December, Friday 30, 2011

DOW – 69 = 12,217
SPX –5.42 = 1257.60
NAS – 8 = 2605
10 YR YLD -.03 = 1.87%
OIL -.65 = 99.00
GOLD =20.90 = 1567.40
SILV +.09 = 27.96
PLAT +30.00 = 1403.00

One year ago

DOW = 11,577.51
SPX = 1257.64
NAS = 2652.87
10 YR YLD =3.31%

OIL =79.36
GOLD = 1410.25
SILV =30.63
PLAT =1731.00

US Dollar Index 78.22 on 12/31/2010  & 80.57 on 12/30/2011

Auld Ange Syne – the song always make me miss people, though I’m not sure whom I’m to be missing specifically; I suppose there’s always somebody, isn’t ther?

The Pacific island nation of Samoa is taking 186,000 citizens through a national time warp by moving west of the international dateline, forfeiting the last Friday of 2011 and jumping straight from Thursday into Saturday. So, it’s Saturday in Samoa. It never was Friday.

For Samoans, this solves a practical question: Why remain 18 to 23 hours behind chief trade partners Australia and New Zealand? Of course, it doesn’t answer the question: Why didn’t they do this on a Monday?

The worst performer among the Dow 30 industrial stocks? Bank of America – which isn’t really an industrial stock to begin with. BofA was down 58% for the year, wiping out $80 billion of shareholder value. The bank also ended 2011 last in the Standard & Poor’s 500 Financials Index and the KBW Bank Index. It was BofA’s worst annual performance since 2008, when it dropped 66 percent. Other big banks performed poorly. Citigroup dropped 44%, JPMorgan Chase dropped 22%, Goldman Sachs dropped 46%, AIG, the insurer fell 52%. The best performer in the Dow was McDonalds – up 31%.

World stocks have lost more than 9 percent for the year. The darlings in the emerging markets fared the worst. China's Shanghai Composite index .SSEClost 22 percent, India's BSE .BSESN sank 25 percent, and Brazil's Bovespa .BVSP dropped 18 percent.

The S&P 500's price-to-earnings ratio - what investors are willing to pay for a dollar of earnings - is under 12, below the 25-year average of 15. In weaker markets like Germany's DAX, the figure is below 9.

Benchmark 10-year Treasuries returned nearly 17 percent in 2011, their largest gain since 2008. 

In a normal year predicting economics is like predicting the outcome of a coin toss or the flip of a card: there are too many variables and the only certainty being that the suckers will lose and the stealthily self-interested will win.

In 2012 however, the shape of the crisis is heavily predetermined: there are a series of crucial stages the eurocrisis has to go through and the way they're resolved will affect everything else.

Starting from where we are now, there are three big questions:

·         Is the ECB's unofficial money printing operation - a massively expanded bond-buying venture combined with unlimited provision of cash by global central banks - going to be enough to prevent a second credit crunch, centred on Italy?

·         Does Greece spiral finally into default, social crisis and chaos, raising the prospect of the near-dictatorial economic policies needed if you have to exit the Euro?

·         Do the French banks take so many losses on the sovereign debt of southern Europe that they have to be part nationalised, thus removing the country's AAA credit rating and the all-important financial parity between Germany and France that lies at the heart of the European system?

Right now my answers to these questions would be yes, yes and yes.

That is: yes, a liquidity splurge is going to be enough to prevent a credit crunch - though it will later have to be acknowledged as a massive and unconstitutional policy shift, forcing the ECB to become lender of last resort.

And yes, Greece will default. Its 50% haircut is proving hard to make stick; its coalition government is unstable and cannot collect enough tax; its people are increasingly destitute; its rich elite has, functionally, scampered in anticipation of the pain to come. But given that the majority of Greeks still don't want to leave the Euro, and the eurozone leaders won't force them out, we will end up with a defaulted country using the Euro on sufferance, which is another de-facto step towards fiscal union.

And again yes: France will lose its AAA credit rating - causing problems for President Sarkozy and huge soul-searching in Germany, where those close to Chancellor Angela Merkel believe Franco-German apparent equality of status is crucial to selling any future fiscal union.

Despite assertions from Federal Reserve officials that the United States would not play a role in bailing out European banks, that is exactly what has happened — again.

Earlier in the month, Federal Reserve Chairman Ben Bernanke told the U.S. Senate that the Fed had no intention of bailing out the European banks, indicating that he “doesn’t have the intention or the authority” to do so.

As it turns out, however, the Fed is in fact doing just that. The Wall Street Journal reports:

The Fed is using what is termed a "temporary U.S. dollar liquidity swap arrangement" with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or "swaps" dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.

The Journal outlines the reason for such secrecy:

Why are the Fed and the ECB doing this? The Fed could, after all, lend directly to U.S. branches of foreign banks. It did a great deal of lending to foreign banks under various special credit facilities in the aftermath of Lehman's collapse in the fall of 2008. Or, the ECB could lend euros to banks and they could purchase dollars in foreign-exchange markets. The world is, after all, awash in dollars.

The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.

If you are in the United States or Western Europe, chances are incredibly high that your bank is simply not safe. In other words, your money is at risk. Big time. Let’s review some of the chief concerns:

1) A black box of assets

Banking is a complicated industry… and especially when larger banks are concerned, nobody really knows what’s under the hood. Can we say with any accuracy what’s on Bank of America, Deutsche Bank, or Citi’s balance sheets?

No way. There’s $8.5 trillion worth of mortgage-backed securities floating around the system. Not to mention, tens of trillions of dollars worth of derivatives contracts tied to mortgage-backed securities on top of that.

These assets are all highly susceptible to downturns in housing, a rise in interest rates, and a host of other systemic risks. Yet we have no earthly idea who owns what, or who the counterparties are. It’s all a black box of assets.

In a world where the most basic foundations of the financial system can no longer be accepted as truth, we cannot assume away that bank balance sheets are healthy without more careful investigation and transparent information.

2) The assets that we do know about aren’t winning any beauty prizes

When governments auction-off tens of billions of dollars worth of bonds, it’s often the banks that buy. Large banks wielding hundreds of billions, trillions of dollars have few options where they park capital. They require enormous liquidity, and it’s ironic that the most liquid bond markets are the most dangerously indebted nations.

When $13 billion worth of 30-year bonds were sold last week at record low yields, your bank may very well have been one of the buyers.

In the all-too-likely event that price inflation surpasses 2.815% thanks to all the easing, twisting, and printing going on, your bank will essentially be sitting on even more worthless paper. And this doesn’t take into account the possibility of an all-out default.

3) Core banking business has all but shuttered

Do you remember the good old days when banks used to be responsible stewards of capital, paying depositors a fair rate (which exceeded inflation) and making sensible loans to creditworthy businesses and individuals?

I don’t either. But I’m told that’s how banking used to be. These days, banks hardly loan to anything that doesn’t come with a government guarantee.

This is not a well-functioning system. “Safe” banks are profitable… and in order to be profitable in the long-term, banks must engage in sound deposit and lending practices. This is no longer part of the banking landscape.

4) Lies, regulatory loopholes, and accounting tricks

Banks are adept at hiding the true nature of their financial condition. They conjure fake profits out of thin air and stuff their liabilities into off-balance sheet entities. And it’s all legal.

Much of the activity in the banking sector is aimed at nothing more than exploiting these accounting rules to register inflated fake profits and hence convert shareholders’ equity and, debt-holders’ and taxpayers’ funds into executive bonuses.”

Government legislators and regulators are willing accomplices in the game. For example, risk-weighted capital adequacy ratios are the industry standard in assessing a bank’s safety. Even the Federal Reserve acknowledges that insufficient capital ratios portend bank failure.

Current regulations, however, allow banks to materially misstate the real risks on their books. Government bonds are assigned a risk weighting of zero… hardly a fair assessment in today’s environment.

As such, a bank filled with worthless government paper can legally tell its depositors, “we are completely safe.”

5) The backstops need backstopping

Today, “government-guaranteed” anything is a joke. Federal deposit funds are even more poorly capitalized than the banks, and the ultimate backstop is the taxpayer – back to that same old story – privatized profits and socialized losses.

6) No one is isolated

Even if your bank has acted responsibly, the issues are global. Given the derivatives exposure that cascades across the entire system, no bank is credibly isolated from the misfortunes of the others.

You could also consider physical precious metals as they carry no counterparty risk. There are security risks with gold and silver, however such risks pale in comparison to the systemic risks in today’s banking environment.

 Mish 2011 Predictions Review 

Looking ahead to 2102, I see a continuation of the same themes, but a few new ideas as well.

Ten Themes for 2012

1.   Severe European Recession as the sovereign debt crisis escalates: Austerity measures in Italy, Greece, Spain, and Portugal plunges all of Europe into a major recession. Spain and Portugal will follow Greece into an outright depression.

2.   Political Crisis in Europe: French President Sarkozy loses to socialist challenger Francois Hollande. German Chancellor Angela Merkel's coalition collapses. The Merkozy agreement is either modified to do virtually nothing or is not ratified at all. This chain of events will not be good for European equities or European bonds.

3.   Relatively Minor US Economic Recession: The US will not avoid a recession in 2012. Retail spending ran its course with the tail-off into Christmas of 2011. The Republican Congress has little incentive for fiscal stimulus measures in 2012 so do not expect any. However, with housing already limping along the bottom in terms of construction and investment (not prices), a US GDP decline will not be severe. The US may see a recession even if GDP barely drops. Certainly the US recession will be far less severe than the recession in Europe and Australia.

4.   Major Profit Recession in US: Profit margins in the US will be torn to shreds as businesses will be unable to reduce costs the same way they did in 2008 and 2009 (by shedding massive numbers of employees).

5.   Global Equity Prices Under Huge Pressure: Don't expect the same degree of reverse decoupling of US equities we saw in 2011. The US economy will be better than Europe, but equities globally will take a hit, including the US. Simply put, stocks are not cheap.

6.   Fiscal Crisis in Japan Comes to Forefront: Japan's fiscal crisis and debt to the tune of 200+% of GDP finally matters. The crisis in Japan will start out as a whimper not a bang, but will worsen as the year wears on. If Japan responds by monetizing debt, not a remote possibility at all, Japanese equities will massively outperform in nominal and perhaps even in real terms. "Real" means "yen-adjusted", not "inflation-adjusted" terms.

7.   Few Hiding Spots Other than the US Dollar: US treasuries and German bonds were safe havens in 2011, but with yields already depressed don't expect huge gains. Expect to see a strengthening of the US dollar across the board against all major currencies. Moreover, cash (one the most despised asset classes ever), may outperform nearly everything, even if the dollar goes virtually nowhere. Hiding places will be few and far between for much of 2012.

8.   US Public Union Pension Plans Under Attack: States finally realize the need to rein in pension plans much to the dismay of public unions. Social and economic tensions in the US rise.

9.   Regime Change in China has Major Ramifications: China will start a major shift from a growth model dependent on housing and infrastructure to a consumer-driven model. The transition will not be smooth. Property prices in China will collapse and commodity prices will remain under pressure.

10.         Hyperinflation Calls Once Again Will Look Laughable: Unless there is a major disruption in the Mideast (which I do not rule out by any means), oil prices will drop and food prices will follow. If so, we will once again see silly talk from the Fed about preventing "unwelcome drops in inflation". As always, the deflation key is not prices at all but rather credit and credit marked-to-market. Expect credit in all forms to come under attack and expect junk bonds take a hit as well. By the way, regardless of what happens to oil prices, hyperinflation calls will look silly.

By Gerald Celente
The Trends Journal

View Celente's Predictions Last Year For 2011 Here...

Gerald Celente of Trends Research International has a habit of predicting nasty events before they happen. He just emailed us his selection of 12 things we’d rather not see in 2012:

One megatrend looms on the near horizon. And we forecast that when it strikes, it will be a shock felt around the world. Hyperbole it’s not! Our research has revealed that at the very highest levels of government this megatrend has been seriously discussed. Read on:

1. Economic Martial Law: Given the current economic and geopolitical conditions, the central banks and world governments already have plans in place to declare economic martial law … with the possibility of military martial law to follow.

2. Battlefield America: With a stroke of the Presidential pen, language was removed from an earlier version of the National Defense Authorization Act, granting the President authority to act as judge, jury and executioner. Citizens, welcome to “Battlefield America.”

3. Invasion of the Occtupy: 15 years ago, Gerald Celente predicted in his book Trends 2000 that prolonged protests would hit Wall Street in the early years of the new millennium and would spread nationwide. The “Occtupy” is now upon us, and it is like nothing history has ever witnessed.

4. Climax Time: The financial house of cards is collapsing, and in 2012 many of the long-simmering socioeconomic and geopolitical trends that Celente has accurately forecast will come to a climax. Some will arrive with a big bang and others less dramatically … but no less consequentially. Are you prepared? And what’s next for the world?

5. Technocrat Takeover: “Democracy is Dead; Long Live the Technocrat!” A pair of lightning-quick financial coup d’états in Greece and Italy have installed two unelected figures as head of state. No one yet in the mainstream media is calling this merger of state and corporate powers by its proper name: Fascism, nor are they calling these “technocrats” by their proper name: Bankers! Can a rudderless ship be saved because technocrat is at the helm?

6. Repatriate! Repatriate!: It took a small, but financially and politically powerful group to sell the world on globalization, and it will take a large, committed and coordinated citizens’ movement to “un-sell” it. “Repatriate! Repatriate!” will pit the creative instincts of a multitude of individuals against the repressive monopoly of the multinationals.

7. Secession Obsession: Winds of political change are blowing from Tunisia to Russia and everywhere in between, opening a window of opportunity through which previously unimaginable political options may now be considered: radical decentralization, Internet-based direct democracy, secession, and even the peaceful dissolution of nations, offering the possibility for a new world “disorder.”

8. Safe Havens: As the signs of imminent economic and social collapse become more pronounced, legions of New Millennium survivalists are, or will be, thinking about looking for methods and ways to escape the resulting turmoil. Those “on-trend” have already taken measure to implement Gerald Celente’s 3 G’s: Gold, Guns and a Getaway plan. Where to go? What to do? Top Trends 2012 will guide the way.

9. Big Brother Internet: The coming year will be the beginning of the end of Internet Freedom: A battle between the governments and the people. Governments will propose legislation for a new “authentication technology,” requiring Internet users to present the equivalent of a driver’s license and/or bill of health to navigate cyberspace. For the general population it will represent yet another curtailing of freedom and level of governmental control.

10. Direct vs. Faux Democracy: In every corner of the world, a restive populace has made it clear that it’s disgusted with “politics as usual” and is looking for change. Government, in all its forms – democracy, autocracy, monarchy, socialism, communism – just isn’’t working. The only viable solution is to take the vote out of the hands of party politicians and institute Direct Democracy. If the Swiss can do it, why can’t anyone else?

11. Alternative Energy 2012: Even under the cloud of Fukushima, the harnessing of nuclear power is being reinvigorated by a fuel that is significantly safer than uranium and by the introduction of small, modular, portable reactors that reduce costs and construction time. In addition, there are dozens of projects underway that explore the possibility of creating cleaner, competitively priced liquid fuels distilled from natural sources. Plan to start saying goodbye to conventional liquid fuels!

12. Going Out in Style: In the bleak terrain of 2012 and beyond, “Affordable sophistication” will direct and inspire products, fashion, music, the fine arts and entertainment at all levels. US businesses would be wise to wake up and tap into the dormant desire for old time quality and the America that was.