Wednesday, February 29, 2012

February, Wednesday 29, 2012

DOW – 53 = 12,952
SPX – 6 = 1365
NAS – 19 = 2966
10 YR YLD +.05 = 1.98%
OIL +.32 = 106.87
GOLD -87.20 = 1697.00
SILV – 2.29 = 34.74
PLAT – 40.00 = 1685.00

I really don't know much. I'm not Nostradamus. I can't see into the future. I do not operate a shadow CIA. I just read a lot and try to make sense of what I read, and that is sometimes a fool's errand, and when all else leaves me awash in chaos I just follow the trend. The trend is your friend. And a trend in place is more likely to continue than it is to reverse, until it reverses. Right now, the trend says the US economy is improving.

The US economy grew 3% in the fourth quarter, so says the Commerce Department; that is up from an earlier estimate of 2.8%. There was an increase in commercial construction, higher consumer spending and lower imports, and a large buildup in business inventories. It doesn't sound sustainable but the trend is up.

The Federal Reserve published its Beige Book, in which they proclaimed the  economy continues to expand at a modest pace, and consumer spending is generally positive, and manufacturing is expanding at a steady pace nationwide.

And then, Federal Reserve Chairman Bernanke went to Capitol Hill to ask lawmakers to dust off the old relic known as fiscal policy, and take it for a spin. Also, as part of Bernanke's semiannual testimony he said, “The recovery of the U.S. continues, but the pace of expansion has been uneven and modest by historical standards.” He did not say he would dump free money out of his helicopter. Wall Street loves it when the Fed  tosses out free money. Wall Street is hooked on free money; if they don't get it, they get cranky. Today they got cranky.  The Fed is still buying Mortgage backed securities. The Fed is still injecting massive liquidity, especially into the housing market, but Wall Street was not satisfied.

And in the precious metals market, someone felt they had a good reason to go short, absent an announcement of QE3. And boom, they knocked the floor out from under precious metals prices. And then Ron Paul talked to Ben Bernanke and said the government is lying about inflation and the Fed will self-destruct when the money is gone. And then Ron Paul held up a silver coin, and Bernanke hissed like a vampire confronted with a cross.

So, I can see it makes no sense at all. And I revert to default setting: What is the trend? The trend is that the US economy is showing slight signs of improvement. The stock market has been on a roll, in large part because the Federal Reserve has been dumping trillions of dollars on Wall Street. Precious metals have been in a secular bull market because the Fed is dumping trillions of dollars on Wall Street. There is no way for the Fed to exit its Zero Interest Rate Program. There is no way the Fed will abandon its monetary easing; I mean its not like Congress is going to pick up the slack with fiscal policy. And so the big trend is that the Fed will continue to be accommodating, despite the fears of the market today.

Maybe somebody was hoping Bernanke would announce QE3 and sprinkle magical liquidity dust and flip the switch to “risk on”, but that wasn't going to happen, especially not while the European Central Bank had just opened up its trading window for the second tranche of the Long Term Refinance Operation which racked up more than 530-billion euros in the first few hours, roughly $700 billion-dollars.  Bernanke did say the ECB was well capitalized, which is interesting because the ECB now has more than 3-trillion on its balance sheets and only about 80-billion in reserves. The Euro-crisis has not been resolved and it is soaking up a whole bunch of money.

Which takes us back to Greece. Tomorrow, the Greek parliament is supposed to sign off, for the umpteenth time, on the bailout. The ECB has sprinkled its magic pixie dust on Greek sovereign bonds and said that a default isn't really a default. The International Swaps and Derivatives Association will meet on Thursday to decide whether a certain aspect of the deal will indeed trigger default and make the default payments necessary.  So, today, when the ECB was passing out free money in the form of LTRO, they were really buying the banks compliance regarding the credit default problem on Greek bonds. Don't trigger the credit default and you can have some money on the side.

There is a chance that the quid pro quo might fall apart. For example, in Greece there is the pesky problem of democracy, which was taken from the people and replaced by a technocratic government. The Greek people have not been comfortable with this arrangement. Tomorrow, the Greek parliament will almost certainly endorse the debt plan with bondholders, which must be completed by March 12th, prior to the March 20th deadline when a $20 billion debt payment is due. Part of the debt plan calls for increased taxes, and privatizing certain assets that used to belong to the government, that is to the people. And the thing is that the people aren't happy, and so they are refusing to play the bankers' game. Merchants are refusing to charge and collect and pay the VAT, the value added tax; tollbooths have been shuttered; public facilities refuse to charge fees; there is widespread tax avoidance. All those austerity measures will fall flat if the people refuse to supply the revenues to pay off the bankers. It is an elegant act of civil disobedience.

Now in light of all that, it would have been most unseemly for Fed Chairman Bernanke to announce QE3, and my guess is that somebody figured this out before me; and my guess is that the overall trends haven't changed. Precious metals took a significant hit today but I think it was a trade, not a change of trend. Stocks moved higher again today. I think this is a trend. Apple moved higher today. Apple has market capitalization of more than $500 billion, almost double the market cap of Microsoft, and 25% more than Exxon Mobil. At some point I have to think that trend will change but not today.

Demand for oil has decreased and the inventories have increased, but today, the price of oil moved higher. Why? Because that is the trend. Someday the depression will be over, and someday wars will end. Someday the Federal Reserve will stop passing out free money to bankers but for now, that is the trend, despite what Bernanke says to Congress. In the next few days, the market will probably realize any pause in helicopter flights is just temporary, and the Fed will get back to doing what the Fed does.
Leopards don't change their spots. The sun will come out tomorrow, the moon will wax and wane, the tide will rise and fall. A trend in place is more likely to continue than it is to reverse – so it makes sense to ride the trend. Eventually, the trend will reverse, and when the trends end, I will probably be a little late in getting out. And that's okay.

Tuesday, February 28, 2012


DOW + 23 = 13,005
SPX + 4 = 1372
NAS + 20 = 2986
10 YR YLD +.01 = 1.93%
OIL – 1.96 = 106.60
GOLD + 15.80 = 1784.90
SILV +1.47 = 37.03
PLAT + 11.00 = 1723.00

Dow at 13,000 for the first time since May of 2008.

I never really liked the Conference Board's Consumer Confidence Index. First, it reduces people to the role of consumers. I consume, but I do much more. I don't consider myself a consumer, at least not first  and foremost. Second, it isn't really trying to measure our confidence, it is trying to determine if we will loosen our steadfast grip on the purse-strings, and if we will buy something. Apparently we will. The Consumer Confidence Index jumped to 70.8 from 61.5 in January. A nationwide average of $3.78 a gallon was trumped by a stronger jobs market and a mild winter that left many people with more work and lower heating bills. Consumer confidence resulted in a 3% increase in chain store sales for the week. Meanwhile, the durable goods orders dropped 4.5% in January. Part of the drop may be the expiration of a tax break which pushed demand forward into December.

The Case-Shiller report on sales of homes in 20 major metropolitan areas across the country shows that house prices continued to drop in December, down 1.1%, for the 4th quarter, prices dropped 3.8%, and for the year, prices dropped 4%. For the Phoenix market, prices have been going up the past couple of months.

So, while we are seeing some signs of improvement in the economy, and confidence is up and the jobs market is showing very modest signs of improvement, the housing market, nationally is still in a mess. Purchases of new homes are down 77 per cent from their 2005 peak. They dropped another 0.9 per cent in January. Home sales overall are still dropping, and prices are still falling – despite already being down by a third from their 2006 peak. January’s average sale price was $154,700, down from $162,210 in December. 

For most people, their home is their largest purchase. The house is a large component of net worth, and one in three homeowners are underwater on their mortgages. Nationally, home inventories are declining in relation to sales, but there may still be about 5 million houses with delinquent mortgages or in the foreclosure process that will soon be added to the inventory. And the inventory numbers don't include 3 million or so vacant houses. Vacancies are up one million from 2006. Some of those vacancies will never be filled.

Phoenix may have hit bottom but we still face challenges. Last year we had the sixth highest foreclosure rate in the nation. Those properties are still moving into the  inventory pipeline. Half of all Arizona homes with mortgages are underwater; that compares with about 25% nationally. For investors, the inventory is tighter and demand is growing. Normal resales in the Phoenix market aren't seeing higher prices, not yet.

The negative wealth effect, homeowners who are underwater, combined with a lethargic labor market and declining real wages means the economy has not truly recovered. We are seeing signs of improvement but I believe the economy is still in a small 'd' depression. The implication is that the housing market is one of the big spots that could still use a jolt of economic stimulus. Actually, the housing market has been neglected. While the Fed has a Zero Interest Rate Policy, that rate hasn't filtered to the typical homeowners; so, monetary policy has stopped with the Wall Street banks, and fiscal policy – well, if it wasn't for dysfunctional fiscal policy, there wouldn't be any fiscal policy. Today, the FHA announced it would increase upfront mortgage insurance premiums by 75 basis points on new financing, not refi's.

Homeowners have been hung out to dry, but this is an election year, and there are changes. The biggest is the HARP refinance program, which should allow underwater homeowners to refinance at lower rates. On January 4, the Federal Reserve released a white paper titled, “The U.S. Housing Market: Current Conditions and Policy Considerations,” which offered ideas for fixing the housing mess. Almost 6 years into the housing bust and this was the first such report from the Fed. The Fed report falls woefully short of addressing the housing market problems in a rich and robust manner. Many of the suggestions seem designed to benefit the bankers as opposed to the homeowners.

I know a lot of you guys like Warren Buffett; there's no question he is a successful investor but he is also a banker, the biggest shareholder of Wells Fargo, the largest mortgage lender in the country. In this role, he tends to be shameless or perhaps clueless or possibly just mercenary. In the annual letter from Berkshire Hathaway, Buffet says banks were victimized by some homeowners who refinanced their loans before getting evicted.

Buffett writes: “large numbers of people who have ‘lost’ their house through foreclosure have actually realized a profit because they carried out refinancings earlier that gave them cash in excess of their cost.” Buffet claims that: “In these cases, the evicted homeowner was the winner, and the victim was the lender.”

While I don't doubt that some people scammed the system in this way, Buffett doesn't give us a number, and the reason he doesn't give the number is because it is inconsequential. And whatever the number is, it would pale compared to the number of homeowners victimized by the banks. Buffett blaming people who lose their homes to foreclosure is kind of like Satan complaining that jaywalkers are evil.

Last July, Berkshire Vice Chairman Charlie Munger criticized bankers for contributing to the housing bubble. Munger blamed the boom on megalomania, insanity, and evil in investment banking and mortgage banking. Charlie got it right last summer, Warren got it wrong this week. The banks are not the victims.

The housing market is going through a radical and fundamental change. For many years, the home was the main component of a family's net worth. What will replace houses as the major investments of the middle class? Will anything? If the housing market can be revived, it will go a long way to lifting the entire economy. This is the plan of the Federal Reserve; this is the plan of the administration; this is the game plan for economic stimulus this year. Hold on, it promises to be an interesting ride.

A combination of unusual and unsustainable forces has pushed the cost of borrowing as low as it has ever been, so low that many investors effectively are paying to lend money to the government.

Investors buying five-year federal debt are accepting such low interest rates that inflation is on pace to reduce the value of their investments by more than 1 percent each year. Yet demand for United States Treasuries remains much greater than the supply.
The glut of cheap money has allowed the government to keep its annual deficits much smaller than it had expected, holding down the growth of the federal debt.
The Treasury may start issuing debt with negative interest rates, making investors pay for the privilege of lending money to the government.
 The average rates that the government pays to investors in its debt have declined in each of the last five years, from 4.92 percent at the end of 2006 to 2.24 percent at the end of 2011. Rates have edged even lower so far this year. Adjusting for inflation, the government is borrowing at virtually zero cost.
As a result, while the size of the public debt more than doubled over the last five years, from less than $5 trillion to more than $10 trillion, the government’s annual interest payments remained about the same. In 2006, the bill was $226.6 billion. Last year, the bill was $227.1 billion.

The basic reason to expect higher rates is that investors usually demand compensation as a borrower’s debts increase. And the government projects that its debt will grow rapidly in coming years. At some point the party has to end, right? Maybe, but for now, the bull run in Treasuries continues unabated.

The United States also has benefited from concerns about the health of European governments. The International Monetary Fund estimates that the benefits of investors fleeing Europe to buy Treasuries have roughly offset any other damage to the American economy from the struggles of the euro zone.

So while Europe fiddles, Treasury debt remains hot. It's a flight to safety, and investors are willing to pay for protection. This month, when the government auctioned off one-year debt, Treasury agreed to pay 14 cents for every $100 that it borrowed, or 0.14 percent. Last week at the most recent auction of five-year debt, it agreed to pay 88 cents a year for every $100 that it borrowed. At a 2 percent inflation rate, investors would need to be paid $2 for every $100 they lent just to keep pace.

Maybe risk aversion has gone too far. Would you pay to park money with the Treasury? Of course, at some point, the pendulum will swing, investors will demand higher rates, bond prices will drop; nothing lasts forever. And when the low rate position unwinds, it will be ugly, but not today. Maybe not today. The problem is that there is no exit strategy from a Zero Interest Rate Policy. How does the Fed back out of this parking lot without destroying the bond market? The simple answer is that they can't.

The World Bank warns that China is headed for collapse. Imagine China crashing. The country holding over a trillion of America’s debt. The World Bank warns that China must essentially overhaul its entire economic structure if it wants to avoid a "crisis". It all sounds very urgent, but it is a part of a report of what might happen over the next 20 years.

The export-driven, state-investment model is producing diminishing returns. According to the World Bank, China's growth rate will slow to 5 percent by 2030 unless China changes its strategy. Remember, South Korea and Japan both went through severe financial crises in the 1990s. And China is already displaying some of the telltale symptoms: A fragile banking sector, companies engorged with debt, and unwise investments in real estate.

The World Bank is calling for a sweeping overhaul, but then the World Bank always calls for sweeping overhauls. That's what they do. Still, BusinessWeek came out with an editorial comparing the situation in China with the years running up to the 2008 meltdown.

The National Association for Business Economics forecasters have raised their expectations for employment, new home construction and business spending this year. But they held on to their average prediction that America’s gross domestic product, or GDP, will grow at a rate of 2.4 percent. That’s a slight improvement from 2011, when economists believe the economy grew 1.6 percent. Final economic growth numbers for 2011 are due out tomorrow. NABE economists see the unemployment rate sticking at 8.3 percent this year, matching January figures. Panelists are also still forecasting strong business spending growth this year. They’ve slightly raised their forecast to 8.1 percent growth this year.

Yesterday, we told you about the Wikileaks dump of Global Intelligence Files from StratFor, the private, intelligence firm that operated as a kind of shadow CIA. Wikileaks claims to have more than 5 million emails that were apparently hacked from StratFor; so far, they have published about 200. It will take some time to go through those emails, but we are already finding some interesting stuff. Osama bin Laden was in routine contact with several senior figures from Pakistan's military intelligence agency while in hiding in the country. Apparently this info came to StratFor after the killing of bin Laden. The e-mail, from a Stratfor analyst, suggested that up to 12 officials in Pakistan's Inter-Services Intelligence (ISI) agency knew of bin Laden's safe house.

The internal email did not name the Pakistani officials involved but said the US could use the information as a bargaining chip in post raid negotiations with Islamabad.

Other e-mails included the suggestion that Hugo Chavez, Venezuela's president, may have less than a year to live after his cancer spread to the colon and bone marrow. Other revelations were statements that Israel had last year carried out a successful covert attack on Iran's secret nuclear facilities.
Apparently the key to intelligence gathering is to state the obvious after the fact.

Monday, February 27, 2012

February, Monday 27, 2012

DOW – 1 = 12,981
SPX + 1 = 1367
NAS + 2 = 2966
10 YR YLD -.06 = 1.92%
OIL – 1.07 = 108.70
GOLD – 5.50 = 1769.10
SILV +.05 = 35.56
PLAT – 3.00 = 1711.00

Let's look at the price of a gallon of gas and the factors that have been pushing prices higher. You may recall that last May, oil prices moved up to $114 per barrel. So one of the first considerations is that this is a seasonal move. You will also recall that last spring, the oil production in Libya was disrupted. After a while, Khadafi was deposed and by last October, prices had dropped to $75 a barrel.

Now the concern is Iran, and any disruption in Iranian oil supply would be considerably larger than Libya, and might lead to even more widespread disruption of oil transportation through the Strait of Hormuz. Iran produces about 4.3 million barrels per day. So, now we are looking at the imposition of sanctions on Iran. What are the implications? The most likely result of sanctions is that the countries participating in the sanctions would have to cut back demand and find new sources, and the countries not participating could buy the oil from Iran. China and India would buy more oil from Iran, while Europe would buy more oil from Saudi Arabia. There would still be the same amount of oil in the global market, just have to buy it from different sources.

Maybe sanctions could alter global production, or maybe the situation deteriorates and we end up with disruptions; what happens then? Well, we can look back to the Iran-Iraq War in 1980, the first Gulf War in 1990; these wars disrupted oil supply, taking out 4-7% of net world production and resulting in oil price increases of 25% to 70%. What follows a sharp spike in oil prices? Recession in the United States. Some people theorize the US is less susceptible to oil price shocks than in the past. If the Strait of Hormuz is closed, even if for a day or two, we'll get a good test of that theory.

The Murdoch Street Journal speculates that monetary policy is to blame.  “Oil staged its last price surge along with other commodity prices when the Fed revved up its second burst of "quantitative easing" in 2010-2011. Prices stabilized when QE2 ended. But in recent months the Fed has again signaled its commitment to near-zero interest rates first through 2013, and recently through 2014. Commodity prices, including oil, have since begun another surge, and hedge funds have begun to bet on commodity plays again. John Paulson says he's betting on gold, the ultimate hedge against a falling dollar.”

There might be something to this argument, loose monetary policy tends to lead to inflation; oil is priced in dollars. The reality is that most commodity prices haven't moved much in the past six months. Oil was up 22% in the 4th quarter of 2011; copper gained 4% in that time. Most of the agricultural commodities were largely unaffected by the Federal Reserve. The Fed's efforts to stimulate the economy probably have some effect and they might even swing out of control, but we're not seeing that right now.

I don't quite follow this argument I've been hearing about the Fed causing higher oil prices. In order for that to be true, wouldn't the markets have to expect a fall in the value of the dollar? And doesn't that imply inflation? If the oil markets expect inflation, then why don't the bond markets? The dollar Index is pretty much where it was last October, and pretty much where it was in October 2010. I doubt the Murdoch Street Journal is trying to claim the Fed has stimulated the economy so much that demand is now smashing available supply.

While there is evidence the economy is improving, one of the twists is that gasoline demand is waning. There are three explanations for this anomaly. First, as the economy has improved we have seen an increase in car sales and those new cars are much more efficient – Second, as the price at the pump has increased Americans have cut back driving (we've done this before and we are learning how to improve our efficiencies), and third, the improvements in the economy aren't real and the economy is contracting rather than growing. Take your pick.

As best I can figure, economic activity is improving in the US but not by much, still that might account for a modest increase in oil prices except that demand for gasoline has dropped in the US. So, let's toss in an improving outlook for economic activity in Asia. Aside from production disruptions, or fear of them, global economic activity has to be the key driver of oil price changes. A very small change in outlook for the next five years would justify a significant change in current oil prices. The reality is that since 2005 we have seen virtually no increase in global crude oil production and total petroleum liquids. You should expect that prices would rise over time. Demand has increased a little and supply has been flat, but that is the long term outlook.

Still, that doesn't explain the jump in prices that we've seen since October. Gas prices are back to levels that we last saw in the summer of 2008. Remember when oil hit $147 a barrel? Today, we only – ONLY – see prices pushing up against $110 per barrel. And that brings us to a major inefficiency that is pushing prices at the pump much much higher.

As prices for oil have moved higher, domestic demand for gasoline has dropped to a 15 year low. The result is a squeeze on refineries. Since December, the U.S. Has lost 4 percent of its refining capacity. Two major refineries in Pennsylvania shut down, so there has been a significant impact on refined supplies, especially in the East. Still, domestic oil production has increased over the past three years, and the offshore oil rig count is now 2.5 times higher than the previous 10 year high, and refineries are exporting gas, one of our major exports now in the U.S.

So, let's only presume that prices are impacted when non-North American oil supplies are threatened or there is the threat of a threat.
Then markets wisely react to possible supply reductions as opposed to ongoing domestic and North American supply restrictions. Which further makes the case for reducing North American oil production because such production is irrelevant to oil prices and can only cause all of the ground water in North America to be contaminated.
No wait. There must be a better answer. Speculators hold 70% of the open interest in oil futures. If the CFTC actually enforced it's rules, speculators would only be allowed to hold 30% and the price of oil would reflect supply and demand.
And if you want to know the real reason why we can't seem to get a serious commitment to sustainable, renewable energy the answer is that the bankers haven't figured out how to control it and take their cut.

In December, Anonymous may have hacked into security data of Stratfor, a Texas-based intelligence and threat analysis firm, that has been described as a shadow CIA. Today, Wikileaks dumped 5-million Stratfor emails; they call them the “Global Intelligence Files”. According to Wikileaks, the emails “reveal the inner working of a company that fronts as an intelligence publisher, but provides confidential intelligence services to large corporations.” Wikileaks name-checks several Fortune 500 corporations as well as U.S. government agencies

Wikileaks claims the emails”show Stratfor’s web of informers, pay-off structure, payment laundering techniques and psychological methods,” adding that the emails “expose the revolving door that operates in private intelligence companies in the United States” and alleging that government-related sources around the world give Stratfor political scoops in trade for cash.

WikiLeaks founder Julian Assange told Reuters: "Here we have a private intelligence firm, relying on informants from the U.S. government, foreign intelligence agencies with questionable reputations and journalists. What is of grave concern is that the targets of this scrutiny are, among others, activist organizations fighting for a just cause."

Among the more disconcerting emails, one involving a Goldman Sachs Managing Director looking to utilize the intelligence to form a hedge fund and trade on what I think might be considered insider information. Another email indicates that Stratfor attempts to use financial, psychological, or sexual control of informants or possibly people being investigated. Which makes the story of Julian Assange all the more intriguing.

I'm still waiting on the Wikileaks dump on the big banks. Assange has been promising that for almost two years, during which time, the infrastructure for funding Wikileaks has broken down. I don't know whether Assange is a saint or a sinner but it sure looks like some very powerful people have been trying to put a lid on his work.

The potential drag from fiscal restraint contributed to the rationale behind Federal Reserve policy makers’ reduced forecasts for growth this year and in 2013, that is part of what we learn from the minutes of the January FOMC meeting. Put another way, the fact that we have a dysfunctional fiscal policy is a contributing factor to why we have such extraordinarily accommodative monetary policy. Fed Chairman Bernanke returns to Capitol Hill on Wednesday to deliver his semiannual report to the  House Financial Services Committee. There are several programs that are set to expire around the end of the year. Bernanke's expected to tell Congress to pursue a long-term outlook on balancing spending and revenue, but no sudden moves.

The Federal Reserve Bank of New York issues a quarterly report on Household debt and credit. The latest finding from the fourth quarter show most households are continuing to delever. Aggregate consumer debt dropped $126 billion to 11.53 trillion. Consumers’ non-real estate indebtedness now stands at $2.635 trillion.  The report finds that $1.12 trillion of consumer debt (or 9.8 percent of outstanding debt) is currently delinquent, with $824 billion seriously delinquent (at least 90 days late). So, I think I understand; foreclosures and delinquency tends to decrease outstanding debt.
And when you decrease outstanding debt, you increase net worth. So, if you're looking for a quick way to increase your net worth - I'm just saying, you do the math.

Friday, February 24, 2012

February, Friday 24, 2012

DOW  - 1 = 12,982
SPX + 2 = 1365
NAS + 6 = 2963
10 YR YLD - .01 = 1.98%
OIL +1.86 = 109.69
GOLD – 6.50 = 1774.60
SILV +.04 = 35.51
PLAT – 13.00 = 1717.00

We've almost made it through the first two months of the year and if you haven't noticed, things are getting better. This is not to say that everything is good or even great, just that things are getting better. And of course, there is the caveat that things might get worse and that could happen fast and it could be severe, but for this specific moment in time, things are getting better. Some people would like to deny this; they claim this getting better notion is a false meme; we're being manipulated into believing that things are getting better when they are not. Despite the presence of bright sunlight, we know that the darkness of night is right around the corner; and even cold, hard numbers are unconvincing. Let's look at the numbers: the S&P 500 has doubled in less than 3 years, and it's up more than 8% year to date; just this week home sales showed strength and inventories dropped, the unemployment rate has been steadily dropping and the initial claims for jobless benefits fell to the lowest level since March, 2008; and consumer confidence in January moved to its best level in a year.

Maybe these numbers don't apply to you personally; fair enough. And it's easy to claim the markets are flying blind because the economic numbers are distorted; which is true, but this is not the first month or even the first year that the numbers have been distorted. If you can move past the politics of denial the numbers tell a story and rather than deny the facts (however imperfect), let's dig for deeper understanding. What is the source of this move? How might this all play out?

For several months we've been telling you that the European sovereign debt crisis would follow the Federal Reserve's Playbook from 2008. I can now say with some confidence that QE3 has begun. Check the Fed's balance sheet and you will see unadjusted M2 (money supply plus “near money” savings, cd, money market) is jumping higher. The Fed has been buying and there are new assets appearing on their balance sheet. It isn't being called QE3 and several Fed leaders have stated that no stimulus is needed because the US economy is improving, but the reality is that the real reason the economy is improving is because we have QE3.

Remember last November, when the Super Coalition of Central Bankers announced their coordinated actions to enhance capacity to provide liquidity support to the global financial system. The ECB, the Bank of England, Bank of Japan, Bank of Canada, and the Swiss National bank and the Fed all agreed to pump cash into the Euro-banks. They did this by way of unlimited dollar swaps.

Right before Christmas, the ECB gave another nice gift to the Euro-banks in the form of the LTRO, the Long Term Refinance Operation, which handed over close to 500-billion-euro. And don't forget that the next tranche is scheduled for this coming week and it could be up to 1-trillion-euro.

Meanwhile, the Federal Reserve buys 90% of all 20 and 30-year maturity US bonds; and the Fed is the backstop for mortgage backed securities and they have been increasing their purchases of MBS. The Fed has made clear they will prop up the mortgage market. And don't forget the Fed's ZIRP, Zero Interest Rate Policy, now in its fourth year and headed to an unprecedented 6 year engagement.

Do you really think we would have near record low interest rates on 30 year mortgages without the Fed's Operation Twist program? And if we didn't have record low mortgage rates, wouldn't we have much higher default rates in housing, and wouldn't that lead to much higher toxic assets on the balance sheets of US banks big and small?

And what do you think would have happened if Bernanke and the FOMC had not committed to two more years of zero interest rates? Of course, part of the problem is that the market latches on to zero interest rates and refuses to let go. There is no exit strategy at this time for the Fed.

And if the Fed and its foreign counterparts had not juiced the Euro-banks, there is a strong probability we would have seen a liquidity crunch by now.

So, even if we don't come out and call it QE3, there has been a huge dose of central bank intervention and the economy has received a massive injection of stimulus. It is difficult to measure the exact impact of the stimulus on the market's positive performance since the start of the year. Is it 50%? 80%? 95%? Without the latest round of Fed stimulus, we wouldn't be talking about the market's positive performance; we might be talking instead about the crash of 2012. You may disagree with the concept of central bank intervention but it works – at least in the short term.

Over the long term, the results aren't quite as positive. There is a price to pay for juicing the economy. We've heard this refrain before..., boom-bust-boom-bust – it's a rhythm unique to central banking. Unfortunately we can't cure debt with more debt. There is a problem with debt; it grows though compounding, which means it grows exponentially. The only thing in nature that grows exponentially is cancer, and eventually it consumes the host. As debt grows exponentially it is manifest through inflation and if inflation grows significantly faster than economic growth, the result is hyper-inflation. When hyper-inflation happens, money stops being an effective medium of exchange and commerce grinds to a halt.

We're already starting to see signs of inflation, and the problem is that the economy must now grow faster than inflation, which means that the Fed must juice the economy and it is doing that – and the unpleasant side effect is inflation. And so we have a vicious cycle. I don't claim to know the intent of Chairman Bernanke but any central bank intervention must ultimately seem as futile and absurd as Sisyphus rolling a boulder up a hill.

On the flip side is deflation. When people expect falling prices, they become less willing to spend, and in particular less willing to borrow. When prices are falling, just sitting on cash becomes an investment with a positive real yield and borrowing, even for a productive investment, means the loan will have to repaid in dollars that are worth more than the dollars you borrowed.

And the economy may stay depressed because people expect deflation, and deflation may continue because the economy remains depressed. That’s the deflationary trap. Everything just freezes. A new approach is to cut everything – the austerity move; which means economic contraction surpasses falling prices. The trick is to have economic growth greater than price growth. The typical central bankers' response to a credit freeze is to inflate with wild abandon.
Of course, this process is not so easy. Someone must pay for someone to collect. In this case, the taxpayers pay and the bankers have their hands out. And the stimulus is addictive.

The ink is barely dry on the deal to enslave Greece and the International Monetary Fund is begging for more money.  The G20 is meeting this weekend in Mexico and the IMF wants to raise as much as $600 billion-dollars in extra resources to help deal with the fallout from the Euro-zone debt crisis. And this is on top of the ECB's bailout funds.

We've seen the playbook. We know how the story ends.

Let's go to the Mail bag:
First, thank you for the finest financial program I've ever heard. If there is a solution to today's banking - investment woes it must begin with defining the problem. Education is the key, and you provide the fundamentals so well.

I've concluded that unfunded liabilities will amount to broken promises or be re-negotiated. What I am not sure of (and neither is anyone else that I have talked to) is am I personally and legally obligated to pay my part of the national debt? Back when I purchased I bonds I noticed the term "Public Debt" at the top of the document instead of National debt.

Am I personally accountable for not reigning in career professional political hacks who run up a debt "in my name?"

There are many different ways to categorize debt, including secured or un-secured debt. For example, I borrow money to purchase a shiny new bicycle, the lender might hold the title to the bicycle as collateral on the debt. If I don't pay, they take my bike. With bonds there are sometimes fees, revenues, or taxes pledged to pay the debt, or it may simply be a general obligation to pay which means they are backed by the full faith and credit of the United States or municipality or whoever the issuer might be, that means the bond is backed by all legally available funds of the issuer and the debt can be paid from the issuer's general fund but not necessarily from ad valorem taxes.

Are you personally responsible for public debt? It depends on how the issuer feels about it. For example, we recently have seen municipalities that have issued full faith and credit bonds, and now they can't pay. Jefferson County Alabama decided to stop paying on their general obligations because they were draining cash for essential services. Meanwhile, Rhode Island put bondholders ahead of its citizens.

So, if a government doesn't pay its debts, then they won't have credit in the future. For example, going back to the 1820's, Greece has defaulted on its debt six separate times. Something the European Union failed to consider when they were writing the Maastricht Treaty. In Greece, it looks like bondholders will take a hit and citizens will take an even bigger hit.

The quick answer is that you are not personally liable for public debt. The US Treasury will not itemize the debt and send you a bill to pay a bond when it comes due. Likewise, if you own a bond, you can't go around to various citizens and demand payment. Conversely, if you own a stock and the company collapses, you do not have personal liability for debts incurred by the company. But of course, the public must pay debt, and we do pay debt by replenishing the general fund of the issuer – usually by paying taxes or cutting services.

So you are publicly accountable for the debt, but you are not personally accountable.