CFNAI Yellow Alert

The Chicago Fed National Activity Index is a composite index built from 85 monthly indicators. A reading of zero is historical trend growth, a reading above zero is faster and below zero is slower growth.

source: http://www.chicagofed.org/webpages/research/data/cfnai/current_data.cfm

The Chicago Fed background document states that a reading above +0.7 indicates inflation danger and below -0.7 indicates recession danger. In a 2012 Chicago Fed Letter, Scott Brave and Max Lichtenstein found that:

the crossing of a -0.35 threshold by the CFNAI Difusion Index signaled an increased likelihood of the beginning (from above) and end of a recession (from below). This threshold was determined using the Berge and Jord a ROC method. Additionally, Brave and Lichtenstein found that, on average, the CFNAI Difusion Index signals the beginning and end of recessions one month earlier than the CFNAI-MA3.

The reading for August was -0.87 and the three month moving average was -0.47. These readings are flashing a recession warning.

The trends are equally discouraging. The August index was the 6th monthly negative reading in a row, and the 4th negative three month moving average reading in a row. The last time that happened (from a general positive trend) was October 2007, two months before the last official recession started.

368,283,619 Years

368,283,619 years is the amount of time it would take for a person to pay off the Federal debt ($16,012,971,761,294.54) if that person was earning the average hourly wage in the U.S. of $21.74/hour (source: http://www.bls.gov/oes/current/oes_nat.htm#00-0000) and worked 2,000 hours per year (50 weeks, 40 hours a week).

If that number of years doesn't sound staggering, it is roughly one twelfth the age of the Earth.

What if we put the entire work force of the US (128,278,550 people) to work on the debt?

Let's also say that everyone stopped eating, stopped paying for their houses and cars, stopped getting sick, stopped paying student loans, stopped paying for insurance, gasoline, everything. They dedicated 100% of their income to paying off the debt.

Let's also say that the debt stops growing and the US government stops all spending including running the military, and declares that all treasury bonds, notes, and bills will from this day forward pay 0% interest.

In that case, the debt could be paid off in only 2.87 years.

All we have to do is roll up our sleeves, stop eating, and shut down the federal government for 3 years and we can clear up this little debt problem.

Gold Price vs Production, Actual and Conjecture

The first chart shows actual gold prices and production from 1994 through 2011.

sources: USGS http://minerals.usgs.gov/minerals/pubs/commodity/gold/mcs-2012-gold.pdf, and Kitco

It is interesting to me that there was not a big increase in production relative to the increasing price until 2011. Part of that delay may have been the time required to ramp up production in mines. 2012 may not set a new production record because of widespread strikes by miners in South Africa.

Another interesting point in the USGS data is the shrinking estimated world reserves. Using the mean production rate of 2,439 tons per year since 1994, the world has less than 19 years of gold production left before it runs out. The next shows three different scenarios for how production might occur in the future. They are all pure conjecture and I have no reason to believe one is any more likely than another.

If mean production rate continues and no new reserves are found, everything continues smoothly until about 2032, then production goes to zero regardless of price. Production could also ramp higher as price increases, then reserves are exhausted faster, or production could decline as energy prices rise in a falling exponential curve. Of course, something completely different may happen.

The black line shows an exponential price curve based on price data since 1994. I added it just to flesh out the thought experiment, but I have no feeling or conviction that price will behave that way.

note: long gold, but not making any recommendations to buy, sell, or hold.

QE4EVA

There were pundits predicting outcomes on both sides prior to the Fed meeting last week. The mainstream expected a substantial QE3, and contrarians expected nothing more than extension of ZIRP. The Fed exceeded the expectations of both combined by announcing a never ending $40 billion QE purchase of mortgage backed securities plus ZIRP through mid-2015. But the Fed went even farther with plans to increase QE if the labor market did not respond fast enough.

I honestly leaned toward the contrarians with the US presidential election so close, and was shocked at the size, scope, and infinite pledge of fresh money printing. The Fed promised to continue to beat savers over the head until morale (labor market) improves. I am trying to remember a time in history when endless money printing solved an economic problem, but I can't. Every case I am aware of has ended in disaster.

Inflation is never uniformly distributed among products, services, or people. This will create some big winners and losers, but since inflationary pain is usually regressive, mostly lower income losers.

Propublica: Bailout Net to Date: $-197,600,000,000

While both parties crow about their achievements and their grand plans, I thought it might be a good time to check the scoreboard on how the massive financial system bailout was working.

According to the detailed tracking by Propublica, the US government has lost $197,600,000,000 so far, more than three years into the recovery.

While there are some profit points, AIG still owes the government over $23 billion for its existence. Bank of America Countrywide is $663 million in the hole. Blackrock investment fund still owes over $1.2 billion. Chrysler owes over $1.3 billion. Fannie Mae is down $90 billion (and getting worse). General Motors owes $27 billion and GMAC (renamed Ally) owes $10.7 billion. Popular Bank owes $773 million. Wellington investment fund $2.9 billion.

These are staggering losses for the taxpayer. The argument from the Fed is that it would have been much worse without intervention, and for a short time, no doubt it would have been. Some viable businesses were saved, but so were money losing, inefficient businesses. The bailout cemented the broken state of the economy in place.

The main incentive in business now is to become so big and financially interconnected that the Fed will print trillions and hand it to you to keep your failed business alive no matter what. Then, you can sit back and collect the bailouts into retirement. Winning!

Unlimited Power!

The European Central Bank agreed on Thursday to launch a new and potentially unlimited bond-buying program to lower struggling euro zone countries' borrowing costs and draw a line under the debt crisis.

Warning: you are entering the sarcasm zone.

Unlimited bond buying means unlimited power!

Now, what Draghi says and what he does may end up being different. The ECB announcement also said that the buying would be sterilized, meaning reserves are reduced or assets are sold to keep to the total money supply the same. The announcement also said the buying would come with conditions. Of course, Greece hasn't lived up to those conditions and money keeps flowing, so the conditions may be mere suggestions.

In response to the ECB bazooka, the S&P rose over 2% to multi-year highs. A lot of paper wealth was created today based on the ECB statement. What I wonder is why no financial geniuses in the past ever came up with the idea of monetizing bad debts of a government to make everyone wealthy. I bet the citizens of Spain, Italy, and Greece are feeling really wealthy now that all of their problems have been solved.