March 26, 2011


Peter David Schiff

March 24, 2011

The Mechanics Of The US Treasury Market

Very few people have either the time or patience to sift through the data released by the Treasury Department in the wake of its bond auctions. But the numbers do provide direct evidence of the country’s current financial condition that in many ways mirror a financial shell game that typifies our entire economy.

Despite continued deterioration of America’s fiscal health, the Treasury is still attracting adequate numbers of buyers of its debt, even with the ultra low coupon rates. Market watchers take these successful auctions as proof that our current monetary and fiscal stimulus efforts are prudent. But who’s doing the buying, and what do they do with the bonds after they have been purchased?

Most people are aware that foreign central banks figure very prominently into the mix. They buy for political reasons and to suppress the value of their currencies relative to the dollar. And while we think their rationale is silly, we do not dispute that they will continue to buy as long as they believe the policy serves their own national interests. When that will change is harder to determine. But another very large chunk of Treasuries go to “primary dealers,” the very large financial institutions that are designated middle men for Treasury bonds. In a late February auction, these dealers took down 46% of the entire $29 billion issue of seven year bonds. While this is hardly remarkable, it is shocking what happened next.

According to analysis that appeared in Zero Hedge, nearly 53% of those bonds were then sold to the Federal Reserve on March 8, under the rubric of the Fed’s quantitative easing plan. While it’s certainly hard to determine the profits that were made on this two week trade, it’s virtually impossible to imagine that the private banks lost money. What’s more, knowing that the Fed was sure to make a bid, the profits were made essentially risk free. It’s good to be on the government’s short list.

Given that the Treasury is essentially selling its debt to the Fed, in a process that we would call debt monetization, some may wonder why it doesn’t just cut out the middle man and sell directly. But the Treasury is prevented by law from doing this, so the private banks provide a vital fig leaf that disguises the underlying activity and makes it appear as if there is legitimate private demand for Treasury debt. But this is just an illusion, and a clumsy one to boot. – in Europac

Related: ProShares UltraShort 20+ Year Trea (ETF) (NYSE:TBT) , iShares Barclays 20+ Yr Treas.Bond (ETF) (NYSE:TLT) , iShares Lehman 7-10 Yr Treas. Bond (ETF) (NYSE:IEF)


Now Is The Time For The Next Big Short To Emerge And It Will Be In Gold

Market Anthropology | Mar. 25, 2011, 11:01 AM | 4,212 | comment 46
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At some point in the near future, the next BIG trade will likely come from a leveraged short position of the precious metals sector.

With proper execution, it could easily exceed the record Paulson short of 2008. Unlike the Paulson trade, where he actually had to create the trading vehicle to perform his thesis of thinking – there’s a line around the block waiting for someone to take the other side of this market at a moments notice.

Generally speaking, the criteria for an asset bubble in Gold and Silver have been met:

  1. Explosive & exponential gains (>400% gains w/Gold & >700% gains w/Silver since 2002)
  2. General public participation (is MC Hammer the general public?)
  3. Everyone’s a winner (how could Glen Beck and Laura Ingraham both be wrong?)
  4. People who did not participate before – participate now (gold party anyone?)
  5. “This time is different” syndrome (the financial system is broken, therefore…)

This trade is no different than Paulson’s short on the housing sector – or Buffet’s short on the dollar. They did their due diligence – recognized an asset class that was so historically stretched in relation to the mean and waited for their ship to come in. It is most similar to the Paulson trade – because everyone believed that the housing market was infallible to the kind of declines Paulson recognized as inevitable.

Today, everyone believes the inverse relationship to be true. That the financial system is broken, that the Fed has lost control and that Islamic Jihadists or a Middle Eastern state(s) will bring us to our knees. While there is some truthiness in shades of that – it’s more hyperbole than reality.

It was the confluence of the Tech Bubble bursting in 2000, the events of 9/11 and a commodity sector that was overdue for outperformance – that gave birth to this bubble. As with every bubble – it starts with a legitimate thesis for outperformance – and then runs away with emotion. It is only after we reach the dizzying heights of the sun that we realize the danger we so confidently embraced.

That moment seems imminent.

The Unified Field Theory – Where Reflexivity Meets Equilibrium

Here are a few charts of different asset classes with my Meridian Theory applied through their respective trends. Each chart utilized the same reference dates as crosses to establish the meridians.

In essence, the shading represents time periods where the markets are at a disequilibrium with the trend. In my unified theory (tongue in cheek once more), the meridian represents an equilibrium, which could be construed as the overlap between Soros’s theory of reflexivity and traditional equilibrium thought. This makes rational sense, since it has typically represented where the market has either found equilibrium – or lost it altogether.

In 1987, it represented the top of the trading range out of the historically depressed markets of the 1970′s. The gains were steep, the programs misfired, mass psychology took over and the rest is history. After the 87′ crash, the market eventually made its way back to equilibrium and crossed the threshold right before Greenspan invoked the self fulfilling prophecy that was Irrational Exuberance. In 2002 and 2003, the market found its balance at the meridian and started its reflationary ascent to the 2007 highs.

In 2008, it represented the threshold where the markets lost their footings – due to the financial crisis, and crashed. Today, with the exception of the commodity and gold sectors, these markets have worked their way back to equilibrium – as represented on the charts.


Image: Market Anthropology


Image: Market Anthropology


Image: Market Anthropology


Image: Market Anthropology


Image: Market Anthropology


Image: Market Anthropology

Assuming all things are relative, and the kinetic intra-market/asset class relationships still apply – you can see why George Soros believes that the gold market is the largest asset bubble of the day, and by extension the commodity complex as well.

These charts illustrate that thought rather profoundly. It would be an excellent time for him to put his money where his theory applies and dwarf the gains he reaped for breaking the British Pound. Ironically, the catalyst this time may be realized when the financial system and the global economy are found to be in better shape than most suspect, and that once the stimulus is slowly removed… surprise, surprise – life goes on and the markets function.

With that said, a dislocation of this magnitude would likely have negative impacts to the equity markets in the short to intermediate time frames. So stay frosty. More to come in this line of thinking.

Read more: http://www.businessinsider.com/the-next-big-trade-2011-3#ixzz1HiTMkKev

We’re At The Edge Of A Dollar Crisis, The DOW Could Fall 6,000 Points



America’s remarkably wrong-headed innovation and jobs policies

Mar. 25 2011 – 1:51 pm | 616 views | 0 recommendations | 4 comments

It is unlikely anyone in business or government thinks productivity is a bad thing.  Economically the more productive we are at everything from growing wheat to making cabinets to writing smartphone apps improves the quantity of goods and services available to our population, thus growing the gross domestic product (GDP.)  Improving productivity is one of the most critical requirements for creating and maintaining a healthy economy, growing incomes and generating wealth.

Then why is American policy so anti-productivity?

American manufacturers today are about the most productive in the world.  In the Wall Street Journal’s “The Truth About U.S. Manufacturing” we learn that American factory workers are producing triple the output of 1972.  The use of ever more sophisticated equipment, often with digital controls, and a higher trained workforce has made it possible to make more and more stuff with less and less labor.  While considerable manufacturing has gone offshore, it is not because our workers are competitively unproductive.

Unfortunately, most of America’s business/economic government policy has been trying to preserve jobs that are, well, not that productive.  Take for example agriculture subsidies.  They pay farmers to produce less and otherwise make less productive use of land, feedstocks, grains, etc.  By giving farmers (most of which are now huge corporations, not the “family farm” circa 1970 and before) subsidies it actually lowers agricultural productivity.

Similarly, bank and auto bailouts (and all subsidies to all manufacturers) lowers productivity.  The first gives money to banks, which make nothing.  Because they have no economic outputs, they can only aid productivity (via loans) and are of themselves not a contributor to national productivity.  (An economy can live without banks, it cannot live without producers of goods and services.) The latter gives money to an unproductive manufacturer to keep its plant operating when the value of its output is insufficient to cover costs.    These government programs serve only to defend and extend the least productive jobs in society – jobs that are economically unviable.  Through these investments the government attempts to preserve the old (companies such as GM and Chrysler) at the expense of national productivity.

Said another way, bailouts are opting to invest in preserving old jobs, not creating new ones.  Bailouts have taxpayers subsidizing unproductive jobs, rather than investing in creating more high-productivity jobs.

America can create highly productive jobs

Amazon.com On Hiring Spree” is the Seattle Times headline. Amazon has revolutionized book retailing, publishing and is changing a number of other markets as well.  Amazon has created a far more productive workforce in these industries than previous competitors.  Borders, to cite a recent example, could not be nearly as efficient selling or publishing books with its out-of-date model, so Borders recently followed 90% of other book sellers into bankruptcy. The more productive company, Amazon, is now hiring people as fast as it can to grow its business.  Higher productivity allows Amazon to be more competitive, sell more and create jobs.

Had the government chosen to bail out Borders there would have been a public outcry. Why should taxpayers protect the jobs of store shelf stockers?  Likewise, as the number of printed books drops, replaced by digital books, should it be government policy to subsidize book (or magazine, or newspaper) publishers/printers?  Whenever a business is no longer competitively productive – whether it be agricultural, manufacturing or anything else – bailouts serve only to keep the unproductive competitor alive.  Which actually harms the more competitive company that subsequently must fight the subsidized competitor.

The better policy would be to subsidize Amazon.  Amazon is growing.  Theoretically, the more money Amazon has the faster it could grow and the more jobs it could create.  But, of course, nobody feels good about subsidizing a growing, profitable concern.  And Amazon isn’t asking for subsidies, anyway.

Our public investments are shifting in the wrong direction.

The right public policy is to invest in creating new Amazons.  New businesses that create products and services which are desirable to customers, productively using resources and creating jobs.  By helping create new businesses the government spending creates new markets, new revenues and a growing GDP.  Investing here the government money “primes the pump” for future investors.  Early stage funding allows a business to get started, create a product or service, generate initial revenues, demonstrate a P&L and entice others to invest.  The payback to society is a growing enterprise that creates jobs, both of which creates future tax revenues which repay the early investment funding.

The current administration touts investing in growth creation tools.  In early February, MercuryNews.com reported on a Presidential speech in Michigan, “Obama Promotes Plan for Near Universal High-Speed Wireless.”  But, like previous Presidential administrations, this is just a lot of talk.  While Mr. Obama may think national wireless technology to promote economic growth is good, there is no money for it.  In the same article it is noted that Michigan congressional representatives, who resoundingly backed putting billions into the auto bailouts, question the efficacy of investing in emerging infrastructure tools.  Protecting the past, while questioning (or opposing) investments in the future.

Unfortunately, for the last 50 years American policy has been headed in the wrong direction!  Innovation investment projects peaked around the Kennedy administration (early 1960s) with several American efforts to dominate new technologies through programs such as the famous “space race.”  Since then, less and less has gone into America’s future, and more and more has been spent preserving the past – through entitlements, military spending and tax cuts which provide less and less incentive to invest in unproven projects.

Us spending on R and D1953-2008

Source: Silicon Alley Insider Chart of the Day from BusinessInsider.com

Since 1953 government “pump priming” by spending on R&D for innovations has declined by 50%!!!  No longer is even 1% of Gross Domestic Product spent on R&D.  Businesses, which require an immediate return on investment and are generally loath to spend money on things which are uncertain, have been left to fill the vacuum.  As a result, total spending has been stagnant.  Worse, most spending by business is on sustaining innovations – improvements which defend and extend an existing business – rather than on breakthroughs which create new markets, and a lot more jobs (for more on sustaining innovation investments by business read Clayton Christensen’s books including “The Innovator’s Dilemma.“)  Investment in breakthrough innovation has been woefully underfunded, allowing America’s economic leadership position to shrink.

America is driving innovation offshore

The Wall Street Journal has reported “More Companies Plan to Put R&D Offshore.”  When things are equal, business will invest where the costs are lowest.  With little incentive to undertake innovation in America, increasingly U.S. companies are moving their R&D — along with manufacturing, customer service, telesales, etc. — to emerging markets.  And their plans are to increase this movement offshore by 50-100% by 2015!


What will happen if innovation investments move from America to emerging markets?  Will intellectual property remain an American advantage?  Will new product development remain in America, or go elsewhere?  If manufacturing capacity already exists in these markets, is it hard to predict that new products will increasingly be made offshore as well?  Asked another way, if we outsource the innovation jobs – what jobs will America have left?

A dramatic change in American policy is needed

Last week America started bombing Libya.  Part of protecting the national interest.  But, this is not free – reportedly costing Americans $100M/day.  Two weeks is $1.4B (probably a lot more, to be honest.). Let’s not debate whether this is necessary, but rather recognize (as Roseanne Rosannadanna used to say on Saturday Night Live) “it’s always something.”  There are programs, policies, military bases, agricultural lands, national parks and jobs to protect in every district of America – and its interests around the globe.  And that’s increasingly where America’s money goes.  Protecting the past.  Not into innovation.

So why are Americans surprised that job growth struggles?  When the head of GE, a company that has moved manufacturing, information technology, engineering and R&D to offshore centers during the last decade is made head of the U.S. jobs initiative is there much doubt?  When the spending and incentives, as well as the selected leaders, have as their #1 interest preserving the past – largely in areas where American productivity lags – why would anyone expect new job creation?

America’s protectionist mentality is causing its lead in innovation to slip away.  The President, administration officials, Senators and Congresspeople needs to quit thinking that talking about innovation is going to make any difference in investments, or job creation.  If America wants to remain globally economically vibrant it requires a change in investments – starting with more money for R&D via grants, subsidies and tax breaks.

If America wants jobs, and healthy economic growth, it needs innovation.  Innovation that will create new, highly productive jobs.  And that requires investing in the future, rather than spending all the government’s  money protecting the past.

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