Signs of the Economic Apocalypse, 10-23-06

From Signs of the Times, 10-23-06:

Gold closed at 595.00 dollars an ounce on Friday, up 0.2% from $593.70 at the close of the previous week. The dollar closed at 0.7926 euros Friday, down 0.8% from 0.7992 euros at the close of the Friday before. That put the euro at 1.2617 dollars compared to 1.2513 at the end of the week before. Gold in euros would be 471.59 euros an ounce, down 0.6% from 474.47 for the week. Oil closed at 59.25 dollars a barrel Friday, up 0.9% from $58.70 at the end of the week before. Oil in euros would be 46.96 euros a barrel, up 0.1% from 46.91 for the week. The gold/oil ratio closed at 10.04 Friday down 0.7% from 10.11 at the close of the previous Friday. In the U.S. stock market the Dow closed over 12,000 for the first time, ending the week at 12,002.37, up 0.3% from 11,960.51 for the week. The NASDAQ closed at 2,342.30 Friday, down 0.6% from 2,357.29 at the close of the Friday before. In U.S. interest rates the yield on the ten-year U.S. Treasury note closed at 4.78%, down two basis points from 4.80 for the week.

The Dow Jones Industrial Average in the United States hit a record high this week. It was the same week that the Iraq War became so bad even the United States mainstream media couldn’t ignore the complete disaster it has become. The media makes sure to keep news of the war and news of the economy separate, but the contrast became inescapable this week.

Surges: the Dow and the Death Count

By Missy Comley Beattie

October 20 / 22, 2006

The Dow Jones Industrial average is surging. So is the death count in Iraq. Ten U.S. troops were killed on Tuesday and two died Wednesday, bringing the total for October to seventy-one. Almost 1,000 Iraqis have perished in the last 18 days.

Yet investors are happy. And according to one heavily eye-shadowed television anchor, the man on the street will be as well. There is optimism about corporate earnings.

Twelve families have just heard the words, "We regret to inform you." The Dow could skyrocket to the ozone but life for these families is filled with pain. Life is painful for all families who have lost so much in this senseless war of deception. Sympathy cards say, "May your memories bring you comfort." They don't. They bring a longing for days when those children inside the flag-draped coffins were alive, living their dreams and looking forward to their futures.

The stock market is surging. Sectarian violence has been surging for months. Iraq is in a civil war and no matter what George Bush says about our mission there, he is a failed president with the blood of hundreds of thousands of people on his hands. James Baker calls Iraq a 'helluva mess.' Bush says it's the central front in the war on terror. Experts now tell us that there will be no democracy in Iraq. They, also, have told us that this war has increased terrorism and we are less safe as a result…

Maybe the coincidence is more than dark irony. Maybe there is a direct relation between corporate profitability and wars. In fact, the line of causation probably goes in both directions. Wars are always good for corporate profits and corporate profits drive stock prices. But the disastrous Iraq War has created a political crisis in the United States just before an election. The entire political class (both parties), having spent over a decade pushing war on Iraq, must now be fearing a vengeful public. Better pump the economy with money and lower energy prices!

Where will the economy and the stock market go after the election? Some see more turbulence, with wild swings in different directions, sort of like what Earth’s weather will do.

Going, Going, Gold

by The Mogambo Guru

With a bleary, jaundiced eye, I wearily note that Total Fed Credit is up $4.4 billion, to a total of $829.64 billion, making it look like they are moving back into the "inflation or die!" mode. But maybe not, since judging by their track record for the last decade, TFC should be up to around $850 billion or so. Or more. But it ain't.

But this seeming lack of new TFC is important because, if you care to check, you will notice that the Fed stopped increasing TFC in February 2000, clearly coincidental with the crash of 2000, where lots of people lost tons of money. Now, something bad may get ready to happen again, and if the Fed doesn’t start jamming money down people’s throats pretty soon (and making them spend it) the stock market will soon be toast.

Not surprisingly, I also note that foreign central banks put a whopping $13 billion into their accumulated Fed holdings of US securities last week. Thirteen billion dollars! In one week! After taking out $12 billion the week before! This is the same worrying kind of turbulence that fluid systems exhibit right before breaking up in a chaotic, catastrophic event.

Putting words in the mouth of Sol Palha of the Tactical Investor, he thus notes in his essay "Dow 14660 Has Come And Gone" that the handsome, dashing, charming Mogambo was right, both about how his blue eyes merrily twinkle under the starlight, and about this chaos/ turbulence/ volatility thing, too, when he says, "The next few months are going to be packed with extreme volatility; expect the volatility to increase by a factor of two to three."

If you want a real piece of Federal Reserve stupidity, then tune in to MarketWatch.com to read what Fed chief Ben Bernanke said in a speech about the lack of household savings in America: "Unfortunately, many years of concentrated attention on this issue by policymakers and economists have failed to uncover a silver bullet for increasing household saving." Hahaha! What a moron!

I have a Hot Mogambo Tip (HMT) for this Bernanke birdbrain: How about not constantly increasing money and credit, which makes the monetary aggregates go up, which makes prices go up, which strains the family budget so that they have to spend more and more (and thus can save less and less) just to stay at a standard-of-living standstill? How about trying that for a change, you Fed morons?

And as if to underscore my fear, consumers now owe so much money that they are even having a hard time going deeper into debt! As astonishing as that sounds, News@yahoo.com reports "consumer borrowing rose at an annual rate of 2.6 percent in August, compared to a 4.3 percent rate of increase in July. Borrowing in the category that includes credit cards rose at an annual rate of 4.2 percent in August, following a gain of 4.7 percent in July." Nevertheless, "Total consumer debt rose by $4.99 billion at an annual rate to an all-time high of $2.35 trillion in August."

…One reason that these foreigners are in the debt soup is because prices are up, which is because, as Jim Willie CB of the Hat Trick Letter newsletter reports, "Central banks worldwide have grown the money supply in reckless fashion in the last year. The pace ranges from a seemingly modest 8.5% in [the] European Union, a modest 7.5% in Australia, and roughly 9% in the United States. Check this! Money supply growth is up to 18.4% in China, 19.1% in India, and a whopping 23.2% in South Africa. These are staggering numbers. Without fanfare, Russia has increased its money supply by almost 45%."

And why is this happening? Perhaps Bill Bonner at DailyReckoning.com has hit the proverbial “nail on the head” when he notes, "We did not expect the market to hold up as long as it has. Our error was one of over-estimating the good sense of our fellow man. He is a bigger blockhead than we ever thought. Given the lure of easy credit, ARMs, and 'stated income' lending - he took the bait greedily. Now, he's on the line for more money than any man in history...with no greater income than he had before to pay it off."

He goes on to say that "poor Mr. Typical has not had a wage increase since 1972, according to the U.S. Department of Labor's website. He earned the equivalent of $334.60 a week back 24 years ago. Now, the figure is just $277.96." Hahaha! Welcome to the world of inflation, Mr. and Ms. Typical! What do you think of the Federal Reserve now? Hahahaha! I thought so! Now you are on the path to achieving True Mogambo Enlightenment (TME)!

And when you are paying those outrageous credit-card bills and higher taxes with less real (inflation-adjusted) income, you will more completely understand it when reader Ed informs us that "the word 'usury' in the Hebrew concordance means 'the sting of the serpent' or 'snakebite.'" Thus, he says, "The interest on our national debt, our mortgages, and our credit cards are killing us."

… [Axel Merk, of the Merk Hard Currency Fund] goes on to say that the imbalances in the economy are so severe, thanks to the loathsome Federal Reserve financing the explosion in the size of the government, that "in the absence of an agreement on entitlement reform, the politically most convenient solution is a devaluation of the dollar. In such a scenario, nominal promises can be kept, but the purchasing power[s] of benefits erode. While this is a likely scenario, it is a risky one as side effects may include significant inflation."

Hahaha! Did he really say "may include significant inflation"? I stand tall to tell you the Transcendent Mogambo Truth (TMT)! It WILL be inflationary, as there is no other possible result from all that new money chasing a static supply of goods and services!

Of course, all this bidding up of prices is the horror of inflation that compels me to hide under the stairs, heavily armed, wearing a tinfoil hat and whimpering in fear; and it’s made worse by Richard Russell, of the Dow Theory Letters, when he writes "The current reasonably accurate inflation number is seven percent. The current estimation of the M-3 money supply is nine percent. The only thing holding back massive price inflation today is the massive over-supply of goods. So today we have the almost unprecedented situation of too much money confronting too many goods. The result is a highly unstable market with accompanying massive speculation and leverage."

But before I can really get up a good head of steam and vent some hysterical outrage about how massive deflation and roaring inflation will consume all of us in a bonfire of monetary stupidity, it suddenly occurs to me that not only can we smelly, stinky, lowlife peons now look forward to more and more suffering as inflation starts really catching fire, but we are ALREADY suffering. As Justice Litle Outstanding Investments newsletter reports, "U.S. corporations are bursting with cash, but that is because consumers' pockets have been voluntarily emptied. The talking heads have never bothered to examine this curious point: the biggest run of corporate profits in history and the biggest run of consumer borrowing in history happened at the same time. This is another monster imbalance, with [an] ultimately ugly consequence, that doesn't get much press."

…Jason Furman at CBPP.org is one the guys talking about the rise in the nominal Dow Industrial average, which conveniently neglects to adjust the Dow for the changes in the buying power of the dollar (inflation), or mention the other stock indexes.

Mr. Furman says, "The Dow Jones Industrial Average, adjusted for inflation, is down 17 percent from its all-time high on January 14, 2000. It would need to rise another 2,378 points to set a new record, adjusted for inflation. The broader stock market is even further below its 2000 peak. The Dow Jones Wilshire 5000, which tracks more than 5,000 stocks and is the most comprehensive measure of the U.S. Stock Market, is 23 percent below its record close on March 24, 2000, after adjusting for inflation."

Peter Schiff of Euro Pacific Capital notes that, "priced in British pounds, Canadian or Australian dollars, or euros, at 11,850 the Dow is still below its 2000 peak by approximately 25%, 26% and 32% respectively."

Michael Nystrom at BullNotBull.com is pretty hip to this black-box/computer program trading jazz, and says "So much of today’s program-based trading keys off momentum. This creates a positive feedback loop that sends stocks to new highs and buys any dips before they materialize...[so] after making a tentative new high on the Dow, phony or not, this market has the potential to move a lot higher." The lesson, he says, is to "never argue with new highs! Phony or not, what we have are new highs. If you’re a bear, get out of the way."

Biz.yahoo.com reports "Congressional estimators" are saying that "the federal budget deficit estimate for the fiscal year just completed has dropped to $250 billion." Hahaha! Lies, smoke and mirrors are one thing, so let's take a look at the actual Gross National Debt. Instantly, you notice that we are, thanks to Congress, $620 billion deeper in debt over the same "fiscal year just completed.” Hahaha! How in the hell can you be $620 billion deeper in debt and still say, without your tongue leaping out of your mouth in shame, that the "budget deficit" is only $250 billion? Do you mean that you meant to go into debt by $370 billion, and ended up borrowing $620 billion by accident or something?

But although they spent every dime and borrowed another $620 billion, tax receipts are up $253 billion, a big 12% over last year. What a lousy return on investment!

The budget is now about $2.7 trillion dollars, and with a population of only 300 million, that comes to $9,000 per man, woman and child in the country. So, for every family of three, the federal government is spending $27,000! And this does not even include how much money each little town, city, county or state is spending per capita by issuing bonds! And somehow we American idiots think that we can continue this stupidity indefinitely? I reiterate, "Americans are morons!"

Or, as Bill Buckler of the Privateer newsletter explains, with all the fudging, lying, and outright deceit running rampant today, "We are all in the middle of history's biggest ever 'Potemkin Village' - a prosperous looking facade designed and erected to disguise the financial ruins behind it."

For those who had the smarts to load up on gold in the recent downdraft, you did the right thing, as that trend will probably reverse, if I can surmise from Ambrose Evans-Pritchard of the Telegraph UK. He writes "Central banks may have dumped far more gold on the markets over the last three weeks than officially reported, accounting for the sudden plunge in prices that has stunned investors. Barclays Capital said Europe's banks had sold an extra 100 tonnes from reserves in a rush to meet a quota deadline on Sept 26, but had done so by selling through forward contracts that disguised the effect. The huge sales would help explain gold's brutal fall from $640 an ounce in early September to $559 an ounce this week, an effect compounded in recent days by hedge fund liquidation."

Philip Klapwijk, chairman of the precious metals group GFMS, has the opinion that bullion would soon resume its five-year bull market. "The game is not over for gold," he said. "We've still got a big dollar devaluation ahead."

Reader Larry J. has been connecting dots, too, and says that he thinks that there is something weird involving Toronto Scotia Mocatta Bullion, the Bank of Nova Scotia, and the Royal Bank, who are he says, having a hard time getting, or filling small investor's orders for silver. "The fact remains that when one of the world's largest bullion banks - on COMEX and the LBMA - cannot supply these small orders, then we can safely say that we are, [for] all intents and purposes, out of the metal."

Roger Wiegand Trader Tracks writes "The American stock markets are peaking for several reasons. First and foremost is the non-confirmation of the transportation index. If transports are lousy, the stuff they normally haul is not being hauled. If goods are not moved, this means no sales as buyers are gone. This is fact, not guessing. CNBS reported this morning Wal-Mart was off two percent. Wal-Mart is a retail sales proxy for all of America as they are the largest in the USA both for employment and retail sales. Trends are screaming stagflation as the economy stagnates while prices of food, energy, real estate taxes and services are racing higher."

SafeHaven.com gives us an "Interesting Picture of the US Bond Markets" by Pinank Mehta of Metier Capital Management. He says, "The current Long 'Open' Interest in 10-year US treasury bonds is greater than SIX Standard Deviations (12 SIGMA)!!!!!!!" Please note the use of the extremely rare seven exclamation points, a literary device to denote particular emphasis, in this case to alert you to prepare for the next sentence, which is that "the odds of a 6-Sigma event are one in 500 million, or 1.37 million years, so it will be exponentially higher for a 12 Sigma event." I don't know about you, but when I read that, sphincters tightened up.

From John William's Shadow Government Statistics we learn that "the broad outlook for a deepening inflationary recession remains in place. Confirming the extremely bleak employment picture, the August help wanted advertising index dropped to 31, from 32 in July, and from 34 in June. The August level is the lowest reading since April 1961." I gasp! 1961?

"Risks of recession continuing to rise, economy is slowing, showing warning flags" says Will Deener of the Dallas Morning News. He reports that "new-car sales are down about 5 percent from a year ago. This has happened six times over the past 40 years, and in every instance the economy was either lapsing into recession or already in recession."

In a related story, reader Titus N. writes, "I received an email from a friend whose friend works in a credit union and does car loans. She said that they do 15 applications per day on a normal day. Last week they did ZERO."

James Stack, a market historian and editor of InvesTech Research hears us talking about this recession stuff, and adds "Not one recession in the past 50 years was forecast in advance by a major poll of economic forecasters", but that the inversion of the yield curve did, and that "The yield curve shows an 88 percent probability of a recession beginning sometime between now and the end of next year."

The prospect of much greater economic dislocation may be one reason why the government has been quietly eliminating citizen’s rights under the guise of fighting terrorism: they may soon have to put down uprisings by foreclosed, unemployed, angry and hungry citizens, and not just in the United States, but also in social democratic Europe:

A devastating indictment of the former SPD-Green government

By Ulrich Rippert

20 October 2006

Stark figures from a still unpublished study by the Friedrich Ebert Institute (Friedrich Ebert Stiftung—FES), which has close ties to the Social Democratic Party (SPD), were revealed last weekend. The statistics immediately unleashed a torrent of debate. The FES report bears the headline “Society during the reform process” and makes clear that mass poverty is growing rapidly in Germany.

Eight percent of the population—i.e. 6.5 million people—are forced to live on an average monthly income of 424 euros (US$535) or less. Poverty is growing especially rapidly in the east of the country with up to twenty percent—other reports even speak of 25 percent—of the population living in poverty in the states of what was formerly East Germany (DDR).

Although the study originates from the SPD headquarters, the figures released so far represent a devastating indictment of the seven-year rule by Germany’s former SPD-Green government (1998-2005). This government, led by Gerhard Schröder and Joschka Fischer, was responsible for the most dramatic redistribution of wealth from the less well off to the rich and corresponding social disaster in the history of postwar Germany.

The job market “reforms” introduced by the SPD-Green government created conditions whereby those with relatively well-paid jobs, such as skilled workers, technicians or even engineers, could undergo a rapid descent into poverty should they lose their job. After just twelve or at the most 18 months of regular unemployment benefits, the jobless then become dependent on so-called Unemployment Pay 2, which corresponds to former levels of basic social welfare. At the same time such payments are only made if “need” is identified—i.e. when the unemployed person has expended all of his or her personal savings.

A thoroughly hypocritical debate

Following the publication of some of the FES report’s findings, representatives from Germany’s major political parties quickly expressed their concern and worries. The response to the report in the form of statements of concern and expressions of surprise over the extent of mass poverty in Germany has been characterised by utter cynicism and hypocrisy.

The chairman of the SPD, Kurt Beck, was one of the first to respond. He told the Frankfurter Allgemeinen Sonntagszeitung that he was “deeply concerned” about the emergence of a social “underclass,” which is unable to break out of a vicious circle of inadequate education, unemployment, poverty and frustration. His comments simply ignore the fact that, as the prime minister of the state of Rhineland-Palatinate for many years, Beck played a key role in the SPD executive in developing, defending against criticism and vigorously implementing the party’s so-called “Agenda 2010.”

A response to Beck’s comments came from the head of the conservative parliamentary fraction, Volker Kauder, who fulsomely stressed the importance of a debate over the “new socially deprived class.” He regarded the term “underclass” for such people as inappropriate and strictly rejected it. “This expression stigmatises and ensures that one can no longer reach these people. I prefer to speak of people with social and integration problems,” Kauder continued, and demanded “concrete assistance with integration.”

While politicians were arguing about the term “underclass,” the president of the German Chamber for Industry and Commerce, Ludwig George Braun, intervened in the debate to warn against any increase in social security benefits for the unemployed and the poor. The problem had to be tackled “at the root,” he emphasised and that means “more education and not more social welfare payments.” According to Braun the plight of those condemned to long-term unemployment and poverty has its origins in “an inheritance over decades of bad education.”

In light of the obvious responsibility of the Schröder-Fischer government for this situation, the outgoing chair of the German Trade Union Federation (DGB), Ursula Engelen Kefer, referred to that government’s “misplaced labour policy.” Kefer told German radio that the expansion of 400 euro (US$505) low-wage jobs and so-called “one-man companies” under the SPD and Greens had helped to expand “the low wage sector and poverty.”

Kefer failed to mention, however, that the trade unions had largely supported all the social cuts incorporated in Agenda 2010. Instead she declared that as a member of the SPD’s executive committee she was very pleased that her party was now beginning to address the problem. Another SPD deputy, Otmar Schreiner, who is speaker of the SPD working group for employee issues, made similar comments. He also spoke of a hopeful step being made by the SPD.

Fear of radicalization

In fact, the entire debate is politically farcical because the figures revealed by the FES study—based on what we know so far—are neither new nor surprising. The real reason for the phoney display of concern on the part of the politicians is due to the fact that the political consequences of the social crisis in Germany are increasingly obvious. Broad sections of the working population are turning away from the traditional parties.

Since the start of the “grand coalition” between the Social Democrats and Christian Democrats (CDU) at the end of last year—in fact, a conspiracy against the German working class—the two parties have lost a total of nearly 40,000 members. Since German reunification in 1990 the SPD has lost more than 40 percent of its membership (over 400,000).

In Senate elections held last month in Berlin, the SPD was able to improve its share of the vote by around one percent. However, when one takes into account the drastic decline in voter turnout, the party actually lost 57,718 votes. In elections in the state of Mecklenburg-Western Pomerania the SPD lost a total of 146,806 votes and in the national elections one year ago a total of 2.3 million votes.

For decades in Germany after the war political stability was guaranteed by a welfare state providing a large degree of social security, watched over by the so-called People’s Parties—the SPD, the Christian Democrats and the Christian Social Union (CSU)—representing a broad variety of political programs. The latest figures over social inequality and mass poverty make clear that this period is finally at an end.

Last year, when the SPD and Greens were still in government, an official report was published on poverty and wealth, which revealed that the proportion of the population officially living below the poverty line had risen from 12.1 percent in 1998 (the start of the government) to 13.5 percent—i.e. every eighth household (around eleven million people). The poverty line is based on those earning less than 60 percent of average income, i.e. under 938 (US$1,185) euros monthly.

A few months later the German Institute for Economic Research (DIW) actually estimated the level of poverty at 16 percent—based on statistics from the year 2004—compared to 11.5 percent in 1999. That figure, according to the Institute, increased by half a percent in the course of 2005 alone—to 16.5 percent. And, according to the DIW, the newly incorporated states of the former DDR were even worse off, with poverty rates of 21.5 percent.

At the same time, the concentration of wealth increased at the top of society. The richest ten percent of households control approximately 47 percent of private wealth, an increase of approximately two percent since 1998. Meanwhile the number of indebted households has increased from 2.77 to 3.13 million.

When these figures were made known at the end of last year the main political parties unanimously declared there was no alternative to the existing policies.

Since then the social divisions in Germany have become even more pronounced. The salaries of executive board members of the 30 enterprises listed on the DAX (stock performance index) rose 11 percent last year to an average of three million euros (US$3.8 million). According to a study published by the leading German association of private investors (DSW) earlier this week, the Commerzbank increased the salaries of its executive board members by a staggering 175 percent.

The biggest earners were to be found at the Deutsche Bank, where an ordinary member of the board earns 3.83 million euros (US$4.84 million—an increase of 26 percent), and chief executive Josef Ackermann takes home 8.4 million euros (US$10.6 million)—not including his share options and retirement funds. In second place were executives at the software producer SAP (3.18 million—US$4.02 million), ahead of Daimler Chrysler (nearly 3 million euros—US$3.8 million).

In the case of many companies and banks, these increases for leading executives are the reward for their role in implementing mass redundancies and cuts for their own employees.

The fact is that social decline and the increasing pauperization of ever-broader layers of population is the result of a deliberate policy, which was implemented against fierce popular opposition. Thousands took part in demonstrations and protests against the Agenda 2010 and Hartz IV laws.

Following increasing opposition to its anti-social policies and drastic defeats for the SPD in a series of local elections, chancellor Schröder called early elections with the intention of handing over power to the conservative opposition. Following the creation of the “grand coalition” in the winter of 2005, the SPD subsequently took over key ministries in order to press ahead with the social and welfare cuts embodied in its Agenda 2010 program.

The current debate over increasing social decline and instability does not mean that any change of political course will be undertaken—quite the opposite. Above all, the issue at stake for the ruing elite is how to suppress the anticipated resistance to such policies.

Calls for a strong state

Public confidence in existing political relations is declining rapidly. According to a recent joint report by the Federal Statistical Office and the Federal Centre for Political Education, certain layers of the population are increasingly disappointed with “democracy” and all of the political parties. In a recent poll, just 38 percent of those living in the states of former East Germany regarded democracy as the best system of government.

The report concludes that the state must intensify its intervention with regard to education and job provision. The gaps in the existing social fabric are too large and have to be systematically closed. Any guarantee of state subsidies had to be increasingly coupled to the readiness to work. The arguments employed in the report increasingly make the case for a type of national labour service.

A development arising from the globalization of production, which has already far progressed in many other countries, is now taking affect in Germany—after some delay—and proving to have explosive force. The ruling elite is very conscious of the social implications of such a development and is making the necessary preparations. Working groups have been established in the Ministries of the Interior, Justice and Defence for the purpose of changing the German constitution and permitting the use of the army for domestic interventions “for direct protection against attacks on the foundations of the community.”