An Open Letter to All
Presidential Candidates
March 19, 2012 By gpc1981
Dear Presidential Candidates:
Democrats, Republicans, Independents, etc.
Watching your debates and speeches of
late, it is clear that you are all (with possibly the exception of Ron Paul)
missing the point and only
continuing to widen the gap between the
In some regards, this is not entirely
your fault. You all are doubtless surrounded by strategists and experts who
ascribe to the dominant economic theories of the last 80 years; namely that
Government and monetary intervention can “fix” any economic problems this
country faces. Mr. President I know for a fact that your inner circle of
advisors is comprised of individuals who owe their current jobs and fortunes to
bailouts (Mr. Immelt and Mr. Buffett to name two).
Your strategists are missing the
point. Aside from the fact that their own self-interests are completely at odds
with those of the American people, they are looking at economic numbers and
data as “realities” or stand alone items. This the
completely off-base. The economy and economic data are not reality,
they are simply measures of the
American People’s activity.
With that in mind, you need to
actually consider the people,
not the data.
The people are already voting whether
you realize it or not. They’ve voted with their money by doing the following:
1) Pulling their money
out of the stock market en masse (the mutual fund industry saw investors pull
$132 billion from stock-based funds in 2011).
2) Buying guns (according
to the FBI, there were over 16 million background checks in 2011, an all-time
record. The FBI has noted that only 1.3% of background checks result in denial
of a weapon… so these were gun buyers.)
These two data points tell us one
thing: Americans do not buy into or
trust the current policies being enacted in the
Americans don’t believe that the
stock market represents the
It is easy to see why. Despite record
Government deficits, debt levels, and stimulus, the
Here’s duration of unemployment.
Official recessions are marked with gray columns. While the chart only goes
back to 1967 I want to note that we are in fact at an all-time high with your
average unemployed person needing more than 40 weeks to find work (or simply falling off the
statistics).
Here’s the labor participation rate
with recessions again market by gray columns:
Another way to look at this chart is
to say that since the Tech Crash, a smaller and smaller percentage of the
Here’s industrial production. I want
to point out that during EVERY recovery since 1919 industrial production has
quickly topped its former peak. Not
this time. We’ve spent literally trillions of US Dollars on Stimulus and
bailouts and production is well below the pre-Crisis highs.
Here’s a close up of the last 10
years.
Again, what’s happening in the
Americans don’t pay their bills using
the proceeds from stocks. They pay their bills and buy their food/ gas with the
money earned from their incomes.
This is why most people don’t care
about the stock market anymore. Well, that and the fact that a large percentage
of the ones running the show in the markets committed massive fraud, earned
billions doing it, and have never been called to justice despite admitting they did this.
As for the Depression, the reason we
are in a Depression is due to the realities underlying our financial system:
namely too much debt. Moreover, the
Let’s face the facts… we are
saturated with debt on a Federal, State, Local, and Household basis. You cannot
solve a debt problem by issuing more debt no matter what your economists and
strategists tell you.
For the sake of my letter to you,
let’s focus on US Households since they’re
the ones who will vote for the next President.
During the housing boom, consumer
leverage rose at nearly twice the rate of corporate and banking leverage. Indeed, even after all the foreclosures and
bankruptcies, US household debt is equal to nearly 100% of US total GDP.
To put US household debt levels into
a historical perspective, in order for US households to return to their
long-term average for leverage ratios and their historic relationship to GDP
growth we’d need to write off between
$4-4.5 TRILLION in household debt (an amount equal to about 30% of total
household debt outstanding).
This is the mathematical reality
underpinning our economy today.
So
how do we solve this?
The only way for us to get out of
this mess is for incomes to start rising. And the only way that will happen is
if jobs pick up. For that to happen, we HAVE to do two things:
1) Focus almost
exclusively on small businesses.
2) Remove the distrust
that Government policies have engendered in the
Regarding #1, according to the
Government’s own data:
Represent
99.7 percent of all employer firms.
Employ
half of all private sector employees.
Generated
65 percent of net new jobs over the past 17 years.
Create
more than half of the nonfarm private GDP.
Produce
13 times more patents per employee than large patenting firms.
Who runs these small businesses? The American people.
In simple terms, the
And they will vote based on their experiences of the economy, NOT
based on the fudged numbers coming out of the BLS.
So, if you want to win the 2012
Presidential Election, you need to focus on these people and win back their
trust. And how can you do that? Two simple steps:
1) Stop bailing out/
permitting the elite to get away with crimes that normal Americans would be
prosecuted for.
2) Stop interfering with
small business. Make it easier for small business to start hiring by removing
the uncertainty surrounding future benefits/ regulations/ taxes that small
businesses will face (why do you think everyone’s hiring temps and
part-timers?)
Obviously these moves wouldn’t solve the problems for the
Trust creates jobs. Trust wins votes.
Trust gets the economy back on track, even if it means some short-term pain
(defaults/ deleveraging). This country has gotten through a Civil War, Great
Depression, numerous recessions, and more. We will get through this latest Depression
as well. But this will only happen if we go back to being the
Whichever of you figures this out
first and acts accordingly, will be the next President.
Sincerely,
Graham Summers
What
the End Result of the Fed’s Cancerous Policies Will Be and When It Will Hit
March 17, 2012 By gpc1981
Yesterday I noted that the “addict/
dealer” metaphor for the Fed’s intervention in the markets was in fact not
accurate and that the Fed’s actions would be more appropriately described as permitted cancerous beliefs to spread throughout
the financial system, thereby killing Democratic Capitalism which is the basis
of the capital markets.
Today I’m going to explain what the
“final outcome” for this process will be. The short version is what happens to
a cancer patient who allows the disease to spread unchecked (death).
In the case of the Fed’s actions we
will see a similar “death” of Democratic Capitalism and the subsequent death of
the capital markets. I am, of course, talking in metaphors here: the world will
not end, and commerce and business will continue, but the form of capital
markets and Capitalism we are experiencing today will cease to exist as the
Fed’s policies result in the market and economy eventually collapsing in such a
fashion that what follows will bear little resemblance to that which we are
experiencing now.
The focus of this “death” will not be
stocks, but bonds, particularly sovereign bonds: the asset class against which
all monetary policy and investment theory has been based for the last 80+
years.
Indeed, basic financial theory has
proposed that sovereign bonds are essentially the only true “risk-free”
investment in the world. While history shows this theory to be false (sovereign
defaults have occurred throughout the 20th century) this has been
the basic tenant for all investment models and indeed the financial system at
large going back for 80 some odd years.
The reason for this is that the
Treasury (
If you’re unfamiliar with the Primary
Dealers, these are the 18 banks at the top of the
The Primary Dealers are:
- Bank of
- Barclays Capital Inc.
- BNP Paribas Securities Corp.
- Cantor Fitzgerald & Co.
- Citigroup Global Markets Inc.
- Credit Suisse Securities (
- Daiwa Securities America Inc.
- Deutsche Bank Securities Inc.
- Goldman, Sachs & Co.
- HSBC Securities (
- J. P. Morgan Securities Inc.
- Jefferies & Company Inc.
- Mizuho Securities USA Inc.
- Morgan Stanley & Co. Incorporated
- Nomura Securities International Inc.
- RBC Capital Markets
- RBS Securities Inc.
- UBS Securities LLC.
I’m you’ll sure you’ll recognize
these names by the mere fact that they are the exact banks that the Fed focused
on “saving” thereby removing their “risk of failure” during the Financial
Crisis.
These banks are also the largest
beneficiaries of the Fed’s largest monetary policies: QE 1, QE lite, QE 2, etc. Indeed, we now know that QE 2 was in fact
was meant to benefit those Primary Dealers in Europe, not the
The Primary Dealers are the firms
that buy US Treasuries during debt auctions. Once the Treasury debt is acquired
by the Primary Dealer, it’s parked on
their balance sheet as an asset. The Primary Dealer can then leverage up that
asset and also fractionally lend on it, i.e. create more debt and issue more
loans, mortgages, corporate bonds, or what have you.
Put another way, Treasuries are not
only the primary asset on the large banks’ balance sheets, they are in fact the
asset against which these banks lend/ extend additional debt into the monetary
system, thereby controlling the
amount of money in circulation in the economy.
When the Financial Crisis hit in
2007-2008, the Fed responded in several ways, but the most important for the
point of today’s discussion is the Fed removing the “risk of failure” for the
Primary Dealers by spreading these firms’ toxic debts onto the public’s balance
sheet and funneling trillions of dollars into them via various lending windows.
In simple terms, the Fed took what
was killing the Primary Dealers (toxic debts) and then spread it onto the
When the Fed did this it did not save capitalism or the Capital
Markets. What it did was allow the “cancer” of excessive leverage, toxic debts,
and moral hazard to spread to the very basis of the
These actions have already resulted
in the
The reality is that the Fed has done
the following:
1) Set itself up for a collapse: at $2.8
trillion, the Fed’s balance sheet is now larger that the economies of
2) Called the risk
profile of
3) Put
the entire Financial System (not just the private banks) at risk.
The Financial System requires trust
to operate. Having changed the risk profile of US sovereign debt, the Fed has
undermined the very basis of the
Moreover, the Fed has undermined
investor confidence in the capital markets as most now perceive the markets to
be a “rigged game” in which certain participants, namely the large banks, are
favored, while the rest of us (including even smaller banks) are still subject
to the basic tenants of Democratic Capitalism: risk of failure.
This has resulted in retail investors
fleeing the markets while institutional investors and those forced to
participate in the markets for professional reasons now invest based on either
the hope of more intervention from the Fed or simply front-running those Fed
policies that have already been announced.
Put another way, the financial system
and capital markets are no longer a healthy, thriving system of Democratic
Capitalism in which a multitude of participants pursue different strategies.
Instead they are an environment fraught with risk in which there is essentially
“one trade,” and that trade is based on cancerous policies and beliefs that
undermine the very basis of Democratic Capitalism, which in the end, is the
foundation of the capital markets.
In simple terms, by damaging trust
and permitting Wall Street to dump its toxic debts on the public’s balance
sheet, the Fed has taken the Financial System from a status of extremely
unhealthy to terminal.
The end result will be a Crisis that
makes 2008 look like a joke. It will be a Crisis in which the US Treasury
market implodes, taking down much of the US banking system with it (remember,
Treasuries are the senior most assets on US bank balance sheets).
I cannot say when this will happen.
But it will happen. It might
be next week, next month, or several years from now. But we’ve crossed the point
of no return. The Treasury market is almost entirely dependent on the Fed to
continue to function. That alone should make it clear that we are heading for a
period of systemic risk that is far greater than anything we’ve seen in 80+
years (including 2008).
The Fed is not a “dealer” giving
“hits” of monetary morphine to an “addict”… the Fed has permitted cancerous
beliefs to spread throughout the financial system. And the end result is going
to be the same as that of a patient who ignores cancer and simply acts as
though everything is fine.
That patient is now past the point of
no return. There can be no return to health. Instead the system will eventually
collapse and then be replaced by a new one.
On that note, if you’re looking for
actionable investment strategies on how to play these themes in the markets I
suggest checking out my Private Wealth
Advisory newsletter.
Private Wealth
Advisory is my answer to the consensus view presented by
the mainstream media and non-thinking “analysts.” It’s a
bi-weekly investment advisory published to my private clients. In it I
outline what’s going on “behind the scenes” in the markets as well as which
investments are aimed to perform best in the future.
My research has been featured in RollingStone, The
To learn more about
Private
Wealth Advisory… and how it can help you navigate the
markets successfully…
Graham Summers
Chief Market Strategist
Graham Summers
Chief Market Strategist
The
Fed Isn’t Providing “Monetary Morphine”; It’s Spreading
Financial Cancer That is Killing the Markets and Democratic Capitalism in
General
March 16, 2012 By gpc1981
While the
vast majority of commentators look at the market action of the last three
months and celebrate, I cannot help but shudder. The reason is that the stock
market has been propped up solely by Central Bank and/or Federal Government
intervention or the hope of more intervention.
That alone is
worrisome as it indicates the stock market no longer cares for economic or
financial fundamentals (something that has been clear for several years now).
However, far
more worrisome is fact that the Fed and Federal Government are now not only
propping up stock prices, but are openly trying to crush other assets
(especially politically dangerous commodities such as oil and gasoline) in an
attempt to make it appear that inflation is under control.
Consider the
following:
1)
The sudden talk of “sterilized QE” or QE that won’t involve more money printing
(read: There is No
Such Thing as Sterilized QE).
2)
The sudden and curious collapse in precious metals (right after Bernanke says
QE 3 isn’t coming anytime soon… only for the Fed to leak the “sterilized QE”
talk a week after Gold and
Silver collapse).
3)
The Government’s decision to unlock our Strategic Petroleum Reserves again
(crushing gas prices which were the primary inflationary concern of the Obama
administration)
4)
Those Wall Streeters close to the Fed (Goldman’s Jan Hatzius) predicting “sterilized QE” coming in April or June
All of these
moves have two goals:
1)
Propping up stocks
2)
Crushing those commodities/ assets that are politically (and economically)
dangerous (gasoline, food prices).
The take away
point that I’m trying to make here is that we’re now at the point of
intervention in which the Fed is openly
managing the markets right down to specific
asset classes.
Never in
history has Central Planning gone well for either the
markets or the economy. Wall Street and the mainstream media may cheer that
stocks are up and inflation “transitory” (despite clear evidence that the
latter point is false: the bond market indicates real inflation to be around 10%). However, I for one am
truly terrified by what I see occurring in the markets.
The reason
for this is that I do not view what’s happening through the same lens as most
investment commentators. Most commentators, including Fed officials, view the
Fed’s involvement in the markets as being akin to a drug dealer trying to cure
an addict of his/her addiction by providing more drugs (see Dallas President
Fisher’s recent speech on the market’s need for “monetary morphine”).
I disagree
with the “addiction” metaphor because it implies that the markets/ addict could
potentially become healthy if the dealer stopped dishing out the drugs. This ties in with Bernanke’s claims that everything is under
control and that he can remove the excess liquidity anytime he wants to.
Remember, Bernanke
is speaking from the perspective of an economist: someone who believes that
monetary policy and the economy are items that are separate from human
psychology or emotion (much as an addiction can be viewed as a physical issue
that can be cleared up by physical removal of the drug and the body adjusting
accordingly).
However, the
markets and the economy are not standalone items or “real things” in of
themselves. They are in fact measures of human
activity. And human activity is guided by reason and emotions,
which are based on varying amounts of evidence and belief.
With that in mind, I
believe Central Bank
intervention is not a drug or “hit” for an addict. Instead, it is a cancer that
has spread throughout the financial system’s psyche and which is killing the markets and Democratic capitalism.
The markets
are supposed to be based on Capitalism. And Capitalism, particularly Democratic
Capitalism, which is based on the involvement of the general population, by definition requires two primary items:
1)
The risk of failure as well as the opportunity for success
2)
Trust between market participants
The Fed’s
policies have damaged both of these areas beyond repair.
Regarding #1,
the Fed’s action of bailing out the connected elite erased the concept of risk
of failure for that group entirely. The Big Banks continue to engage in
reckless practices including drawing down loan loss reserves, refusing to come
clean about their true balance sheet risk, paying out record bonuses, and of
course, screwing their
clients (the Greg Smith op-ed in the New
York Times is only the beginning of the whistleblowing
for Wall Street).
Put simply,
the Big Banks, and even well-connected hedge funds (several of which were
warned in advance of the Fed’s upcoming moves in private meetings with Fed
officials) are now basing their
business models and investment strategies on the idea that risk of failure is
next to none.
This in turn has
destroyed the second principle of Democratic Capitalism: trust between market
participants.
By supporting
the very folks who should
have failed (the Big Banks) the Fed has engendered
distrust from those who were not on the receiving end of the bailouts (
As a result,
the markets are now viewed by market participants and the general public as a
“rigged game.” This, in turn, has caused two trends to emerge:
1)
Investors leaving the market en masse (the mutual fund industry saw investors
pull $132 billion from stock-based funds in 2011 while the hedge fund industry
experienced a net removal of funds in 4Q11 for the first time since 2Q09).
2)
Those investors who remain market participants simply betting on continued Fed
intervention and/or front-running Fed policies when they can.
Put another
way, the Fed has killed the most important form of trust for Democratic
Capitalism. I’m referring to the trust that there is one set of rules/
guidelines for all market participants or that the person on the other side of
the transaction has the same risk of failure and opportunity for success as you
or I do.
Indeed,
things have gotten so bad that even those on the receiving end of Fed largesse no longer trust one another
as evinced by inter-bank lending in the
As if this
was not bad enough, the Fed is not only killing the basic trust of Democratic
Capitalism and replacing it with another, more “sickly” form of trust: the trust that the Fed will continue to prop up
those institutions that should have failed as well as the stock market in
general.
This fits
well within my “cancer” metaphor, as the Fed is literally killing off the
positive form of Democratic trust needed for Capitalism and spreading a
negative Moral Hazard-based form of trust, much as cancer cells kill off
healthy cells by infecting them until they too are cancerous.
So while the
mainstream media and various “gurus” view the Fed’s actions as saving
capitalism, I totally disagree.
The Fed’s actions have
permitted cancerous beliefs to spread throughout the financial system, thereby
killing Democratic Capitalism which is the basis of the capital markets.
Short-term,
this may have allowed the “patient” (the markets) to continue to function, much
as can someone with cancer can continue to function normally for a while before
the disease makes it impossible. But long-term the end result will prove
disastrous.
I’ll address
the “end result” in my next research piece. But for now, everyone should know
that whether the “end result” happens next week, next month, next year, or
further down the road, it will be akin to what happens when cancer spreads
unchecked throughout a patient.
On that note,
if you’re looking for actionable investment strategies on how to play these
themes in the markets I suggest checking out my Private Wealth
Advisory newsletter.
Private Wealth
Advisory is my answer to the consensus view presented by the
mainstream media and non-thinking “analysts.” It’s a bi-weekly
investment advisory published to my private clients. In it I outline what’s
going on “behind the scenes” in the markets as well as which investments are
aimed to perform best in the future.
My research
has been featured in RollingStone, The
To learn more about Private Wealth Advisory… and how it
can help you navigate the markets successfully…
Graham Summers
Chief
Market Strategist
The
Big Fat Greek Lie Is Now Obvious to Spain… So Who’s
Next to Default?
March 15, 2012 By gpc1981
The big fat Greek lie being spread
throughout the financial community is that
1)
2)
3) The Greek economy
continues to implode (youth unemployment over 50%, one in ten Greek youth
looking for jobs abroad, Greek GDP fell 7% in 4Q11)
4) This Second Bailout
was indeed a “Credit event” which the markets have yet to discount (though
German investors are already lining up litigation)
5)
Anyone who thinks that
Indeed, if anything, the Greek
situation has made it clear that the whole “give up fiscal sovereignty and
implement austerity measures in exchange for bailouts” formula is a waste of
time and money. Let’s take a look at the progression here.
1)
2)
3)
4)
5)
6)
7) Talk of Second Greek
Bailout begins (July –October 2011)
8)
9) Second Greek bailout
announced/ finalized (February/March 2012)
10) Talk of third Greek bailout
begins (March 2012)
No other EU country could look at
this progression and think “this looks like a good approach.” Indeed,
Both countries have already had a
small sampling of the austerity measure medicine.
Yet, even these tiny moves resulted
in protests and riots. One can only imagine what Spanish and Italian
politicians are thinking as they witness the widespread civil unrest,
country-wide strikes, and economic depression that have occurred in Greece as a
result of that country’s full commitment to the EU’s austerity measure demands.
Spain’s official Debt to GDP is only
64%, but its private sector debt is at an astounding 227% of GDP. And the
Spanish banking system is leveraged at 19 to 1 (worse than
Moreover, the country is already
experiencing an economic Crisis with an unemployment rate of 20+% and an
economy that has been contracting since mid-2011 (in fact
Indeed,
Spain’s sovereign thunderclap and
the end of Merkel’s Europe
As many readers will already have
seen, Premier Mariano Rajoy has refused point blank to comply with the austerity
demands of the European Commission and the European Council (hijacked by Merkozy).
Taking what he called a “sovereign
decision”, he simply announced that he intends to ignore the EU deficit target
of 4.4pc of GDP for this year, setting his own target of 5.8pc instead (down
from 8.5pc in 2011).
In the twenty years or so that I have
been following EU affairs closely, I cannot remember such a bold and open act
of defiance by any state. Usually such matters are fudged. Countries stretch
the line, but do not actually cross it.
With condign symbolism, Mr Rajoy dropped his
bombshell in
The EU rejected this (of course) and
So… we must consider that it is
highly likely the option of simply defaulting is being discussed at the highest
levels of the Spanish and Italian government. Should either country decide that
austerity measures don’t work and it’s simply easier to opt for a default, then
we are heading into a Crisis that will make 2008 look like a joke.
On that note, if you’re looking for
actionable investment strategies on how to play these themes in the markets I
suggest checking out my Private Wealth
Advisory newsletter.
Private Wealth
Advisory is my bi-weekly investment advisory published
to my private clients. In it I outline what’s going on “behind the scenes” in
the markets as well as which investments are aimed to perform best in the
future.
My research has been featured in RollingStone, The
To learn more about
Private
Wealth Advisory… and how it can help you navigate the
markets successfully…
Graham Summers
Chief Market Strategist
Filed
Under: Uncategorized
The
Relationships Between Wall Street, the Fed, and
Politicians Are Crumbling
March 14, 2012 By gpc1981
People often write to my company
asking customer service to forward emails to me asking how I can remain bearish
when stocks continue to rally.
For one thing, I want to note that
one can be bearish, but still profit from the “current game,” or short-term
trends that are in place. For example, while I am ultimately very bearish on
the economy and on the markets, I positioned my Private Wealth Advisory clients
to profit from the various trends of 2011 so that we saw a 9% return for the
year vs. a 0% return for the S&P 500.
Having said that, the big picture
reason why I’m bearish can be expressed as follows: the current situation that
is allowing the market to rally is based on relationships and policies that are
crumbling.
The relationships that most matter
for stocks are those between the Federal Reserve, Wall Street, and the White
House (the topic of today’s research).
The policy that matters most is the
Fed’s ability to convince the market that it can and will keep the markets up
without letting inflation get out of control (we’ll address this tomorrow).
Regarding the relationships that
matter, I’ve stated for months now that we are going to see them crumble. This
process has already begun in the sense that we’ve seen:
2) The Fed distancing
itself from its responsibility for the Crisis by:
- Suing Goldman Sachs
- Opening itself to Q&A sessions and townhall
meetings
- Having “pro Fed” editorials written in the Wall Street Journal
- Putting the blame for the Crisis and the
3) Various members of
Congress (especially Ron Paul) and GOP Presidential candidates taking aim at
the Federal Reserve.
Do not, for one minute, believe that
the folks involved in the Crisis will get away with it. The only reason why we
haven’t yet seen major players get slammed is because no one wants the system
to crumble again. And the only way for the system to remain propped up is for
the Powers That Be to appear to have things under control and be on good terms
with one another.
However, eventually things will come
unhinged again. Whether it’s Europe collapsing, or the
When this happens, the relationships
between Wall Street, the Fed, and the White House will crumble to the point
that some key figures are sacrificed.
Indeed, this process is already
starting.
Fed Fights Subpoena on Bernanke
The Federal Reserve is fighting a
subpoena from lawyers in a civil lawsuit who want the central bank’s chairman,
Ben Bernanke, to testify about conversations he had with Bank of America Corp.
executives before the lender completed its purchase of Merrill Lynch & Co.
The three-year-old class-action suit
alleges that the
http://online.wsj.com/article/SB10001424052702303717304577277712160795098.html
I’ve stated before that I believe
Bernanke will face legal troubles in the coming months. The only reason he got
a free pass before was because he was thought to have saved the system and
capitalism. So, when it becomes evident that he actually didn’t do either of these things
(another Crisis hits), expect to see Bernanke in the hot seat.
Indeed, things may already be
accelerating here. Consider JP Morgan’s moves yesterday in which it announced
ahead of the Fed’s release of its stress test results that it (JPM) would be
raising its dividend and issuing a $15 billion buyback program with Fed
approval.
Jamie Dimon
played this one beautifully. By including the “with Fed approval” phrase he made
it appear that the Fed is in charge of JP Morgan’s business. However, by
announcing that he wanted to raise JPM’s dividend and
issue a buyback program he:
1) Implicitly stated that
JPM was in great shape and would pass the Fed stress test with flying colors.
2) Indicates that JPM was
depleting its capital, which goes against the Fed’s supposed claims that it
wants banks to raise capital.
3) Shows who’s really running the show in the markets
(the Fed had to speed up the release of its stress test results as the other
large banks released similar leaks to the press).
This last factor is key. Wall Street just publicly stated “we’ll do as we like,
thank you very much” which undermines the view that the Fed is the one in
charge of the markets. This is yet another illustration that the relationship
between Wall Street and the Fed is not what it used to be.
This is a major political trend that
needs to be watched closely as we approach the next Crisis as well as the
Presidential election. Just how it will play out remains to
be seen. But it is certain that dynamics these three groups (Wall
Street, the Fed, the White House/ politicians) will be changing dramatically in
the months to come. And when push comes to shove, eventually someone(s) will be
sacrificed so that others can maintain control. This will happen concurrently
with the markets facing “reality” which is that the Crisis is not over and
we’re in worse shape than we were in 2008.
I’ll explain why in tomorrow’s
research. Until then…
Best Regards,
Graham Summers
Chief Market Strategist
Filed
Under: Uncategorized
Two
Reasons Why the Global Economy Will Slow and Government Promises to Retirees
Will be Broken
March 13, 2012 By gpc1981
The coming years will be marked by a
seismic change in the economic landscape in the
The reasons for this slow down are
myriad but the most important are:
1) Age demographics: a
growing percentage of the population will be retiring while fewer younger
people are entering the workforce.
2) Excessive debt
overhang.
Regarding #1,
Over the same time period,
These numbers alone go a long ways
towards explaining why
These issues are, for the most part,
left out of most current analysis of
Jagadeesh Gokhale of the
Cato Institute presents the situation with an interesting data point, “The average EU country would need to have more than four times (434
percent) its current annual gross domestic product (GDP) in the bank today, earning interest at the
government’s borrowing rate, in order to fund current policies indefinitely.”
The situation is not quite as
profound in the US, though we will be seeing a dramatic increase in the age
dependency ratio (the number of people of retired age relative to those of
working age) between 2010 and 2030 as the Baby Boomers retire: in 2010 there
were 22 people aged 65 and older for every 100 people of working age. By 2030,
this number will have grown to 37 people aged 65 and older for every 100 people
of working age.
However, while the ratios are not as
poor in the
However,
The EU,
This debt overhang will result in
several developments from a political perspective. For one thing, the social
contract between Governments and retirees will have to be re-negotiated, as the
money promised by the former to the latter simply isn’t there.
Governments will try to deal with
this in one of two ways: by raising taxes on high- income earners/ any other
potential avenue for raising revenues and by reneging on the promises made to
retirees.
The impact these moves will have on
the political landscape will be profound. Among other things we will be seeing
more protests both at the ballot box and in the streets (
To picture how a cutback in social
programs will impact the US populace, consider that in 2011, 48% of Americans
lived in a household in which at least one member received some kind of
Government benefit. Over 45 million Americans currently receive food stamps.
And 43% of Americans aged 65-74 are Medicare beneficiaries.
Consider the impact that even a 10%
reduction in these various programs would have on the
With that in mind, people will have
to make do with less. This will have a profound social impact, as it will force
many more traditional values to come to the forefront of American culture
again. Among other things I believe:
1) Divorce rates will
drop as people cannot afford to divorce anymore.
2) Individualism will
give way to more community focused lifestyles: whether they be food co-ops,
neighborhood watches, or simply having to live with relatives, the nuclear
family and local community will become increasingly important as an emotional
and economic support.
3) Savings will increase
and entertainment expenditures will become more frugal (Netflix vs. going to
the movies, camping vs. more expensive vacations, etc.)
More importantly, the political
process will change dramatically in the developed world, as politicians will no
longer be able to promise social benefits and other handouts in order to incur
votes. The impact of this will be very dramatic both in terms of campaigning
and lobbying efforts in DC.
From an economic growth standpoint,
these age demographics and their accompanying debt overhangs will act as a drag
in the developed world. Regrettably, this will likely lead to increase
geopolitical tensions (much as we saw in the Arab spring) as times of economic
contraction usually result in increased conflict both in terms of trade (the US
and China) and actual warfare (the Middle East).
However, the fact remains that we
will witness a Global Debt Implosion. It has already begun in Europe and will
be coming to
On that note, if you’re looking for
actionable investment strategies on how to play these themes in the markets I
suggest checking out my Private Wealth
Advisory newsletter.
Private Wealth
Advisory is my bi-weekly investment advisory published
to my private clients. In it I outline what’s going on “behind the scenes” in
the markets as well as which investments are aimed to perform best in the
future.
My research has been featured in RollingStone, The
To learn more about
Private
Wealth Advisory… and how it can help you navigate the
markets successfully…
Graham Summers
Chief Market Strategist
Filed
Under: Uncategorized
Five
Charts That Prove We’re in a Depression and That the Federal Reserve and
Washington Are Wasting Money
March 12, 2012 By gpc1981
Wall Street and mainstream economists
are abuzz with chatter that we’re seeing a recovery in the
The reality is that what’s happening
in the
See for yourself. Here’s duration of
unemployment. Official recessions are marked with gray columns. While the chart
only goes back to 1967 I want to note that we are in fact at an all-time high
with your average unemployed person needing more than 40 weeks to find work (or simply
falling off the statistics).
Here’s the labor participation rate
with recessions again market by gray columns:
Another way to look at this chart is
to say that since the Tech Crash, a smaller and smaller percentage of the
Here’s industrial production. I want
to point out that during EVERY recovery since 1919 industrial production has
quickly topped its former peak. Not
this time. We’ve spent literally trillions of US Dollars on Stimulus and
bailouts and production is well below the pre-Crisis highs.
Here’s a close up of the last 10
years.
Again, what’s happening in the
As for the jobs data… while the
headlines claim we’re adding 200K+ jobs per month the sad fact is that without adjustments we’ve lost jobs 1.8 million jobs so far in 2012.
Not only is this data point actually in the JOBS REPORTS THEMSELVES… but
it’s supported by the fact that taxes (which are closely tied to actual
incomes/ jobs) are in fact below 2005
levels.
Folks, this is a DE-pression. And those who claim we’ve turned a corner are
going by “adjusted” AKA “massaged” data. The actual data (which is provided by
the Federal Reserve and Federal Government by the way) does not support these
claims at all. In fact, if anything they prove we’ve wasted money by not permitted
the proper debt restructuring/ cleaning of house needed in the financial
system.
It all boils down to the same simple
sentence repeated by myself and others: you cannot
solve a debt problem by issuing more debt (even if it’s at better rates).
Indeed, take a look at
Just like in the
Which is why smart
investors are already preparing for a global debt implosion. And they’re doing it by carefully
constructing portfolios that will profit from it (while also profiting from
Central Bank largesse in the near-term).
If you’ve yet to take these steps, I
strongly suggest you consider a subscription to my Private Wealth Advisory
newsletter. Few people on the planet can match my ability to return a profit
during times of Crisis.
To wit , my clients MADE money in 2008 outperforming every mutual fund on the
planet as well as 99% of investment legends.
We also outperformed the market by
15% during the Euro Crisis of 2010. And since the latest round of the Euro
Crisis began in July 2011, we’ve locked in not 10, not 20, but 35 STRAIGHT WINNERS including gains of 12%, 14%, 16% and 18%,
So if you’re looking for a guide to
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I’ve been helping investors,
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navigate their personal portfolios through the markets for years.
I can do the same for you with my Private Wealth
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The minute you subscribe to Private
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and Protect Your Portfolio reports
telling you precisely which steps to take to prepare your loved ones and your
personal finances for what’s coming.
You’ll also join my private client list in receiving my bi-weekly market updates outlining what’s really
happening behind the scenes in the markets and which investments will profit in
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The time for dilly dallying is over.
To take action to protect yourself…
and insure that the coming weeks and months are a time of profit and safety,
NOT losses and pain…
Best Regards
Graham Summers
Filed
Under: Uncategorized
Mr.
Market: Get It Through Your Head, The PSI DOESN’T
Matter
March 9, 2012 By gpc1981
I don’t know how many times I have to
say this, but I’m saying it again.
Remember,
And somehow another 130€ billion is
going to get this country back to economic growth in two years’ time?
Again, this entire deal is just
stupid. And all it’s done is alert
As I wrote to clients several weeks
ago:
Meanwhile, on the other side of EU
equation, Spain and Italy must be
watching what’s happening in Greece and asking themselves whether they want to
go through this whole process of negotiating for bailouts via austerity
measures.
Both countries have already had a
small sampling of the austerity measure medicine.
Yet, even these tiny moves resulted
in protests and riots. One can only imagine what Spanish and Italian
politicians are thinking as they witness the widespread civil unrest,
country-wide strikes, and economic depression that have occurred in Greece as a
result of that country’s full commitment to the EU’s austerity measure demands.
Spain’s official Debt to GDP is only
64%, but its private sector debt is at an astounding 227% of GDP. And the
Spanish banking system is leveraged at 19 to 1 (worse than
Moreover, the country is already
experiencing an economic Crisis with an unemployment rate of 20+% and an
economy that has been contracting since mid-2011 (in fact
So… we must consider that it is highly likely the option of simply
defaulting is being discussed at the highest levels of the Spanish and Italian
government. Should either country decide that austerity measures don’t work and
it’s simply easier to opt for a default, then we are heading into a Crisis that
will make 2008 look like a joke.
Well,
Spain’s sovereign thunderclap and
the end of Merkel’s Europe
As many readers will already have
seen, Premier Mariano Rajoy has refused point blank to comply with the austerity
demands of the European Commission and the European Council (hijacked by Merkozy).
Taking what he called a “sovereign
decision”, he simply announced that he intends to ignore the EU deficit target
of 4.4pc of GDP for this year, setting his own target of 5.8pc instead (down
from 8.5pc in 2011).
In the twenty years or so that I have
been following EU affairs closely, I cannot remember such a bold and open act
of defiance by any state. Usually such matters are fudged. Countries stretch
the line, but do not actually cross it.
With condign symbolism, Mr Rajoy dropped his
bombshell in
So… if you still think the Greek PSI
matters in any way, you’re not thinking past the next 24 hours.
So… if
Hint: It will be Lehman times ten.
On that note, if you’re looking for
actionable advice on how to play this situation (and the markets in general) I
suggest checking out my Private Wealth
Advisory newsletter.
Private Wealth
Advisory is my bi-weekly investment advisory published
to my private clients. In it I outline what’s going on “behind the scenes” in
the markets as well as which investments are aimed to perform best in the
future.
My research has been featured in RollingStone, The
To learn more about
Private
Wealth Advisory… and how it can help you navigate the
markets successfully…
Graham Summers
Chief Market Strategist
Filed
Under: Uncategorized
There is No Such Thing as
Sterilized QE
March 8, 2012 By gpc1981
Over the last 24 hours, the market
has rallied on a Wall Street Journal piece
stating that the Fed is considering a new bond buying program through which it
would print money to buy bonds but then borrow the money back to make sure
inflation remains under control. This has resulted in some commentators calling
this “sterilized QE.”
The story was published by Jon Hilsenrath who is generally considered to be a mouthpiece
for the Fed itself. Because of this, the markets are taking his story to be
gospel.
I don’t buy it. There is no such
thing as “sterilized QE.” Either the Fed prints and inflation explodes or the
Fed doesn’t and the market tanks. End of story. The notion that it can somehow
inject money but then take it out to make sure there’s no inflationary impact
is ridiculous.
Besides, the Fed cannot announce more QE due to
political pressure (if they do Obama has NO CHANCE at re-election which in turn
means the White House turning on the Fed) not to mention gasoline prices, which
are already through the roof.
Do you really think the Fed would do
QE now? What for? The markets
have only fallen a few percentage points.
So… a much more likely interpretation of this is that this story is a Fed leak
to attempt to juice the market because the Fed is going to disappoint by announcing
NO QE at next week’s meeting.
Remember, just last week Bernanke
told Congress that no more QE was coming. Also remember that the Fed has been
largely using verbal and symbolic interventions to prop up the market rather
than actual money printing or new monetary policies (Operation Twist 2 only
shuffles the Fed balance sheet; it doesn’t actually inject more money into the
system).
So my view is that the Fed is about
to disappoint and is doing damage control by verbally intervening via its
favorite Wall Street Journal
reporter to juice the markets higher.
Which means… the Fed will disappoint, and we will get a market correction. This Hilsenrath story is just an attempt to prop things up
verbally without the Fed openly contradicting Bernanke’s testimony last week. All the macro and technical signs point towards something bad
coming this way. The red flags are literally everywhere. And judging by
the significance of them, we could very well be heading into a full-scale
Crisis.
On that note, if you’re looking for
actionable advice on how to play this situation (and the markets in general) I
suggest checking out my Private Wealth
Advisory newsletter.
Private Wealth
Advisory is my bi-weekly investment advisory published
to my private clients. In it I outline what’s going on “behind the scenes” in
the markets as well as which investments are aimed to perform best in the
future.
My research has been featured in RollingStone, The
To learn more about
Private
Wealth Advisory… and how it can help you navigate the
markets successfully…
Graham Summers
Chief Market Strategist
Filed
Under: Uncategorized
The
Mainstream Media Still Doesn’t Get the ECB Greek Debt Swap
March 6, 2012 By gpc1981
Graham’s
note: this is an excerpt of a client letter I sent out to subscribers of
Private Wealth Advisory
regarding the ECB’s “game changing” Greek debt swap.
To learn more about Private
Wealth Advisory and
how it can help you grow your portfolio (we returned 9% last year vs 0% for the S&P 500) CLICK HERE.
First off, the details of the swap
are as follows: the ECB simply exchanged 50€ billion worth of old Greek
sovereign bonds (which were soon to be worth much less if not be outright
worthless) for 50€ billion worth of new
Greek sovereign bonds which would not be exposed to default risk or any kind of
debt restructuring (unlike those bonds held by private Greek bond holders).
I want to mention here that the ECB
only owned about 50€ billion worth of Greek sovereign bonds to begin with. So
they exchanged roughly ALL of their exposure to
The message here is clear: all
private investor sovereign bond holdings are now subordinate to those of the
Central Banks/ the IMF.
The ECB had been toying with this
idea of subordinating private debt holders for over a year now: all
negotiations concerning a Greek debt restructuring featured private debt
holdings taking a “haircut” while the ECB, IMF, and Eurozone
countries kept their holdings at 100 cents on the Dollar.
However, this latest move by the ECB
has made this arrangement completely formal. Essentially, the ECB just told the
private bond market “what we own and what you own are two different things, and
ours are the only holdings that are risk free because we make the rules.”
Thus, the academics, who have been
governing the private economy and private capital markets for the last four
years, have finally made their control of these entities explicit. It’s simply
astounding. And the repercussions will be severe.
However, for now, the mainstream
media believes this move to be insignificant:
Feared Bond Swap Met With Shrug
(from the Wall Street
Journal)
A bond swap completed last week aimed
at protecting the European Central Bank from a restructuring of Greek
government debt was widely seen as unsettling euro-zone sovereign-bond markets.
So far, though, it hasn’t.
Last week, the ECB swapped the estimated
€45 billion to €50 billion ($59.2 billion to $65.7 billion) face value of
bonds—bought in the open market in 2010 and 2011 in a vain effort to quell
bond-market turmoil—for bonds of the same face value. The new bonds—unlike the
old—won’t be subject to any forced restructuring like those held by private
bondholders.
The above story only confirms that
that mainstream media, like the Central Banks themselves, have no concept of
the unintended consequences such policies can create: if you’ll recall most coverage
of the Fed’s QE 2 announcement only briefly mentioned
that some “critics” thought the move might result in runaway inflation. What actually happened were numerous revolutions,
riots, and a massive increase in the cost of living as inflation took food
prices to record highs.
With that in mind, it is not
surprising that the media has not caught on to the true consequences of the ECB’s move. However, the ripple effect this will have on
the private bond market is going to be seismic in nature.
The global sovereign bond market is
roughly $40 trillion in size. And the ECB just sent a message to all bond fund
managers and private financial institutions that their Euro-zone sovereign bond
holdings are not only the only holdings that are “at risk” for debt restructuring,
but that ECB can change the rules at any point it likes.
This instantly and immediately makes
Euro-zone bonds far less attractive to private investors. It was bad enough
that the idea of a 50+% haircut on a sovereign bond was on the table. The only
reason private Greek bondholders were willing to stomach this was in order to
avoid a default/ catastrophe and the total loss of capital.
However, now all private bond investors know that
not only will they be shouldering all
of the losses during any upcoming sovereign defaults/ debt restructurings but
that the ECB can change the rules any time it likes.
Indeed, the only reason the ECB was
able to get away with this without causing private bondholders to flee European
sovereign debt en masse was because it didn’t take a profit on the debt swap.
In terms of Europe’s ongoing debt
Crisis, this move is extremely damaging
to any hopes of clean debt restructuring for
So what happens once we get into the
hundreds of billions of Euros’ worth of sovereign debt that needs to be rolled
over in the coming months. The ECB, IMF, and EU have
already spent 176€ billion trying to prop up the PIIGS bond markets. What
happens now that private bondholders know that any potential restructuring of
sovereign bonds for these countries means them taking a large hit while the ECB
doesn’t suffer a cent in losses?
Again, we really need to step back
and think about what just happened: the entire Eurozone
and financial system were on the verge of collapse because of a mere 14€
billion in debt payments from minor country. This should give us pause when we
consider the fragility of the financial system.
Regarding the actual Greek deal
itself, it:
1) Fails to address
2) Slams
3) Is anything but
guaranteed (
We’re fast approaching the end of the
line here. It’s clear that the EU is out of ideas and is fast approaching the
dreaded messy default they’ve been putting off for two years now.
Indeed,
Which means… sooner
or later,
This is not a situation that gives
one much confidence that
Indeed, I recently told subscribers
of my Private Wealth
Advisory of a “smoking gun” that proves
So if you’re looking for actionable
advice on how to play this situation (and the markets in general) I suggest
checking out my Private Wealth
Advisory newsletter.
Private Wealth
Advisory is my bi-weekly investment advisory published
to my private clients. In it I outline what’s going on “behind the scenes” in
the markets as well as which investments are aimed to perform best in the
future.
My research has been featured in RollingStone, The
To learn more about
Private
Wealth Advisory… and how it can help you navigate the
markets successfully…
Graham Summers
Chief Market Strategist