Hopeful's  Instablog

Fiat currency is now our undoing. The US congress voted the Federal Reserve Act into existence in 1913 and since that time we have seen the US dollar eroded to a worth of 5% of its original value. We stood idly by as Nixon unilaterally shut the gold window in 1971, untethering the dollar from any anchor to reality. No wonder the French hate us. It was because they wanted to convert their dollars to gold Nixon told them to pound sand. How do you like that for balls? I wonder what the Chinese are thinking right now. I’ll tell you what their thinking. They just moved about a billion people from the rice patties into the cities to man their newly built shod factories where they produce products half as good as what Americans can make and then charge a quarter the cost. They’re thinking holy shit. How do we keep a billion people making stuff if the Americans aren’t there to buy it? You think we have a problem on our hands. Just wait until the orders stop rolling in to China and all those assembly workers have to move back out into the rice patties. I’ll bet a thousand bucks they see revolution before we do. They just got their first taste of capitalism and they ain’t gonna want to go back to the stone ages. Just like we don’t want to go back to work.

Over the course of the last few decades the middle class of our society has become acutely aware of economic bubbles, corporate corruption, government cronyism, and a wall of deception built in the name of the almighty dollar. The facts are the facts. The gap between the rich and poor in the US has never been wider. This entire nation was duped into the belief that if you had things, like a bitchen house, or a cool car, or took expensive vacations that you were rich. Not so. Somewhere along the way we forgot that debt was a claim on our future income. A liability no matter how you dressed it up, with teaser rates, no annual fees, no income documentation to qualify, it was all just a claim on our future. Well the future is here. The four horsemen of the apocalypse bear down on us every waking moment. Their coming for their claim. And they want our souls.

This crisis began when banks pushed exotic mortgages as a means to realize a dream. The institutions that sprung up around this colossal ruse churned trillions of dollars into new homes made of sticks and stucco. When the mortgage machine was running full blast US dollar reserves parked overseas flowed back into this country as fast as you could say “escrow”. Free market capitalism, however perverted this chapter was, was working. However, when it went bust the free market broke down. The Fed stepped in and replaced the arms-length buyer. Our central bank is now the sole purchaser of mortgages in the US. All prices are hence distorted as the free market no longer exists. US GDP is about $13 trillion dollars. The Fed has already purchased $1.0 trillion in MBS directly and about another trillion in toxic assets. This cannot go on forever. This is known as monetizing debt and will lead to a form of financial destruction the likes of which will make the Great Depression look like a day at LegoLand.

This is it. There is no other game in town. When the Fed quits buying mortgage backed securities from Fannie Mae, Freddie Mac, FHA, and whoever the hell else is still stupid enough to be lending into this clusterfuck, it’s game over. System collapses. Markets evaporate. All wealth gone. Martial law. Riots. Every man for himself. Perhaps the greatest revolutionary soul in all history, Thomas Paine, wrote as the opening line in his series of pamphlets, The Crisis – “These are the times that try men’s souls.” The Crisis was written during the American Revolution and cut to the heart of the ideas and beliefs of great men who chose freedom over tyranny. And if you don’t think that our modern system of selective taxation and fractional reserve banking with a secretive privately owned central bank and the fiat currency of which they force you to accept is not tyranny, then we are of a different opinion.

It is a federal crime to walk into a grocery store and pay for your food with gold. If that isn’t tyranny, I don’t know what is. What is it going to take for this country to wake up, pull our collective thumb out of our ass, and march on the streets of Washington? I’ll tell you what I think it’s going to take. First, it’s going to take real estate values to finally capitulate once and for all to the overwhelming negative forces that so far have been held at bay by the Federal Reserve. Second, it’s going to take the US population to wake up and realize that the unemployment rate is twice what the government reports. Third, when what is left of our savings and 401k money is gone and we have nothing left to sell on Craig’s List we’re going to see a lot of desperate people taking to the streets.

Had the Federal Reserve not bailed out the banks by swapping perfectly good US Treasuries for worthless toxic assets, had they not stepped in to become the sole buyer of mortgages in the US, had they not bailed out every imaginable banking misstep our entire economic system would have collapsed at their feet. Isn’t that the definition of failure?

Do everything you can to convert all your assets to cash or cash equivalents. Do not hesitate to buy physical gold and silver even at current prices. Prepare for the worst. Hope for the best. Vote every incumbent politician out of office barring (R) Ron Paul and (D) Alan Grayson. The Federal Reserve has got to go. They have pulled the biggest heist in the history of our planet and we sit idly by cheering them on to do more. Are we really that stupid?

Finally, if you don’t believe my ramblings then visit ShadowStats.com read the open content section and browse the headlines of the subscriber section. I am a paid subscriber to this site and have found it to be the only sanctuary of truth in the midst of this manufactured fog.

On the cursory subject of unemployment John Williams of Shadowstats.comhas this to say in his most recent report:

Employment and Unemployment Not Improving
Despite Distortions from Seasonal Factors and Revisions

Updated Outlook: The Economic Downturn Is Ongoing. Just in time to boost the confidence of Holiday Season shoppers, the Bureau of Labor Statistics (BLS) announced a 0.2% downturn in the November Unemployment rate, with November payroll employment virtually unchanged. Those results are nonsense, if taken literally. As discussed in Commentary 262, the better-quality series that underlie the government’s employment and unemployment reporting are show ongoing deterioration, particular the various help-wanted advertising and purchasing managers surveys.

Important to keep in mind is that the severity and duration of the current economic downturn — unprecedented in the post World War II era — has led to serious data distortions, particularly tied to seasonal adjustments. Such was noted recently by the Federal Reserve for some of its series, where patterns of sharp variations in reporting of activity a year ago — now being built into current seasonal-adjustment factors — are anything but regular seasonal patterns. Giving the BLS the benefit of the doubt on the unemployment rate, October’s above-consensus reported 0.4% surge in the headline unemployment rate likely was spiked by bad seasonals, which reversed in the November reporting. Such was touched upon in Commentary 262 on the outlook for today’s report. The upturn in the unemployment rate should return with December’s reporting.

Shadowstats.com reports real unemployment at 21.8%. That is greater than 1 in 5 people in the US out of a job. Add to this alarming statistic the number of people in and around the housing industry, from construction laborers, to real estate agents, to escrow officers, to loan officers and carpet installers, and small business owners numbering in the millions that support the housing industry all of which have seen their incomes decline dramatically as a result of this historic crisis. As a nation we are hemorrhaging blood at an alarming rate. Our jugular vein has been severed and the surgical team charged with our care knows only to pump more blood into the body, rather than seal the wound. My question to them is how long can we bleed?

The disconnect between the stock markets and what we know to be the underpinnings of this crisis should set alarm bells ringing in every US household but somehow this is not the case. An entire nation has been lulled into believing that somehow, someway, the rabbit’s going to pop out of the hat at any moment and we’ll all be saved. Everything will turn around. Our home values will skyrocket again, our 401k plans will recoup their losses, and everyone will go back to work selling homes to each other. This is simply not going to happen. The US housing market depended on foreign countries churning their dollar surpluses back into this country in the form of mortgage-backed-securities and US treasuries and if it weren’t for the quick printing Fed our foreign friends would have been stiffed on every home loan that ever flowed out of this debt ridden mortgage factory. Face it, the world got burned. Everyone knows it. Securitized lending is dead and it’s never coming back – at least not in time to save our sorry asses.

From RealityArbiter.com

The fact is that unemployment far exceeds what the media and government portray and even THEY admit it’s going to get worse in 2010. Hooray for the jobless recovery though! Maybe we should all go out and buy up as many stocks as we can. Goldman can pay their bonuses. GM can rise from the grave and Ben Bernanke will look like a hero as he exports inflation all around the globe. On the other hand, how about we don’t do any of those things. How about we do the exact opposite and protect our assets from lies and fraud. Taking that one step further it is a safe bet that we WILL in fact get hit to the downside again at some point – we’re just NOT sure when.

The root of this crisis was a nationally accepted policy of over-lending, over-borrowering, over-spending, and over-leveraging all of it fueled by unaffordable mortgage payments, car payments, and usury revolving debt. Foreclosures have yet to peak. Cash-for-Clunkers was a circus sideshow and our national credit card is tapped. Thank God almighty we can print our own money though. Otherwise our stock markets would reflect their real value, our banks would all be shut down, and our homes and everything else financed by this perverse system of fiat money and fractional reserve banking would come crashing down on us like Tiger Wood’s wife swinging a golf club at our head.

Final thought. Maybe taking a golf club upside the head is what we all need? I mean, think about it – maybe it was like we thought we were all doing the oiled up dream girl in the bikini this whole decade. And we need a good crack in the head with a nine iron to knock some sense into us and realize we were sleeping with these four fatties all along.

No Positions.

The Federal Reserve has decided that they alone set market price. As evidenced by their purchasing 80% of all MBS in the US they have become the de facto sole buyer in our modern form of capitalism. Anyone who would willingly strap into this ride is a fool. You are being set up for slaughter. There is no other way to view our present situation.

In modern terms capitalism had morphed into something completely different than would be recognized by its original architects. We exist in a system of finance capitalism wherein the major purchases of which average people need to make just to keep pace with the rest of society must be purchased with the aid of borrowed money from lending institutions that have the power to create interest bearing commercial money – money that is loaned into existence. On the flip-side, all other money is created by the Federal Reserve and again, it is loaned into existence vis-a-vis the issuance of US Treasury Securities – debt instruments of which bear interest to the holder.

When the Federal Reserve, the Obama administration, or the main stream media reports that the housing market has stabilized they are in fact, lying. I don’t care if they can’t wrap their pea-sized brains around the fact that you can’t replace a free-market buyer with the creator of money and expect the price quotient to reflect market terms. Seventy-percent of US GDP is based on consumerism and the majority of consumerism is based on the wealth-effect American’s have as reflected in the value of their homes. And when the Fed became the sole purchaser of agency mortgages in the US they became the de facto buyer of all US homes in an attempt to prevent the free-market from functioning. To say that the present US housing market resembles any fair market terms is simply ludicrous. The Fed however will argue that as they exit the mortgage pimping business other pimps will re-enter the market as MBS buyers and housing prices will remain stable. This is absolute hogwash.

Tab 9 – Federal Reserve Balance Sheet – Factors Affecting Reserve Balances- November 19, 2009

Everything around you from the Dow Industrial Average to the value of your home, to the food in the grocery store or gas at the pump, all of it is in a distorted state of flux wherein the real value of such things cannot be known. Had the Fed not purchased a single MBS in the wake of September 2008 the entire real estate market would have collapsed along with the perverted fractional reserve banking system that surrounds it. Technically, the system has collapsed. It is merely on life support for now. We all know this. Yet we turn our heads as if somehow, some way, the Federal Reserve will pull the proverbial rabbit out of its ass and we’ll all stand by in amazement wondering, “Now how did they do that?”

The largest asset most American’s purchase in their lifetime is their home. The largest debt-load they carry is again wrapped up in their home. When both the price or value of these homes and the underlying mortgages become distorted by a misguided central bank policy wherein the central bank alone becomes the arbiter of fair market value – that, is an unsustainable model in direct conflict with every basic tenet of free-market capitalism. Participating in this market in any fashion is like making love to a blow-up doll – you know the air is going to leak out of her at some point, but you keep pumping her like there’s no tomorrow. Sooner or later the Fed will have let the air out of the doll. And any allure that made-up hussy had will vanish as she deflates to the floor, once and for all.

The Federal Reserve has become a mockery, an Alzheimer’s patient wandering the lawn of the asylum hiding their own Easter eggs for a hunt they will later forget the location of each egg they hid, let alone what Easter means anyway. They are virtually making this up as they go along. And we’re letting them do it. Bernie Madoff should be so proud. It’s the Ponzi scheme to end all Ponzi schemes – hide the fair-market-value of the world’s largest banking system. Buy a trillion dollars of MBS – prop up the falling homes. Maybe no one will notice we’re social engineers and that we just dismantled free-market capitalism.

There is no fundamental rooting in this stock market rally from the March 2009 lows. There is no consumer with an increasing wage base to justify confidence in any kind of so-called economic recovery. We are in the midst of a consumer credit contraction unlike anything seen even in the Great Depression – and it’s accelerating. 48 states are underfunded and will soon be knocking on the US Treasury’s door. Commercial real estate is imploding. All stimulus programs were temporary in overall effect, if effective at all. Less than one percent of loan modifications have been resolved and will only prove in the end to be futile. Unemployment is twice what the BLS is reporting. The dollar is under siege. And finally, we are about to see the next leg down in residential real estate. This one will be the death knell. It will either come when the Fed quits buying MBS or when the vintage 2005-2006 Alt-A mortgage pools incinerate.

It’s game over when the Fed bows out of the MBS buy program. It will be every man for himself, literally. Below is an excerpt from Scopelabs.netMarket Insight section of their RealityArbiter.com web-site:

Scopelabs Insight – Thursday, November 19, 2009

US Markets -

11/19/2009 – The benchmark Standard & Poors (S&P) 500 closed down (14.90) to settle at 1,094.90 (a 1.34% decline).

The 50% retracement of the S&P 500 from its (13-year) low of 676 (set on March 9, 2009) to its all-time high of 1,565 (set October 9, 2007) draws near – see graph. Depending on how one graphs the Fibonacci retracement, the pattern points to (approximately) 1,120 as the 50% mean. Hence, a very logical short-term market top could be in place. If this 50% retracement is significantly breached to the upside, the next and always very important Fibonacci retracement number (of 61.8%) stands at 1,229.

So, from a risk management standpoint the potential upside in the S&P (to 1,229) based on today’s close (of 1,094) is positive 12%.

Conversely, a 50% (negative) retracement from the top of this rally would take the index back down to 893 – which for the bulls should be a logical support target as a buyer. 893 equates to an 18% downside risk from today’s close, not including event driven and/or systemic problems that we at Scopelabs see as a more acute in probability versus March when the market was at its all-time lows.

So, you’re a 3-to-2 dog going long vs. short here (i.e., the S&P is out of gas).

Scopelabs Insight originates from Greg Simmons, a prop trader living on Maui who made prescient market calls long before the names Peter Schiff and Nouriel Roubini became widely known. See 2003 Thesis and The Next One Could Be Worse to hear from a guy who’s been dead on since 2000 and is calling for near Armageddon in the markets when the Fed pulls out of their MBS buy program.

No positions.