“The expected return/risk profile of the stock market has shifted to hard-negative”

Wall Street Fund Manager John P. Hussman

One of the most respected Wall Street fund managers has confirmed what every hedge fund manager in the world knows. The European Central Bank (ECB) will not keep inflating credit. Italy would need $1 trillion to $3 trillion, Greece $500 billion, Germany is leveraged up to 82% of GDP, France is in worse shape. It all adds up to a $30 trillion bail out by some estimates. The European banks have “rehypothecation,” a practice that occurs principally in the financial markets, where a bank or other broker-dealer reuses the collateral pledged by its clients as collateral for its own borrowing, to the edge of the financial cliff.
The “growth” in the USA last quarter can be summed up as follows. The GDP “increased” 2.0% and the Gross Domestic Income, what we are actually earning, grew at a 0.3% pace. You do the math.
The following appeared in Hussman Funds on 12-12-2011.
With the exception of extreme market conditions (see Warning- Examine All Risk Exposures , and Extreme Conditions and Typical Outcomes ), I try not to wave my arms around about near-term market risks, but I think it’s important to cut straight to the chase here. The present market environment warrants unusual concern, in my view. Based on a wide variety of evidence and its typical market implications over an ensemble of dozens of subsets of historical data, the expected return/risk profile of the stock market has shifted to hard-negative. This places us in a tightly defensive position. This isn’t really a forecast in the sense that shifts in the evidence even over a period of a few weeks could move us to adjust our investment stance, but here and now we observe conditions that have often produced abrupt crash-like plunges. This combination of evidence includes elevated valuations, overbullish sentiment, market internals best characterized as a “whipsaw trap” on the basis of typical follow-through, heightened credit strains, and clear evidence (on reliable forward-looking indicators) of oncoming recession, among other factors.
As always, we try to align our investment positions with the evidence we observe. If the evidence softens, our hedges will soften. While the quickest route to a modest exposure to market fluctuations (perhaps 20-30%) would be a clear improvement in market internals – which could justify a less defensive stance even in the face of recession risks and rich valuations – the most likely route to a significant investment exposure would be a decline to much lower prices and correspondingly higher prospective returns. Presently, avoidance of major market losses takes precedence in our analysis.

Latest Unemployment Rate is 10.6%

The latest official unemployment rate is 8.6%. Everyone knows it is worse but very few have the skill set to find out the truth. Different economist have different methods. I like using “real world” analysis comparing today’s economy where the federal government consumes 25.3% of the GDP to the 1999-2000 economy where the federal government consumed 18.2% of the GDP.

Civilian Labor Force Participation Rate going nowhere but down

I do this because that is when the labor force participation rate peaked at 67.9% in July 1999. The employment-population ratio also peaked at 64.9% that month. Compared that to today’s dismal 27 year lows of 63.9% and 57.6% respectively.
Simply put keeping the 1999 ratios we have 140,580,000 workers today compared to the 148,681,000 we should have with limited federal government and sound economic policies. The civilian labor force is 153,683,000 but under the 1999 criteria it would be 157,278,000. Doing the math the “1999″ unemployment rate would be 10.6%, not 8.6%.

Inflation and Money Creation 101

Since 1913 we have had a monopoly central bank commonly referred to as the Federal Reserve. Before the Federal Reserve we had, more or less, free banking with various federal government interventions, laws, and central planning. US Central Banks (1791-1811) and (1816-1841) were put out of business due to inflation, corruption, and general incompetence.

The First Central Bank of the United States (1791-1811) created inflation, corruption, and scandal

Under the private decentralized system of banking, banks typically loaned out 50% to 83% of their deposits. Today that number is legally 90%. Banks under the Federal Reserve System are MORE leveraged than under capitalism. A typical bank before 1913 loaned out 79% of its deposits in the form of loans. Before 1933 the public could redeem their dollars for physical gold. This prevented banks from printing money not backed by gold, or before 1873, silver.
The Federal Reserve remained on a loose gold standard, called the Bretton Woods system (1944-1971) that allowed selected central banks to exchange dollars for gold. In return for this privilege the central banks generally used dollars as their reserve currency “because it was backed by gold and as good as gold.” In 1971 Nixon removed the United States from the gold standard in part because of the pressures to finance the Vietnam War and increased federal expenditures on programs such as the “Great Society” social welfare programs designed to eliminate poverty.
First the basic principal of printing money is to give the money to your favorite constituencies so they can always be in a position to outbid the peasants for goods and services. The favorite constituencies of the Federal Reserve are the Washington politicians and Wall Street. The game is rigged, how can you compete against an institution that can print money whenever it wants? You can’t.

The second central bank of the US (1816-41) was ended due to inflation, corruption, and scandal

The elites watch you work like a dog creating wealth, and then steal your wealth through inflation and taxes. You always end up broke and the elites remain permanently enshrined in their positions of power and privilege, thanks to the wonders of the central banking system.
The elites want readily available credit and the ability to pay back their loans in cheap paper dollars, not hard gold or silver. The elites also want inflation for the prices of the goods they produce to exceed the wages of the workers. This is the secret to wealth inequality. Most workers do not have the educational background to understand inflation. Prior to 1933 they were protected from greedy bankers and politicians by being able to possess gold, but with a fiat currency backed by nothing they are at the mercy of the central bank that allows politicians and Wall Street to steal workers money by using inflation to disguise the theft.
So what has happened since 1971 as we prepare to march over the fiscal cliff of financial insolvency?
Since the complete transfer from a fiat currency the Dow Jones Industrial Average (DJIA) has increased 1,262% and the Gross Domestic Product (GDP) 1,233% using “nominal” numbers or numbers not adjusted for inflation. More or less in lock step as one would expect.
Total credit market debt owned has increased 2,902%, outstripping GDP growth by a factor of 2.35.
The Federal Reserve monetary base, (coins, paper money, and commercial banks’ reserves with the central bank) has increased 3,658%, outstripping GDP growth by a factor of 2.97.

The third central bank of the US will end its reign soon mired in inflation, corruption, and scandal

Gold, the traditional source of real monetary value, has increased 4,177%, outstripping GDP growth by a factor of 3.39.
What these numbers are saying is there has been a huge creation of credit and cash by the US central bank as well as the European Central Bank (ECB) that is inflationary and not justified. Gold is simply a barometer reflecting the increase in the money supply as well as the justified inflationary fears of investors.
In past times with gold and silver when times were good people demanded to use their money for consumption. This demand for money increased the cost (interest rate) for banking deposits. When the interest rate increased capital users of money stopped expanding (using money), waiting patently for the day when interest rates declined. When the economy slowed down consumers prefer to reduce consumption and save. This saving reduces interest rates and signals to capital users that now is a good time to expand when money is cheaper. This basic interaction between consumers and capital users of money works perfectly when there is capitalism and no central bank or federal government interfering in the market place. Money, gold and silver, are allocated in an efficient manner for the maximum benefit of society.

The Second Bank of the United States Chairman Nicholas Biddle was just as corrupt as Ben Bernanke

When a banker loans out money he would expect to see a return above the inflation rate plus 3%. Prior to 1913 there was virtually no inflation. Deflation was more common because producers found cheaper and more efficient ways to produce goods and services similar to today’s price reductions on electronic products. So a typical banker would loan out $1,000 would expect to see $1,030 paid back in a year.
So why are bankers loaning out the equivalent of $1,000 to get a payout of $425?
Your guess is as good as mine.
That is the essence of why the world is on the verge of a market failure and collapse. The central bankers have inflated the money supply to historic proportions. There is nothing backing this money but the promise to print more money. It is a Ponzi scheme. It will collapse.
The yield on a 10 year US Bond is 2.02%. With an official inflation rate of 3.6% why would anyone hold a 10 year bond till maturity, essentially losing 1.6% per year?
The answer is no one plans on holding that 10 year bond till maturity. They are hoping the economic chaos in Europe, China, and Japan will drive the price of the bond higher and they will be able to sell the bond for cash, and a profit, before the inevitable bust comes. As long as the number of suckers exceeds the number of people cashing out the game goes on.
Someday even the great and mighty central banks will not be able to print enough to keep pace with those cashing out. That day is fast approaching. When the US Treasury Department is bailing out Europe it is only a matter of time before the math catches up with the banking, government, and private sector elites.

World Meltdown Theme Song

This version of the classic song, Come Undone, is, in my opinion, the best version ever performed. Listening to the words about the breakup of a intensely physical relationship mirrors the breakup going on right now between the Western extravagant lifestyle of bureaucrats, central banks, and elites, from decent society.
One partner went horribly into the direction of ethnocentric pursuit of self gratification using deception and trickery to disguise cheating at the expense of the other hard working honest partner. And so it is, our government parasites and followers lived for decades on the hard work and borrowed money of other more productive members of society. When the full impact of the betrayal is known to the hard working people of the world there will never be a safe place for the parasites.

Below is the official version of the song.
“Come Undone” is the second single from the album Duran Duran (The Wedding Album) by British band Duran Duran, and is their twenty-fourth single overall.
With their commercial and critical success reestablished by the previous single “Ordinary World”, “Come Undone” continued to showcase more of the band’s entry into the Adult Contemporary genre. The single proved to be the group’s second consecutive US top ten hit from The Wedding Album. It was also popular in the UK and other international markets.
The group’s guitarist at the time, Warren Cuccurullo, is credited with developing the instrumentation for “Come Undone”, most importantly its guitar hook, which he developed while trying to do a re-interpretation of “First Impression” from their 1990 album Liberty. In 2005, Cuccurullo revealed to author Steve Malins that he and Nick Rhodes had originally planned on using the song for a project outside of Duran Duran with Gavin Rossdale, but had changed plans when singer Simon Le Bon took a liking to the music and began to come up with lyrics on the spot.[1] The song was included as a last minute addition to their self-titled album in 1993, with the lyrics being written by Le Bon as a gift for his wife, Yasmin.
The group’s bassist, John Taylor, did not actually play bass on this track, although he does in the music video. Nick Rhodes and John Jones both contributed synth bass on the track during his absence. Tessa Niles was credited with backing vocals. The song also contains a sample from The Soul Searchers’ song “Ashley’s Roachclip”.
According to John Jones, “at the time we had completed and mastered the Wedding Album and had started the cover album “Thank You”. One day we took the drum loop and bass groove from a demo of mine called “Face to Face” and added the ultra cool guitar riff that Warren had come up with for a new “cover” version of “First Impression”. After a couple of hours of tweaking we played the track over the phone to Capitol in Los Angeles and they loved it and said they wanted it on the Wedding album! When Nick arrived that afternoon the intro was carved into a song that we played to Simon that night. He was back the next day with the lyrics and the melody and I think we finished the vocals the day after that. On the fourth day we finished the track detail and sent it to David Richards in Switzerland to be mixed. “Come Undone” was also a song by Karen Hendrix and myself from the late 1980s. There is a cover version of it out there called “Cloud 9″ by Alan Frew”.

Kyle Bass Give Three to Five Years Before Massive Political Upheaval

Hedge fund manager Kyle Bass has been intimately involved in studying the financial conditions of world governments. His intimate knowledge allows him to correctly allocate his clients assets so they will make money. His comments are brutally honest. The world has gone mad printing money in a effort to sustain a lazy bloated government sector. The private sector has been equally irresponsible. Which brings us to the bottom line, where did these governments and private institutions get all this cash?
Central banks.
The battle for the people is to force bankruptcy and put the too big to fail banks out of business. The battle for the elites is to have one more bail out, one more quantitative easing. Bass give the people hope that our governments will collapse and cease to exist in the near future. Hopefully without the war.
Here is the link to his interview explaining the financial conditions of Europe, Japan, China, and the USA.
http://www.youtube.com/watch?v=5V3kpKzd-Yw

GM Meeting the Production Goals of Comrade Obama

One of the oddities of the current “recovery” has been the performance of the manufacturing sector. One would suspect if the global economy was normal and the dollar dropped in value our exports would be increasing. Simple enough.

GM Vehicle Inventories from 2009 to present

But the world economy is not normal. China is suffering inflation woes from years of a mercantilism economic policies of exporting goods and services and importing cheap dollars. The Chinese Central Bank is reported to be leveraged 1233-1 making the 56-1 leveraging at the Federal Reserve seem downright prudish. Socialist Europe is a basket case set to implode similar to the USSR implosion in 1991. So where is all the GM production going to?
Just like the former USSR where production goals were more important than actually utilizing resources to increase utility consumption for the masses, GM seems to be copying the USSR model in meeting production goals but not selling anything. Inventories at GM dealers have increased 42.4% in the last two years from 438,000 to 623,666 cars sitting on dealer lots.
Funny, the Institute for Supply Management (ISM) Manufacturing: PMI Composite Index (NAPM), Index, Monthly, Seasonally Adjusted is up from 50.8 in October to 52.7 in November. I guess we know why now.

US Set to Bail Out Europe

Here is a statement released by presidential candidate Ron Paul on the subject.

Presidential Candidate Ron Paul

The Fed’s latest actions in cooperating with foreign central banks to undertake liquidity swaps of dollars for foreign currencies is another reason why Congress needs enhanced power to oversee and audit the Fed. Under current law Congress cannot examine these types of agreements. Those who would argue that auditing the Fed or these agreements with central banks harms the Fed’s independence should reevaluate the Fed’s supposed independence when the Fed bails out Europe so soon after President Obama promised US assistance in resolving the Euro crisis.
Rather than calming markets, these arrangements should indicate just how frightened governments around the world are about the European financial crisis. Central banks are grasping at straws, hoping that flooding the world with money created out of thin air will somehow resolve a crisis caused by uncontrolled government spending and irresponsible debt issuance. Congress should not permit this type of open-ended commitment on the part of the Fed, a commitment which could easily run into the trillions of dollars. These dollar swaps are purely inflationary and will harm American consumers as much as any form of quantitative easing.
The Fed is behaving much as it did during the 2008 financial crisis, only this time instead of bailing out politically well-connected too-big-to-fail firms it is bailing out profligate government spending. Citizens the world over deserve better than this. They deserve sound money that cannot be manipulated and created out of thin air by central planners who promise printed prosperity. Fiat money caused this European crisis and the financial crisis before it. More fiat money is not the cure. The global fiat currency system has proven itself a failure, we need real monetary reform. We need sound money.
Please allow me to translate into a more colloquial interpretation;
“We the elites at the Federal Reserve and in Washington DC have decided that our peasants are not contributing enough wealth from their personal wages to sustain the lifestyle the elites in Washington, New York, Paris, Rome, and all of Europe have become accustomed to.
Therefor to sustain the lifestyle of the rich and almost famous government comrades we will impose a tax on the America peasants in the form of inflation of and unspecified amount until such time as to satisfy our European elites, or we can sucker China into bailing out our bail out.”
“You have no right to your money and wealth. The Federal Reserve will steal your wealth to pay the elites as they please. No gold, no silver, no justice. American gave up their right to economic sovereignty in 1913. Shut up and pay up. The Federal Reserve is your master and you should be thankful we do not confiscate all your wealth.”
American are getting what they deserve because they trusted politicians and central bankers with their money. No Social Security, and no means to make and keep wealth. The Federal Reserve has decided they will steal your wealth whenever they damn well please. Shut up citizen and get use to $5.00 a gallon gasoline.