only thing that really matters in an economy is “confidence.”  As Madoff can attest to, that is indeed the case when you are running a ponzi scheme and since the U.S. government is basically that I can understand where they are coming from.

 I agree that confidence is a huge part of any healthy economy; however, I do not define confidence in the way these arrogant bureaucrats do.  They think confidence comes from rising asset prices, including stocks and homes.  They think this is enough to spark growth in the real economy.  This is nonsense.  The confidence that is needed more than anything else today is two-fold.  First, confidence that there is the rule of law and there will be the rule of law in the future.  The second is that the money issued by the government will maintain its purchasing power over time.  As I have made clear on various occasions, I do not have confidence in either of these things based on how the government has responded to the crisis.  I do not like buying physical gold.  I do not like feeling the need to write these emails every week to warn people.  I wish I could employ capital into businesses and the real economy.  I hope that one day I will be able to do so, but at the moment I do not trust my government and I certainly don’t trust the fascist Federal Reserve.  So I will hoard what I have as the government prints and let the storm pass me by.  I am not the only one.  People are collectively starting to understand this.  So what happens when the big, smart money takes itself out of the investment and capital allocation game because they don’t trust anything?  What happens when the government’s response to this is to print money to keep up the spending habits of people with no jobs or people with government jobs that produce no goods for the economy?  You get the worst case scenario and that is exactly what is staring us straight in the face.

Is a Trade War with China Coming?

The quicker the dollar is devalued the better.  This is not to say that I think dollar devaluation is a good thing.  It is to say we are past the point of avoiding it.  We could have taken the pain in 2008, but instead it was extend and pretend all over again.  Now the debt and promises are too big.  The behind the scenes manipulations are too entrenched.  There is no avoiding a devaluation relative to things people need (food and energy) and capital goods that are imported.  The best thing would be to get it over with and then change policies and restore the rule of law.  The problem with this is that the main currencies the dollar needs its major adjustment against are those in emerging Asia and China.  What has prevented the realignment from happening in a quick and healthy way is China’s refusal to allow the yuan to appreciate.  This creates a situation where Central Banks throughout emerging Asia take steps to prevent their “free-floating” currencies from adjusting either.  If China does not change its policy I fear that what we are looking at a trade war with China after the November elections.  I think Congress and the Administration will start to introduce aggressive policies to discourage Chinese goods and encourage goods made at home.  Think it can’t happen?  We are a lot closer than you think.  This all goes back to my “think local” theme.  While I am inherently a fan of free trade we do not have free trade in any sense whatsoever.  We have policies that are geared to advantage the multi-national corporations at the expense of the U.S. citizen.  The U.S. consumer has merely been spending borrowed money.  This gave an illusion that the U.S. was benefiting from the global multinational corporate rigged market whose model mainly thrives on companies moving abroad to exploit the labor arbitrage caused by a combination of what was a labor surplus (no longer it seems) and a rigged currency.  As more people realize this, more pressure will be placed on politicians and ultimately this will overpower the corporate lobbyists and a trade war of sorts will begin.  Then the chaos could really ensue as we engage in a trade war with our biggest creditor!

Seeing Past the Hologram

The past couple of weeks have been extraordinarily interesting and some of the moves appear to be extremely important.  Although a lot of people like to point to the treasury market and then extrapolate out as to what this means to equities and the ability of the government to increase spending, I think this is the most USELESS market in the world to watch.  If anything is a hologram and a PR tool it is the U.S. treasury market.  How can people with a straight face come out and extrapolate anything from a market where the Federal Reserve is buying the debt of its own government!  The Fed is merely the fiat drug dealer to a government addicted to spending and false promises.  The equity market is the second most useless market in my opinion.  There is no doubt in my mind that a huge part of the government’s “strategy” to build confidence is to keep this thing from doing what it should be doing.  Thus, I am not surprised at all that since I last wrote the S&P500 was +1.6%, -1.5%, flat, and then +3.0%.  So what you have seen is high volatility with no real direction.  How can anyone have confidence this that thing is for real?

So what markets do I watch?  I get the most from the FX markets and the commodity markets.  While these markets are no doubt manipulated heavily as well, I think this is where the players that really understand the macro are playing.  The first currency I check in the morning is the dollar/yen.  The reason for this is that the yen is back to the highs of 1995 and if it does not stop appreciating around this level I think the Bank of Japan is going to absolutely panic.  While the yen has not broken higher yet as market participants are afraid of such intervention, unless the BOJ does something extreme soon the market may test their resolve and push this thing further.  I guess the main point I am trying to make is that with the Chinese yuan NOT strengthening and the yen threatening to break out we could be in for some major fireworks.  Meanwhile Japanese 10 year government bond yields have really started to spike lately (chart GJG10 Index on Bloomberg).  Something big is happening in the land of the rising sun.  In the back of my head I think that any panic move from the BOJ could be the spark that breaks government bond bubbles globally and ushers in a period of massive global commodity driven inflation as every country tries to devalue their way to prosperity.  Essentially, a fiat money version of the 1930’s beggar thy neighbor policies.  When this begins the rush into gold and silver that we have seen thus far will look like a trickle.  I don’t think people will be able to find supply anywhere near the quoted price on comex (or as some like to call it “crimex”).

This brings me to silver which potentially experienced a game changer last week.  I can’t remember the last time silver bounced back almost immediately after every attempted raid.  I am starting to wonder how much physical silver is available.  What we do know is that Central Banks do not store silver to manipulate markets.  Even if it doesn’t break out right now, there is no asset in the world that has more upside than silver.  Don’t buy SLV either.  Buy physical silver not something with JPM as a custodian. 

I also continue to watch food prices very closely.  Wheat, which has come off of its high now seems to have found a base at a price that is 50% higher than the end of June.  Corn prices are threatening to break above resistance at levels 30% where they were at the end of June.  Rice looks like it could have a long way to go on the upside as it is only 20% off of its June low.  If I were a foreign government I would be using this opportunity to buy every single grain of rice I could in order to feed my people when things get dicey in the months ahead.  After strong performance in recent months lean hogs and live cattle also look set to make another push to the upside.  How people in the investment world still focus on the government inflation statistics is beyond me.  It was the rampant commodity inflation, trucker strikes and food riots that played a key role in ending the game in 2008.  This is because it forced the emerging markets to raise rates and cool growth as the Western world imploded under a pile of debt.  It seems the whole play is starting again and people remain focused on deflation.  Deflation in some things yes I agree (discretionary things like homes, technology, stock prices, etc), but not in the things you NEED to buy!!!

Onto oil which is also exhibiting some strange moves.  The Asian benchmark Tapis has not experienced the recent volatility and weakness that WTI has and is currently trading at $80/b.  The Asian price is the one I really pay attention to since that is where the demand growth resides.  The spread between the two now is back above $6/b, which is toward the high end of the range for the past two years.  This tells me that one price is wrong and the spread should narrow.  Given what I think about currency debasement and lack of appropriate investment in the space I think WTI should rally.  We shall see…

A Primer on the Federal Reserve

For those that read my commentary on the Federal Reserve as an immoral an fascist institution and think to themselves “what is this guy talking about,” I have attached a video from G Edward Griffith (the author of The Creature from Jekyll Island).  It’s a great description of how the Fed was formed and who it answers to when push comes to shove.  http://video.google.com/videoplay?docid=6507136891691870450#

Also in case you weren’t aware of the power grab that the “Financial Reform” legislation allowed the Fed, read this Bloomberg article. 

http://www.bloomberg.com/news/print/2010-09-02/bernanke-meets-buffett-in-new-role-conceived-to-protect-markets.html

All the best,
Mike

More articles from Zero Hedge….

By Karl Denninger, The Market Ticker

Again, I must say……

The same principal has left the nations public and private pension funds badly underfunded.

We are actually more underfunded than we were at the end of 2008 because of the drop in interest rates since then, said John Ehrhardt, who tracks fund performance for benefits consultant Milliman.

That "same principal" is The Fed’s ZIRP policy.

By picking winners – in this case the banks who made imprudent loans and should have been forced out of business, along with "protecting" the imprudent buyers of bonds in institutions that made those imprudent loans, the prudent are getting hammered.

There is no solution to this other than to stop doing that.  And this means withdrawing liquidity and forcing the borrowing of money to have a reasonable cost, so that those who lend money through the purchase of bonds can earn a reasonable inflation-adjusted return.

The initial "impact" of low interest rates appears seductively good.  It’s not – it’s always bad.  It forces people to take imprudent risks (how do you think we got a housing bubble in the first place?) and destroys the prudent investor, lender of capital and saver.

As these people are eviscerated their ability to contribute positively to the economy is likewise destroyed, and in particular, capital formation is critically damaged.

This is the real story on how Japan lost two decades. 

We will follow them unless we stop this insanity, and soon.

(PS: Are the unions still sheep on this issue, more than two years after I started sounding this alarm?)

More articles from the Market Ticker….

Oil Price Ignores Long-Term Supply Worries

You could be excused for seeing a grim metaphor for the death of the oil age in the scenes of destruction visited on the U.S. Gulf coast this summer.

However, production from the ocean floor is growing more quickly than from any other type of reserve and is supposed to allay concerns about ‘peak oil’, the idea that the amount of crude the world can produce might suddenly decline.

Now, so far, this notion hasn’t had much of an impact on energy prices.

But, as cheaper oil fields are run down and more crude is drawn from expensive, hard-to-reach offshore reserves, the costs of energy supply are starting to rise.

Drilling agency imposes conflict-of-interest rules

WASHINGTON – Scandalized by federal regulators who had sex with oil company executives and negotiated with them for jobs, the agency that oversees offshore drilling is imposing a first-ever ethics policy that bars inspectors from dealing with a company that employs a family member or personal friend.

Michael Bromwich, head of the Bureau of Ocean Energy Management, said the new policy should help restore credibility to his beleaguered agency, which was widely criticized under its former name — the Minerals Management Service — for being too close with oil and gas companies.

President Barack Obama and Interior Secretary Ken Salazar have pledged to end the agency’s “cozy relationship” with industry and slow the revolving door between government and the energy industry.

Pemex looks to shale

Pemex is considering opening an entire line of exploration that concentrates on shale gas wells in the northern state of Coahuila.

Pemex board member Hector Moreira told Market News International the new line could reduce the company’s dependence on natural gas imports.

OPEC oil output falls to lowest since Nov 2009

LONDON (Reuters) – OPEC crude oil supply fell in August to the lowest since November 2009 as reduced supplies from Nigeria, the United Arab Emirates and Iraq offset increased output in Angola, a Reuters survey showed on Wednesday.

Supply from the 11 members of the Organization of the Petroleum Exporting Countries with output targets, all except Iraq, averaged 26.83 million barrels per day (bpd) last month, down from 26.95 million bpd in July, according to the survey of oil companies, OPEC officials and analysts.

The Gas Bulls of Summer Turn into Bears

Recently, the last of the raging bulls on natural gas prices traded in their horns for bear uniforms – and we don’t mean the Monsters of the Midway variety! By throwing in the towel on gas prices for this year, these bulls-turned-bears then proceeded to claw their future gas price forecast by stating they expected $6 per thousand cubic feet (Mcf) to be the long-term average. The reality is that these bulls of summer were really merely acknowledging the power of the market as natural gas prices are about two dollars per Mcf below where they were at the start of 2010, and well below the $7.50/Mcf average gas price the bulls had forecast.

Feds downplay risk of leak when well cap moved

The federal government’s point man on the Gulf of Mexico spill response said Wednesday there is no “significant risk” that more oil will leak into the sea when engineers remove the temporary cap Thursday that first contained the gusher in mid-July.

Retired Coast Guard Adm. Thad Allen said vessels will remain on standby just in case to collect any leaking oil.

FACTBOX – Key political risks to watch in Uganda

(Reuters) – Uganda expects to become an oil-producing nation in 2011, but a protracted dispute with British exploration firm Heritage Oil may delay production and risks unsettling other investors.

With the potential to be a top 50 oil producer, Uganda stands to reduce its budget dependence on foreign aid and improve poor infrastructure.

Nissan starts selling all-electric Leaf sedan today

At long last, Nissan begins taking actual orders today for the first next-generation fully electric car from a major automaker, the Leaf.

Carpooling

Passengers might be the most under-appreciated factor in how much fuel and money you waste. As I write this, for example, a business headline boasts of Toyota’s multi-million-dollar plan to boost fuel efficiency by 25 percent, with the usual discussion of what this will mean for the economy and the climate. Any of us, however, can boost the efficiency of our cars by several hundred percent instantly, with no additional expense or technology, simply by getting more people in the car.

This fact is also forgotten when we judge car owners by the wastefulness of their vehicles. An SUV is a spectacularly inefficient machine compared to a Prius, for example, but pack that Dodge Durango full of people and suddenly it is greener than the electric hybrid driven alone.

Transit systems easier to predict with smart phone apps

Allen Stern says he had a 40-minute wait between buses when he lived in Manhattan. Using a free mobile app that became available about a year ago, he could at least tap into the Metropolitan Transit Authority with his cellphone and find out exactly how far away the next bus was from his stop.

Jatropha: A new form of energy

SINGAPORE – Biotechnology firm JOil is confident that it can breed and genetically engineer the Jatropha plant to be a more sustainable alternative to fossil fuel and other biofuels.

It plans to create a Jatropha hybrid that can produce more fruits and match the four to six tonnes of oil per hectare that palm trees can generate.

Pedal power takes off as exercise produces electricity

Pedal power is gaining traction as thousands of bikes and elliptical machines are retrofitted to produce electricity.

Gyms are using sweat equity to help power their facilities. A Brooklyn eatery uses it to make smoothies. Female inmates at a Phoenix jail pedal to power their TV to watch soap operas. Actor Ed Begley Jr. bikesrides a bike to run his toaster.

Obama lobbied to add solar panels to White House

A campaign to make the White House greener is intensifying as a group of environmentalists plan this month to give President Obama a solar panel that used to sit atop 1600 Pennsylvania Avenue.

Points of departure

There is a strong correlation between energy consumption and economic growth. We can for sure hope for “decoupling” – to be able to have continued economic growth while maintaining or even reducing energy use – but no country has ever managed this Indian rope trick and that does not bode well. Maybe we are high on energy, listening a little to closely to the voice of intoxication, but it will unfortunately all too soon be replaced by a massive hangover.

The Peak Oil Crisis: Prospects for China

The key question in all this is how much longer China’s economic miracle can continue before the realities of finite mineral resources force a slowdown? Another five years of 10 percent annual economic growth will result in Beijing increasing its oil consumption by another 2.5-3 million barrels per day. This alone would likely mop up much of the world’s spare capacity to produce oil and result in very large price increases. When China’s ever growing demand is added to that of India, Brazil and the oil exporting states, the likelihood that we will see a substantial increase in oil prices within the next five years becomes very high.

Secret German military study warns of dramatic oil crisis

Berlin : A confidential German army study warned of a looming oil crisis which could have dramatic political and economic consequences for the world, the Hamburg-based weekly news magazine Der Spiegel said Tuesday.

According to the report, a think-tank of the German army has for the first time ever analyzed the security policy dimensions of the peak oil problem.

Peak Oil from a Security Studies Perspective

The Strategic Institute of the German Bundeswehr has now published a document on the implications of peak oil for security (more precisely: the study was leaked). The study is very well written and recommended as an essential read not only for geostrategist but especially for those involved in global sustainability questions. In fact, at least in wording the authors care about such diverse issues as environmental impact of unconventional oils and the impact of global-marked-induced land-use change on indigenous populations. It is worthwhile to have a closer look on some of their results:

Remembering Matt Simmons

Matt Simmons, a long time friend of the Maine coast and its islands and a student of the winds and waters of Gulf of Maine, loved to tell the story of his first trip to Maine, courtesy of a labor strike while he worked construction one summer as a college student in his home state of Utah. When a labor dispute suddenly shut down the construction site, he and a buddy were only too happy to collect their strike checks and head out on a jaunt. They went north into the Canadian Rockies then turned right and headed toward the Inscrutable East, dipping back down into the United States via the border at Jackman, where they drove along the shores of Moosehead Lake before ending up in Boston. On a lark, Matt ducked into the Harvard Business School, which had not had a long history at that point of actively recruiting students from Mormon country in Utah, but the visit was enough to entice him to apply and enroll. Matt loved telling that story because it held the kinds of mutually opposed contradictions he loved to explore-a businessman who owed his right future to a labor strike. If genius is the ability to hold mutually opposing ideas in the mind at the same time without being paralyzed, Matt Simmons would certainly qualify.

Oil Drops, Caps Worst Month Since May, as Hurricane Earl Threatens Demand

Oil tumbled, capping its worst month since May, on forecasts Hurricane Earl will pelt the U.S. East Coast, curbing fuel demand during the Labor Day holiday weekend.

Crude dropped the most in 12 weeks amid speculation that stormy weather will keep beachgoers and travelers at home. Labor Day is the traditional end of the U.S. summer driving season, the peak gasoline demand period. U.S. gasoline demand slid to a 12-week low last week, MasterCard Inc. reported today.

“It’s the last thing we need,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “It’s a big gasoline consumption weekend. Given how poor the gasoline demand has been, it will be a final parting blow for the summer driving season if people won’t hit the beach in droves.”

Ethanol Surpasses Gasoline for First Time Since December

For the first time since December, ethanol prices are higher than gasoline as corn surges and refiners profit from tax breaks.

Gas Prices Explained

So what determines the price of gasoline? Speculators? Evil conspiring oil companies? Well, actually no. It’s demand and supply, of course. On the demand side the American automobile fleet gets better gas mileage than it did a few years ago and Americans, whacked by the recession and high unemployment rates, are driving a bit less than they used to. In addition, thanks to government subsidies, about 9 percent of what goes into our gas tanks is ethanol produced from corn, which also reduces the demand for refined crude. On the supply side, global oil supplies are ample and refiners in the U.S. evidently believed the Obama administration’s rosy “recovery summer” scenarios and stockpiled a lot of gasoline.

Sinopec Plans to Cut September Oil Processing by 4% at Refinery in Hainan

China Petroleum & Chemical Corp., Asia’s biggest refiner, will process 4 percent less crude oil at its Hainan plant in September compared with last month, an official at the refinery said.

FACTBOX-Key political risks to watch in Saudi Arabia

(Reuters) – Saudi Arabia, under the rule of an ageing King Abdullah, has the dilemma of making reforms that keep the austere clerical establishment that opposes change on side and violent Islamist militants at bay.

Any instability at the helm of Saudi Arabia, which controls more than a fifth of the world’s crude oil reserves and is a regional linchpin of U.S. policy in the Middle East, would be a concern for the rest of the Arab Gulf region.

FACTBOX-Key political risks to watch in Yemen

(Reuters) – Rising al Qaeda militancy, a surge in violence in a secessionist south and crushing poverty will be this year’s critical tests for Yemen, neighbour to top oil exporter Saudi Arabia.

Reid hopeful for GOP energy votes after elections

WASHINGTON (Reuters) – Senate Majority Leader Harry Reid said he hoped to pick up Republican votes for a pared-down energy bill after the midterm congressional elections.

“Maybe after the elections we can get some more Republicans to help us on these issues,” Reid, a Democrat, told reporters in a teleconference on Tuesday.

Sinopec Sees Solid Gas Growth Ahead

While oil production experienced sluggishness in the first half, natural gas production showed solid growth. China is ramping up gas production as it seeks to find alternatives to coal, which emits high carbon levels. It is set to raise the country’s energy needs from the current 3% to 10% by 2020.

Insurance likely to reduce BP’s liability for Gulf of Mexico oil spill

BP PLC has taken on some of the blame for the Deepwater Horizon rig that spilled millions of gallons of oil into the Gulf of Mexico earlier this year, but the company is still expected to have limited liability for mistakes made misreading pressure data that indicated a blowout was imminent.

BP Raises $363 Million in Malaysian Asset Sale to Help Pay for Gulf Spill

BP Plc, seeking cash to help pay for the worst U.S. oil spill, agreed to sell its Malaysian chemical assets to Petroliam Nasional Bhd. to focus on projects in China and India.

BP will sell its 15 percent stake in Ethylene Malaysia Sdn and 60 percent interest in Polyethylene Malaysia Sdn for $363 million, the London-based company said today in a statement. It will also be eligible for a possible $48 million dividend from the ethylene unit.

A Nuclear Giant Moves Into Wind

Exelon, a nuclear giant that recently backed away from building new nuclear plants, is moving into wind.

Canada company builds major waste-to-biofuel plant

VANCOUVER, British Columbia (Reuters) – A Canadian company started construction on Tuesday on what it says is the world’s first industrial-scale plant to turn municipal waste into biofuel.

Privately-owned Enerkem Inc said the C$80 million ($75 million) facility in Edmonton, Alberta, will produce enough biofuel to keep more than 400,000 cars a year running on a 5 percent ethanol fuel blend.

Thorium Cures the Free Market

Obama could kill fossil fuels overnight with a nuclear dash for thorium … If Barack Obama were to marshal America’s vast scientific and strategic resources behind a new Manhattan Project, he might reasonably hope to reinvent the global energy landscape and sketch an end to our dependence on fossil fuels within three to five years.

New Warnings About Costs of Nuclear Power

As anticipation grows about a possible renaissance for the nuclear power industry — and about its potential for curbing greenhouse gas emissions — some politicians are stepping up warnings about the high cost of such projects.

Last week, Traicho Traikov, the Bulgarian economy and energy minister, said the cost of building a second plant near the Danube River had reached 9 billion euros, or $11.4 billion, according to the Sofia News Agency.

The original cost of the project for two reactors was expected to be just under $4 billion.

Homeowners Must Pay Off Energy Improvement Loans

Many homeowners who participated in a program that let them repay the cost of solar panels and other energy improvements through an annual surcharge on their property taxes must pay off the loans before they can refinance their mortgages, two government-chartered mortgage companies said Tuesday.

The guidance came from Fannie Mae and Freddie Mac as efforts to resolve a dispute over the program — called Property Assessed Clean Energy, or PACE — have failed.

Calif. rejects ban on plastic shopping bags

SACRAMENTO, Calif. – California lawmakers have rejected a bill seeking to ban plastic shopping bags after a contentious debate over whether the state was going too far in trying to regulate personal choice.

The Democratic bill, which failed late Tuesday, would have been the first statewide ban, although a few California cities already prohibit their use.

A Greener Champagne Bottle

“This is how we’re remaking the future of Champagne,” he said, pointing to the area just below the neck. “We’re slimming the shoulders to make the bottle lighter, so our carbon footprint will be reduced to help keep Champagne here for future generations.”

The Champagne industry has embarked on a drive to cut the 200,000 metric tons of carbon dioxide it emits every year transporting billions of tiny bubbles around the world. Producing and shipping accounts for nearly a third of Champagne’s carbon emissions, with the hefty bottle the biggest offender.

Cleaner Cars, A to D

The Obama administration has proposed new stickers for cars and light trucks that will make it easier to see whether you are buying a fuel-efficient one or a guzzler, and how much it contributes to global warming. The stickers are a symbol of how far this country has come in providing a wider range of environmentally responsible choices to help ensure cleaner air and a healthier planet.

L.A. mayor, Latino activists take on oil companies over Proposition 23

They say the ballot initiative to suspend the state’s climate change law would hurt low-income communities already suffering the most from pollution.

Jeff Rubin: High energy prices make Copenhagen green

There is certainly much to be said for Denmark’s leadership in green energy. While North American carbon emissions have risen by around 30 per cent since 1990 (the reference point for the Kyoto Accord), Denmark’s emissions are actually lower than they were two decades ago. That’s generally ascribed to the fact that a world-leading 20 per cent of the power generated in Denmark comes from wind.

Less commonly known is the source of the other 80 per cent. I was surprised to discover that it comes from good old King Coal. In fact, coal’s share of power generation in Denmark’s power grid is basically the same as it is in China.

Tiny creatures reveal ancient sea levels

“It was a very big surprise,” says David Barnes, lead author of the study at the British Antarctic Survey, of the find of similar bryozoans 2400 kilometres apart in seas on either side of the West Antarctic ice sheet, which is 2 kilometres thick.

“The most likely explanation of such similarity is that this ice sheet is much less stable than previously thought and has collapsed at some point in the recent past,” he says.

“And if the West Antarctic ice shelf has been lost in recent times we have to re-think the possibility of loss in future with climate change.”

If one wants to be taken seriously in the world of policy analysis, one should at least use an internally consistent framework. This consideration, apparently, has not troubled Mr. Reidl.

To quote from The fatal flaw of Keynesian stimulus, in the Washington Times:

Last week, the Congressional Budget Office released a report claiming that the $814 billion “stimulus” has added 3.4 million net jobs.

…

Such implausible analysis does not come from actually observing the post-stimulus economy. Rather, it comes from Keynesian economic models that have been programmed to conclude that government spending injects new dollars into the economy, thereby increasing demand and spurring economic growth. In other words, these models are programmed to conclude that stimulus spending always creates jobs and growth, no matter how the economy actually performs.

Well, not quite. As I described in this post, there are a variety of ways in which multipliers are obtained. Oftentimes, the impacts are estimated either directly or indirectly, by estimating the marginal propensity to consume. The article continues:

But there is one problem with the government stimulus theory: No one asks where Congress got the money it spends.

Congress does not have a vault of money waiting to be distributed. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.

It is intuitive that government spending financed by taxes merely redistributes existing dollars. Yet spending financed by borrowing also redistributes existing dollars today. The fact that borrowed dollars (unlike taxes) will be repaid some years later does not change that.

Here, I think Mr. Riedl is invoking Ricardian Equivalence, despite the fact that there is no empirical evidence, to my knowledge, that validates pure Ricardian Equivalence (actually, Ricardian equivalence wouldn’t necessary hold for government spending on goods and services, anyway). Now, at this juncture, I thought that he might be invoking a real business cycle model, or an older, nonstochastic version of the RBC, namely a flex price Classical model. But then the next paragraph reads:

Some believe stimulus spending is the mechanism by which the Federal Reserve injects new dollars into the economy. Yet the Fed could run the printing press and then inject those dollars into the economy by buying existing bonds (with mostly inflationary results). It doesn’t need an expensive stimulus bill to conduct monetary policy.

Accepting that the Fed can stimulate via monetary policy then implies either (1) sticky prices so an expansionary monetary policy can affect the real interest rate, or (2) a financial accelerator model such that collateral constraints or some other financial rigidity holds. In the latter case, it seems prima facie that Ricardian Equivalance cannot hold.

Next, I was thrown for a loop, because Mr. Riedl seems to conflate real saving and the monetary multiplier. He argues that government deficits can only be financed by foreign saving, private saving and “idle saving”. This he describes thus:

Idle savings. The only government spending that truly increases current purchasing is the amount that would have otherwise sat idle in safes and mattresses. Those are the only dollars not already circulating through the economy as consumption, or through the financial markets as investment spending.

Idle savings are rare. People and businesses generally invest or bank their savings, where the financial markets transfer them to other spenders. Banks that receive savings either lend them out to a spender, or (when afraid to loan) invest them conservatively to earn some interest. They are not hoarding customer deposits in massive vaults (beyond the required cash reserves).

This is an odd conflation of saving, measured as a flow, and financial assets. But lets take the equation at face value, there is an incredibly counterfactual observation that there no reserves are behing held in excess of required cash reserves. According to the St. Louis Fed, excess reserves are now approximately $1 trillion dollars. Well, no need for facts to get in the way of a good polemic.

Mr. Riedl’s main point is:

All government stimulus spending requires first borrowing dollars that would have otherwise been applied elsewhere in the economy. The only exception is money borrowed from “idle savings,” which for reasons described above likely constitute a minuscule portion of the $814 billion stimulus.

As I’ve mentioned here and elsewhere, this is true in a full employment model. (I’m working off of textbook models; move to coordination models, or allow monopolistic power, and you have lots of other inefficiencies arising).

Mr. Riedl concludes:

Economic growth requires raising worker productivity to create more goods and services. Government stimulus spending represents a naive “magic wand” attempt to create purchasing power and wealth out of thin air.

No wonder the unemployment rate remains high.

Well, if we’re in a Classical world, then there is no involuntary unemployment. If we’re in a New Classical world, then whatever involuntary unemployment exists is not systematic. If there is involuntary unemployment, then there are resources that are not being utilized, and putting them to use naturally raises productivity (remember labor productivity is defined as output per man hour).

It pains me to say that Mr. Riedl is a graduate of the University of Wisconsin, in economics and political science.

Postscript: Here is Deutsch Bank’s assessment of the impact of the ARRA on the growth rate of GDP.

Figure 1: Dobridge, Hooper, Slok, Sufian, “The growing risk of fiscal drag in the US,” Global Economic Perspectives, New York: Deutsche Bank, July 28, 2010.

Level impacts are depicted in this post. Here is CBO’s latest assessment.

Read more….

One of the oldest methods of protecting your retirement money is by spreading risk out among different stocks and sectors. While this may be a partially effective way of mitigating the risk of a major drawdown in your account, it does NOT ensure success. In fact, in a broad market sell-off, you may see several sectors moving lower at the same time, similar to what we’ve experienced over the past couple months.

Read more….

The Daily Reckoning

Before we get stuck into today’s financial world, a request: please don’t store petrol in your garage. A reader took us to task for suggesting that last week in our survivalists “to own” list. It was just a list. But her point is well taken. Petrol doesn’t keep well. And you may need it later to burn all your paper money and furniture to keep warm. So store it somewhere safe, if you’re going to store it at all.

But perhaps all this talk of a Long Depression is premature. We’ve just finished revising and remaking our case for D2 (the Second Great Depression) in the latest issue of Australian Wealth Gameplan. We were all set with a fairly conventional analysis of the macro-economic scene when we decided to scratch the whole thing and re-write it from a long-term historical perspective.

Usually these attempts are either incredibly stimulating and provocative or really boring for everyone else to read. Hopefully it won’t be boring. But our main point is that when you’re living in the middle of one, a long depression probably doesn’t feel like it. It feels like every day things might get better. But they don’t, at least not for a long while.

You certainly wouldn’t suggest Australia is in the middle of Long Depression based on yesterday’s current account deficit figures. Boy howdy, were they good! The current account deficit went from $16.5 billion in the March quarter to just $5.6 billion in the June quarter. As a percentage of GDP, the current account deficit is now at its smallest level in about 30 years.

Go iron ore!

Go coal!

Go!

The improvement in Australia’s terms of trade is what accounted for the big jump. Record prices for iron ore and coal increased what Australia got paid for exports. And import prices – what Australia pays for the things it buys from the rest of the world – did not grow as fast. Presto. Change-o. Record low current account deficit.

Naturally, a record jump in the terms of trade – 12.5% for the quarter and 24.5% for the year – is the sort of spike that would convince us export prices have peaked and the Chinese real estate crash is imminent. Based on the Economic Statement in published in July, the government is counting a record-high terms of trade to support revenues, bring down the debt, and spur mining investment (despite the MRRT).

Speaking of the government, apparently there still isn’t one. You might have expected this lack of political certainty (clarity about the future rate of taxation on mining companies) to be negative for the share market. But apparently Aussie investors – and maybe their leveraged global contemporaries – are drinking from the big jug of Kool Aid Ben Bernanke and the Fed have brewed.

In fact, whether Aussie investors are reacting to the prospect of Quantitative Easing from the Fed or not, it’s pretty clear that not having a government is not a negative for share prices. Long live the status quo!

But on this issue of the Fed, the relevant question is how QEII would operate. We were going to write “work,” but we’re certain it’s going to fail inasmuch as its ultimate aim is get credit flowing again in America. The Fed is pushing households and businesses to do something they’ve decided they don’t want to do: borrow and spend.

If the aim of QEII is to get consumer spending back up to 70% of American GDP so it can drive global growth and restore the status quo ante the Global Financial Crisis, it will fail and gold and other tangible assets will keep going up. But if the goal of QEII is to buy corporate stocks and bonds to make everyone feel richer so that they might behave with more fiscal irresponsibility, well doggone it, it might just be crazy enough to work!

By work, we mean it might create a bid for stock prices, what with everyone knowing the Fed is there to buy. In fact, it would probably be a very good time to be a seller with the Fed on the other side of the trade. Maybe that’s why everyone’s buying now, so they can sell to the Fed later.

Of course, there’s a long way to go between speculating about QEII will manifest itself and the Fed actually buying stocks outright. But just as a journey of a thousand miles begins with a single step, so also does the destruction of a currency begin with baby moves.

And finally, about that list of things to stock up on for Long Depression, what do you reckon was at the top of most people’s lists? Salt! It was followed closely by sugar, soap, silver, bullets, and booze.

We got many notes on the subject and have read them all. We’re not able to reply to each one personally, but thanks for all the effort. We’ll compile a master-list and make it available later this week. Meanwhile, here was one of our favourite notes:

Hi ,

On reading your list I thought it appropriate to add rifle etc to the list , particularly as you have bullets on the list. I’d also add the Bible, the Koran, and the Talmud, with appropriate iconography should someone with bigger guns happen by.

I’d also add antibiotics, condoms (you can hope while you despair).

Did I mention a phrase book with simple to pronounce invitations, “To come in into my storage unit for bouncy bouncy” ?

If none of that was of use…I’d then do the unthinkable…invest in a Managed Fund!!

Regards,

HB

Dan Denning
for The Daily Reckoning Australia

Similar Posts:

• Statistical Models Can’t Predict the Future
• September is the Best Month for Gold
• Australia’s Current Account Deficit Up 4%
• Right Time for Gold Stocks
• Australian GDP is Doing Better Than the U.S.

More articles from The Daily Reckoning….

Zero Hedge

Submitted by Econotwist

Flight to Mystery

Assets managed by European UCITS
III funds have increased to $52.3 billion over the last two years.
These special purpose vehicles are about to kill the traditional hedge fund industry, and are emerging as the new generation of sophisticated investment strategies.

“Using cautious estimates, projections for 2012 indicate that
over €8,000 billion will be invested in UCITS products, an increase
of 60% – from €5,000 billion at end 2007.”

Eurekahedge Pte.

UCITS – also called NEWCITS

Finally, some happy news for all the bankers who have been living in fear lately of how the new financial regulations – also known as the Dodd-Frank Legislation – will affect their business. I’m proud to announce: Problem solved!

It was Morgan Stanley who put me on the track to this brilliant solution a couple of weeks ago when they announced the launching of its first UCITS III Fund on the Firm’s FundLogic trading  platform.

Since then, I’ve discovered that all the big US, and all global non-European, banks are doing the exact same thing.

They are in practice outsourcing their investment bank activity to Europe.

The new financial regulations in both US and EU are aimed at traditional hedge
funds (who have been blamed for everything from causing the financial
meltdown to climate change) and the well-known tax heavens – also known
as offshore banking.

But the financial industry seems to have found an alternative in EU’s UCITS III Funds. (Undertakings for Collective Investments in Transferable Securities).

And the alternative is about to get even better with the introduction of UCITS IV in 2011.

In fact, it’s so good that several financial institutions are
bringing their offshore accounts from places like Calman Island and
Bermuda onshore – inside the EU area.

A collective investment fund may apply for UCITS status in order to allow EU-wide marketing.

UCITS’ are a set of European Union directives that aim to allow collective investment schemes to operate freely throughout the EU on the basis of a single authorization from one member state.

In practice many EU member nations have imposed additional regulatory
requirements that have impeded free operation with the effect of
protecting local asset managers.

In other words; the EU countries are now competing to offer the funds
the best possible framework, with as few regulations as possible.

At the moment Ireland and Luxembourg is leading the race.

Morgan Stanley’s UCITS III Fund will be managed by by P.Schoenfeld Asset Management LP (PSAM) in Ireland.

Shahzad Sadique, Executive Director and Head of FundLogic at Morgan Stanley says in a statement: “We
are seeing a huge level of interest from investors to access
alternative asset manager expertise through UCITS Funds and are
delighted that PSAM has partnered with Morgan Stanley. We are currently
seeking regulatory approval for a number of funds managed by leading
alternative asset managers and look forward to launching more UCITS
funds on FundLogic in the next few months.”

(Morgan Stanley Press Release)

Mostly Illegal

UCITS III Funds are illegal to offer and sell in the US and most
other countries around the world, except within the 30 countries
connected to the European Economic Area (EEA).

The idea behind the UCITS is to create a single market in
transferable securities across the EU. With a larger market the
economies of scale will reduce costs for investment managers which can
be passed on to consumers.

However, many asset managers are using UCITS as a main channel for
globalizing their businesses with considerable interest outside the EU
and as far out as Asia and South America.

UCITS III Funds   is the second version of the EU Commission’s
directive outlining a framework for investment funds suitable for
marketing to retail investors and has standardized rules for
authorization, supervision, structure and activities of collective
investment undertakings in the EEA and so to enable them to be
distributed throughout the EEA.

This significantly enlarges the range of investment instruments that could be used, notably allowing use of derivatives.

It makes it possible for hedge fund managers to launch versions of
their strategies in a UCITS version so many more investors can access
them.

According to the EU directives, a UCITS fund must be open-ended, liquid, well-diversified, invest only in certain “eligible”
assets (i.e. quoted securities, money market instruments, deposits,
certain derivatives and units in other UCITS) and can only employ
limited leverage.

Examples of Financial Derivative Instruments that can be used:

• CFDs:
Under UCITS III rules, the manager can be long up to 100% in directly
held equity securities and short up to 100% using stock specific
derivatives such as contracts for difference (CFDs) or stock specific
futures. Therefore, the fund can be leveraged up to 100% of NAV.

• Total Return Swaps: This involves investing in a portfolio and
swapping its return through a total return swap for a return that is
related to a reference basket (or index). Examples of a suitable
reference basket could be an equity long/short strategy or a commodity
index. This structure is ideal for managers that find the restrictions
of the previous option too onerous as the reference basket itself does
not have to comply fully with the UCITS rules.

• Credit Default Swaps:
CDS can be used in a number of ways in fixed income strategies, for
example hedging exposures and buy/write protection, or playing the basis
between the CDS and underlying corporate spreads.

* Certificates (either individually or in a
series) can also be used within the UCITS III framework to replicate the
risk/return profile of FOHFs. Alternatively, a UCITS eligible index can
be created to replicate all of the underlying hedge fund strategies;
the index needs to meet the UCITS criteria of eligibility though.

With any of the techniques mentioned, distribution is paramount to
global take-up of UCITS III, and has become the most dominant channels
for cross-border sales of UCITS funds, owned by third-party distributors
and open architecture platforms.

Hedge fund managers, sitting in a larger asset management company
with existing mutual fund platforms, are ideally positioned to
distribute UCITS III funds offerings, benefiting from access to a wider
spectrum of clients.

Road to Freedom

Because the UCITS lies outside the scope of the European draft
Alternative Investment Fund Managers Directive, which is likely to
impact unregulated offshore hedge funds in yet undefined ways, this is
potentially beneficial as the AIFM Directive is likely to impose
constraints on European investors investing in third-country funds, and
most likely include those domiciled in offshore jurisdictions such as
Cayman Islands and Bermuda.

However, Morgan Stanley is not one of the pioneers in this area.

Last month it emerged the world’s third largest hedge fund, Paulson & Co, is coming to Europe.

Founder John Paulson, who made a 589% and 351% profit in his two
Credit Opportunities hedge funds on the US subprime collapse, is making
himself available via a UCITS fund later this year.

But neither Paulson is the first to make his skills available to retail investors via funds domiciled inside Europe.

Others are bringing Caribbean-based product onshore because of the
EU’s plans to regulate hedge funds in such a way that non-EU managers,
including Paulson, and offshore funds, would be barred from taking money
from European investors.

One way for such managers to get around this is launching portfolios in Europe.

Marshall Wace is shifting all its Cayman Islands portfolios to Europe.

Rival Majedie Asset Management did so, too.

Gartmore and RWC Partners will make regulated variants of every offshore fund they launch now, too.

Investors seem increasingly to opt for onshore funds where one is available.

However, Dalton Strategic Partnership has drawn a line in the
Caribbean sand, and is taking steps specifically focused on keeping
offshore fund clients.

The European UCITS long/short fund of Dalton Strategic Partnership
grew from €4m at launch in February to €50m now, during which assets in
its Melchior European hedge fund stayed static, for example.

Similar stories are told at Man Group for AHL, RWC Partners for US equities funds and Gartmore for various portfolios.

The transparency, liquidity and regulatory oversight required in a
UCITS addresses investor concerns in a post-Madoff, post-credit 2008
crunch environment.

However, the regulation allows an even greater risk taking, in fact, it encourages greater risks.

Dalton’s onshore funds will double the risk-taking appetite of Melchior.

Magnus Spence, partner, explains:

“We are differentiating the products one from another, and need
to recognize and meet the different needs of investors in offshore hedge
funds and UCITS III hedge funds. Investors in UCITS hedge funds tend to
seek lower-risk strategies, which typically offer return targets of
between 5% and 10% per year.”

“In contrast, many traditional investors in offshore hedge funds
are prepared to accept a considerably higher level of investment risk in
return for performance greater than 10%.”

What Dalton’s latest move shows is that not everyone is so keen on “on-shoring” after all.

Barclay’s are among the big banks who still offer offshore products to its clients, now within the UCITS framework:

“The Structured UCITS Funds for Offshore Bonds range allows
investors access to a leading range of Funds, all approved under the EU
UCITS III Directive. A UCITS III fund refers to any collective
investment scheme set up under the UCITS Directive of 1985, as modified
by the amending proposal of 2001. As the UCITS Directive is a
pan-European directive, the main benefit of UCITS III is that it makes
it easier to passport and market such funds throughout Europe. UCITS III
allows funds to invest in a wide range of financial instruments,
opening up the range of investment strategies available to fund
managers,” Barclay’s write on their website.

Adding: “Our Fund range is developed by our asset class neutral
structuring team. Our team creates innovative products across asset
classes – developing solutions to help clients achieve optimal asset
allocation as well as manage risk. Our team specializes in delivering
quantitative asset allocation strategies within a UCITS III compliant
fund format.”

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