On The Road To The Endgame: The Farcical Cliff (Cont)

What is more troubling is the genuine lack of seriousness tied to the fiscal cliff debate. In many ways, it seems that most in Washington simply do not at all understand the seriousness of the problems we are facing today. First, the fact that the policy debate has taken on such a predictable antagonist tone filled with all of the endlessly retreaded rhetoric from both sides is annoying enough. The American public on the most part is tired and wary. Many have been out of work for several years and economic prospects remain dim. They wanted to see solutions to their problems years ago, and they would badly like to see two sides working together to get something done to finally start fixing the problem today. Predictably mindless bickering is the last thing that people want to hear right now.

But more important than the tone is the substance of the debate. We have just gone through a period over the last five years where the national debt has risen by $7 trillion with annual budget deficits in excess of $1 trillion each year. Yet the latest proposal in the debate is to raise taxes on the top 2% of income earners today and postpones the debate on spending cuts until next year. Put simply, this is woefully inadequate and teeters on the brink of irresponsible. The government has just spent $7 trillion more than its earned over the last five years. A good portion of this is obviously new spending that did not exist before. As a result, there must be some place where meaningful cuts can be made right off the top today. And no, $1.5 trillion in total cuts spread out over some long-term time horizon is not even close to being enough. In fact, one could argue it should be five times as much. Of course, if the other side wants spending cuts to go along with increased revenue, the time is now to get out with a detailed list to say exactly what should be cut and begin arguing for it. Otherwise, the cuts simply won't happen.

A serious fiscal policy solution is essential in getting the country back on track to a more prosperous future that is not drowning under a rising sea of debt. This includes serious tax reform that increases revenue, broadens the tax base, simplifies the code and closes loopholes. It also includes meaningful spending cuts that if done properly are actually growth enhancing by increasing the operational efficiency of government so that remaining spending is focused toward initiatives that provide the most benefit to the economy. Yes, less can be more if actually carried out correctly.

An additional point in regards to spending cuts - they simply cannot, CANNOT, be of the "$4 trillion over the next 10 years" variety where most of the spending cuts are back loaded when whomever else is running the country at that point in the distant future can simply vote to cancel these cuts down the road. Instead, an approach of gradual revenue increases that are conditional on meeting spending cut targets is an absolute must. And these spending cuts must include entitlement reform. Otherwise, policy makers will continue to repeatedly postpone making the tough decisions until they have absolutely no other choice. After all, is it much easier to say "yes" than "no" to those on which you are lavishing spending.

Some of the blame for the lack of seriousness among fiscal policy makers rests at the feet of the Federal Reserve. Dating back to the summer of 2010 prior to the launch of QE2, the Fed had the opportunity to hold the feet of fiscal policy makers to the fire. But instead of forcing the President and Congress to take on the tough decisions to deal with a rapidly deteriorating fiscal problem, the Fed keeps letting them off the hook by repeatedly implementing stimulus program after stimulus program. The launch of QE3 in September is only the latest example, and look for more juice from the Fed when it meets again in mid December. It is often said that fiscal policy makers need a sharp stock market correction to get their attention and force them to the negotiating table to agree on real solutions. But if the Fed never allows the stock market to correct, fiscal policy makers will never feel compelled until things are so dire that not even the Fed can sweep things under the rug anymore.

All of this brings us back to financial markets. We have a U.S. economy that is rotting at the core. And the global outlook is arguably worse in many parts of the world. Such conditions argue for a stock market that is at minimum in decline and more realistically in sharp correction. But thanks to the monetary pushers at the Federal Reserve, the stock market is threatening to break out to new post-crisis highs after having already rallied so strongly over the last three-plus years.


Such gross market distortions are absolutely maddening for those accustomed to sound fundamental analysis actually meaning anything. But such is the market environment under which we are operating today. We may not like what the Fed is doing. I for one strongly disagree with it. But regardless of how we feel about it philosophically, as investors we must react to how it is most likely to impact the markets.

The Keynesian Depression

Five years have passed since the beginning of the Great Recession. Growth is slow, joblessness is elevated, and the knock-on effects continue to drag down the global economy. The panic in financial markets in 2008 that caused a systemic crisis and a sharp fall in asset values still weighs on markets around the world. The primary difference between today and the 1930s, when the U.S. experienced its last systemic crisis, has been the response by policymakers. Today, I believe we are in the midst of the Keynesian Depression that my father predicted. Like the last depression, we are likely to live with the unintended consequences of the policy response for years to come.

This Time It's Different
What sets the current downturn apart from any other since the Great Depression is that, for the first time since the 1930s, we have had severe asset deflation (declining real prices) in the face of relative price stability. Periods of asset deflation occurred between the 1960s and 1990s, but nominal prices were supported by rising inflation levels. Against the backdrop of a rising price level, nominal asset prices remained stable or continued to increase as real asset prices declined. This protected asset-based lenders from severe losses resulting from declining nominal prices.

During the 2008 crisis, inflation levels were close to zero and unable to offset falling real asset values to stabilize nominal prices. This caused a debt deflation spiral to take hold as nominal prices fell. In contrast to the Great Depression, policymakers took extreme measures in 2008 to prevent a total collapse of the financial system and head off a deflationary spiral like that experienced in the 1930s. These policies included sharply increasing the money supply and engaging in an unprecedented amount of deficit spending.

In many ways the swift policy action proved highly effective. Instead of the 25 percent unemployment seen in the 1930s, joblessness reached only 10 percent. While unemployment now stands at roughly eight percent, if one uses the labor force participation rate from 2008, the level is still higher than 11 percent. Although there was a 3.5 percent decline in the price level between July and December of 2008, policymakers immediately tackled and reversed the deflationary spiral. This compares with the Great Depression, when between 1929 and 1933 the general price level declined by 25 percent.

Investment Implications
The long-term downside of mounting inflationary pressure will ultimately accrue to bondholders and income-oriented investors. The case can be made that we are marching headlong into a generational bear-market for bonds. During the next decade, holders of Treasury and agency securities will likely realize negative real returns. Despite this, these assets continue to trade at extremely rich valuations. Exactly when the market will awaken to this anomaly in securities pricing remains to be determined.

Gold, as I discussed in my October 2012 Market Perspectives, "Return to Bretton Woods," has significant upside and should be included in any portfolio designed to preserve or grow wealth over the long-term. Depending on the scale of the current round of quantitative easing and the decline in confidence in fiat currencies, the price of an ounce of gold could easily exceed $2,500 within a relatively short time frame and could ultimately trade much higher.

The World is Waiting
The Great Depression brought about the Keynesian Revolution, complete with new analytical tools and economic programs that have been relied upon for decades. The efficacy of these tools and programs has slowly been eroded over the years as the accumulation of policy actions has reduced the flexibility to deal with crises as we reach budget constraints and stretch the Fed's balance sheet beyond anything previously imagined. Nations have exceeded their ability to finance themselves without relying on their central banks as lenders of last resort and increasingly large doses of monetary policy are required just to keep the economy expanding at a subpar pace. Some have referred to this as reaching the Keynesian endpoint.

Keynes would barely recognize where we now find ourselves. In this ultra loose policy environment we are limited by our Keynesian toolkit. Today, the world is waiting for someone to come forward and explain how we are going to get out of our current circumstances without suffering the unintended consequences created by so-called Keynesian policies.

Much like that crisis needed Lincoln, the current crisis needs someone who can identify new tools to resolve the present economic crisis. Until then we are condemned to a path which leads to further currency debasement and the erosion of purchasing power, with the result being a massive transfer of wealth from creditor to debtor. Without a new economic paradigm, the deleterious consequences of the current misguided policies are a foregone conclusion.

Link -
http://seekingalpha.com/article/1044891-the-keynesian-depression?source=email_ma...
===============================
As I have said previously, for All actions & Inactions, there are Consequences.

And, sometimes, particularly when we leave taking actions too late, there are no happy endings!

Australia 2012, it's looking bad!
.............................................

Wayne Swan must have choked on his cornflakes...

Last night stories on Australia's economic slowdown popped up in The Wall Street Journal, The Business Times and on the BBC.

But the mainstream press is still behind the curve.

Australia's economy isn't 'losing steam', as the Financial Times put it last night. It's imploding.

My name is Greg Canavan. Today I invite you to have an advance screening of my new online documentary, The Fuse Is Lit. It's the culmination of seven months' research into the TRUE state of the Australian economy.

The core message is this: I am now convinced that Australia today is a mirror image of America in 2007...right before the subprime bust that triggered a Global Financial Crisis.

Just like then, a fuse is burning. And just like then, it will lead to a series of shocking detonations. These detonations will take out three key parts of the Australian economy in 2013.

But just like America in 2007, the politicians, economists and journalists aren't just failing to warn you.

They're leading you straight to the slaughterhouse.

Be warned: The Fuse Is Lit will shock you. It might even anger you. But please, if you do one last thing in relation to your wealth and finances this year, watch it now.

You'll discover deep deception: how people you are supposed to trust are deliberately misinforming you about the true state of Australia's finances.

There is a reason they're doing this. It's the same reason a giant smokescreen was created to fool investors even as Wall Street imploded in 2007.

Be warned: The Fuse Is Lit will shock you. It might even anger you. But please, if you do one last thing in relation to your wealth and finances this year, watch it now.


http://pro.portphillippublishing.com.au/n12smsfuse/ESMSNC04/

three key parts

http://pro.portphillippublishing.com.au/n12smsfuse/ESMSNC04/

article from moneymorning.com.au

will post the link later today......if I remember 

As is often the case, there are areas where I agree with what is said in the video & some where I don't, BUT it is also an obvious "Commercial" for business, so be careful.


I realise that, but they have a fairly solid record of being right over the years. Not 100% of the time, but then who is? the financial arena is very helter skelter these days. They were one of the few who saw the GFC coming prior to the collapse.

I don't trade on stocks any more so I don't even read their market spiel.

The growth of the Treasury bond market coincided with baby-boomers, medicare and social security entitlement.

Its death will be triggered by falling demand for Treasuries as the emerging economies plump for consumption-driven growth.

The funding requirements of western governments will squeeze private sector activity. Napier believes that the predicted rollover in the US Treasury market is already under way:
(see chart in article)

And his next chart is a killer: it shows the growth of China’s foreign reserves:
(see chart in article)
Growth, or lack thereof. Emerging market reserve growth created money and inflation. So when that growth goes ex-growth..

More conclusions ?
US Treasuries could repeat their 83% price decline of 1946-1981.

The supply / demand imbalance for US Treasuries can be met with higher rates – or higher savings and deflation. [Could we get both ?]

Deflation is bad for equities but also for government bonds in the euro zone.

Deflation has been good for government bonds in areas which print their own money “but this will end.”

Cash provides optionality “and foreign cash real optionality”.

Sobering stuff.

Provided one can survive them.. We think our clients’ financial fortunes over the months and years ahead will depend on how they survive the bear markets to come. We use the term in the plural because it strikes us as almost a certainty that a grotesque bear market in western government debt is approaching. (If we knew the precise timing we’d already be on the beach.)
And if western government debt craters (choose your poison: US; UK; euro zone; Japan – they all look appalling), stock markets will not be far behind. It is inconceivable to us that equity markets could simply ignore a savage sell-off in the, ahem, risk free markets of the world.

But that might also be getting ahead of ourselves. If Russell Napier is right, and we are on the cusp of a deflationary shock, western government bond markets might have one last hurrah.

His admittedly crude asset allocation split of cash, gold and equities doesn’t seem like a bad selection. We have somewhat refined it into four asset pots:
Cash and objectively creditworthy bonds

Defensive and sensibly valued equities

Uncorrelated funds

Real assets (with a hefty commitment to gold and silver, the monetary metals).

. If you can propose a better asset split that can offer at least some mitigation of these various threats to our financial well-being, we’re all ears.

Link -
http://www.pfpg.co.uk/cms/document/Sobering_stuff.pdf
==============================================
Well, I don't know about sobering?

But, IF I was going to AA, I MAY be tempted to start Drinking, AGAIN?

I don't know how you do it Perceptions Now?
But you're ******* good.

It_is_the_Darkness wrote on Dec 9^th, 2012 at 9:56pm:


Perhaps it was spending to much time in the financial sector, mainly insurance & a little banking, providing advice on risk management, prior to my retirement?

OR, it may just be Retirement providing too much spare time, which enables "a little more research time"?

OR, it could just be that I'm a pedantic cretin, who doesn't like to be wrong, TOO many times?

Cheers!