U.S. Debt vs. Gold Price

I haven't posted a debt vs. gold chart in a long time and thought I'd dust off the data. A few observations:

- Gold is cheaper now (compared to US debt) than it was when Nixon decoupled the dollar from gold in 1971
- It is still slightly above the exponential trend, which appears to flatten around 0.5
- The 2011 bubble was nothing compared to 1980. Wowza!
- I haven't bought gold in a while, nor have I sold it
- still holding enough to catch the last plane to Guangzhou if the whole US goes Ferguson

For he's a jolly good fallow

source: St. Louis Fed

I updated my graph of M0 and M1 money stock to use hot colors (red and orange) since they are hot, hot, hot. The velocity of M1 and M2 use cool colors (blue and green) because they are cool and getting colder. We have lots of money and money potential, but no one wants to move it around. To bankers everywhere, I offer congratulations by singing "For he's a jolly good fallow".

What if we priced truth in gold?

The FRED (Federal Reserve Economic Data) blog had a post this morning titled "What if we priced food in gold?".

There are several problems with the premise and conclusion, but what interests me more is what signal the Fed is trying to send with this post. Why does the Fed feel compelled to make a point about gold price fluctuations when gold has not been used as currency in the US for 81 years? Has the Fed been flooded with emails asking why we can't use gold to buy groceries? It seems out of the blue.

Let's look at the retail price of bread in New York, NY in dollars using FRED's data. I used all of the available data which runs from 1913 to 1943.

There were some big monthly swings in price. You must account for the supply and demand of bread along with the supply and demand of dollars with the active continuous intervention in the market in both the supply and price of dollars (something the Fed lists as a plus to price stability). For even more instability, let's check out the median price of a new home in US dollars from 1963 to present. This one looks like Mr. Toads Wild Ride!

Donating cash to charities is for fools

$4.4 trillion that could have gone to charity

For individuals, cash is a scarce commodity. I have to earn it by working, and only get to keep what is left over after taxes are taken out from the federal government, state government, and local government. For central banks, cash is an infinite resource that can be created and distributed at the will of a small group of people. The Federal Reserve balance currently stands at well over 4 trillion dollars. Four trillion that was created without work, by simply deciding to create it and spend it on various assets. Theoretically, there are laws that specify where that created money can be spent, but those laws have been bent and broken since 2008 to support failed hedge funds, failed insurance companies, failed banks, failed brokerages, failed mortgages, and more. Really, there are no apparent limits.

I am all for charities, and I am willing to donate material goods and time to certain causes, but it makes no sense to donate something that is infinite, but made artificially scarce for me. Looking at the balance sheets of central banks around the world, you get a sense of what is important. For the Bank of Israel, it's Apple stock. For the Bank of Japan, it's Japanese treasury bonds and stock ETFs. For the Bank of England, it's corporate bonds, and for the Federal Reserve, it's mortgages and treasury bonds. They could just as easily have credited the bank accounts of charities.

Future solicitations I get for cash donations from a charity I will refer to the Federal Reserve for a portion of their divine trillions of cash from the void.

Twitter Fritter v.4

I am a little late posting Twitter's second quarter results. For the second quarter, Twitter racked up a GAAP loss of $145 million, even as their revenue increased to $312 million. They still haven't figured out how make a dime of profit. From reading their financial results on the twitter.com web site, they have figured out how ignore certain expenses in their non-official financial reports:

Non-GAAP Financial Measures
To supplement Twitter's financial information presented in accordance with generally accepted accounting principles in the United States, or GAAP, Twitter considers certain financial measures that are not prepared in accordance with GAAP, including adjusted EBITDA, non-GAAP net income (loss), adjusted EBITDA margin and non-GAAP EPS. Twitter defines adjusted EBITDA as net loss adjusted to exclude stock-based compensation expense, depreciation and amortization expense, interest and other expenses and provision (benefit) for income taxes; and Twitter defines non-GAAP net income (loss) as net loss adjusted to exclude stock-based compensation expense, amortization of acquired intangible assets and the income tax effects related to acquisitions.

In other words, my cash flow looks great if you ignore my mortgage and the 3 vacations I took last month. And yet the stock is soaring. Twitter has convinced investors it can print money indefinitely, just the US government, and as long as investors buy their stock, they can.

Interest rates trapped, "It" is winning

The above chart shows 10-year treasury bond yields for the US, Japan, and Germany through the end of 2013 (the last values FRED has for Germany). The downward trend continued through 2014 and this morning, the German 10-year bond yield dropped under 1%.

What seems clear is that massive government debts lead to falling and flatlining interest rates. QE doesn't help because it suppresses rates through central bank purchases. Ending QE doesn't help because then the underlying macro weakness manifests a pent up deflationary wave. Current policies of round robin central bank QE are not working to ignite inflation and only add to the massive debt burdens. As Illusion of Prosperity has been saying for a long time, it is only getting harder to make money from money. Dr. Lacy Hunt from Hoisington Management cited numerous academic studies showing the impact of high levels of debt on growth. The most reliable and unbiased sources I can find don't see sustained rising rates or growth in the foreseeable future.

It is possible that some new policy might break this cycle. A true central bank helicopter money drop should theoretically create a broad increase in consumption in real goods and services and not just financial products. A fiscal money drop similar to what George W. Bush tried in 2008 should have the same kind of effect but with the additional negative effect of increased debt for funding. There are political and legal issues with either of these policies that may prevent them from even being tried.

So far, Bernanke's famous paper describing how he would prevent "it" from happening here has not worked. At best, "it" has been temporarily delayed, but "it" is still out there and "it" is winning.

IDEA effective unemployment rate

source: http://www.ideaeconomics.org/the-idea-effective-unemployment-rate
The Institute for Dynamic Economic Analysis (IDEA), lead by economist Steve Keen, produces an unemployment rate measure based on the pre-crisis stable participation rate of 66.2%. It then adjusts the published BLS numbers for U-3 and U-6. Using this methodology, the current U-3 rate is just under 10%. See the full explanation on their web site.

While the participation rate will change over time, and the demographics of aging baby boomers does put downward pressure on the participation rate, I don't believe demographics or other explanations put forward fully explain the sudden crash in participation rate. A more reasonable explanation is that people are retiring earlier, applying for disability more, and staying in school longer or going back to school because the job market has forced them. I personally know people in each of those situations, and also people that have taken part time work because they could not find full time work.

FRED blog recklessly wrong on education employment

The Federal Reserve Bank of St. Louis collects and publishes a lot of useful data and tools to analyze the data. They recently started a blog highlighting interesting pieces of economic data and trends. This week, they talk about education and health care employment and present a nonsensical conclusion with absolutely no evidence. Head. Desk. Whack. Whack. Whack.

There’s little doubt that the prices of education and health care have risen considerably over the past decades. One reason for this is that more and more people work in these fields.

With no other evidence, simple supply and demand suggests that more available labor would drive costs down as more people compete for the jobs. The growth in the number of jobs means something is driving employment up. For health care, it is clearly the aging of the baby boomers, who require more care. For education, I think it is the massive, unprecedented increase in student loans available. That easy credit increased demand, just like easy mortgage credit increased housing demand and drove prices to an insane bubble. Back to health care, an argument can also be made for monopoly pricing practices in both hospitals and doctors, plus the massive federal subsidies of Medicare and Medicaid. Presenting the data is a FRED strong suit, making sense of it sometimes isn't.

Morgan Stanley sees all and controls the future

A couple of weeks after having their prediction broken, Morgan Stanley's crystal ball proves all knowing and all seeing. Gold was crushed from the 1300 level to the 1250s in less than two days. I'm starting to get used to the ideas of MMT and the end of all markets (except for labor).

Morgan Stanley prediction fails within 5 days

From this article titled Morgan Stanley: gold price won't see $1,300 again:

The gold price on Tuesday continued to hover below the $1,300 an ounce level, down more than $80 an ounce from 2014 highs reached mid-March. US investment bank Morgan Stanley added to the negative sentiment, forecasting the gold price to average $1,250 this quarter, decline to an average $1,168 in the second half of 2014 and weaken further to $1,138 next year.

And this morning from Marketwatch.com...

There are a dozen failed market predictions like this every week, not all about gold or commodities, from the highly compensated investment banks. The joke is on the thousands of low IQ clients paying for the advice.

Twitter Fritter v.3

sources: http://twitter.com, http://finance.yahoo.com

Twitter is on fire! Revenue for this quarter was $250 million and the net loss was $132 million. Compared the same quarter in 2013, they doubled their revenue and their expenses went up 5x! Woo Hoo!

The CEO was naturally crowing:

In a statement, Twitter Chief Executive Dick Costolo said, “We had a very strong first quarter. Revenue growth accelerated on a year over year basis fueled by increased engagement and user growth.”

Her left out the part about expense growth accelerating faster, but maybe he doesn't know what fueled the expense growth.

The stock price dropped about 10% after earnings were released, which is plain silly. I mean, if they can keep up this performance, the net loss for the year will be a mere half a billion dollars.

Again, I am tempted to extrapolate, but I want to give Twitter more chances to prove me wrong. Will they turn a quarterly profit for the first time in their history? Will their expenses grow less than their revenue next quarter? Tune in next time to the same bat channel to find out.

see also: Twitter Fritter v.1

Mean gap and Median gap

Almost 5 years after the end of the recession, with much fanfare about total employment reaching 2007 levels, mean and median duration of unemployment levels are still worse than the highest levels seen in the 1980s double dip recessions. Both measures seem to have stalled with little or no improvement in the last year or so. The mean gap, in particular, looks like the cruel gap.

Nasdaq a victim of gravity (Schoolhouse Rock)

The meltdown in biotechs and high tech firms with P/Es over 200 has been picking up momentum in the last couple of weeks. This is sort of how the 2000 stock meltdown started. This Schoolhouse Rock video captures the mood.

Peak SNAP?

The total number of people on SNAP has started to decline and the percentage of the US population receiving food stamp benefits appears to have peaked at 15.2% in March, 2013. Since then, it has declined to 14.7%. I don't look at data with a bullish bias, but this is a positive development. It is still very high by historical standards, but this is the first significant reversal in the SNAP program since the recession.

XIRP forecast

Using the premise that the US is copying, Xerox style, the interest rate history of Japan after their bubble busts, we can make some forecasts on when and how effective Fed efforts to raise short term interest rates might be.

After Japan's rates fell below 1% in April, 1995, they stayed near zero until May, 2006, despite a little noise in 1999. That was 11 years of ZIRP, suggesting a serious Fed effort to raise rates in November, 2019.

Japan did make an effort to raise short term rates to 0.5% in 2006, and rates got as high as 0.639% in September, 2008. After about 2.5 years of half-percent interest rates, they crashed back to zero during the global recession caused by the US bubble bust and today sit at 0.05%. Based on that timeline, when the Fed finally does make a serious effort to raise rates, they may hit a wall at 0.5% and be unable to maintain it for more than a couple of years.

This is all conjecture based on the US following the Japanese lead, unable to stop "it" from happening here.

XIRP

source: Federal Reserve Bank of St. Louis (http://research.stlouisfed.org/fred2/graph/?graph_id=163564&category_id=0)

This chart shows the US is following a Xerox Interest Rate Policy: an almost flawless copy of the interest rate policies of Japan, delayed by about 16 years. The blue line is the Japan T-bill rate and the red line is the US T-bill rate. Japan had a last gasp interest rate hike in the early 1990s, while the last gasp in the US came in 2007. Since the mid-1990s, Japan has been at zero, with the corpse twitching a couple of times before coming back to rest at zero. The US has been at zero since 2008 without even a twitch, but we might expect a small one if we are maintain XIRP. Based on the theory that Japan has led all western nations into the financial abyss, we can expect at least another 15 years with the US T-bill rate at zero.

This is not investment advice, but it might be interment advice.

Crimea River

S&P 500 stock futures are down about 1% right now. The Nikkei is down about 2.5%. Maybe central banks have absolute control over world events and have eliminated all risk forever. Or maybe they haven't.

Rate hike in 2015?

Dennis Lockhart, the president of the Atlanta Federal Reserve, said Wednesday that he still thinks the central bank will first hike short-term interest rates in the second half of 2015.

I am not convinced. Six years after the great mortgage fraud recession, we are still sitting at ZIRP. It seems more obvious in hindsight that we are following Japan's path of ZIRP forever. Why do I think that? At least four reasons...

1. The world is awash in overcapacity. Where is the demand for expansion that would require raising interest rates?
2. With 17+ trillion in debt to roll over forever, can the US government afford higher interest rates?
3. With housing still in a weak recovery and plenty of houses left over from the crash, can the housing market afford higher interest rates?
4. With official inflation below the Fed target of 2%, why would the Fed raise rates?

What might change these conditions?

1. A world war that destroys a lot of manufacturing and service capacity. I hope not!
2. A huge government surplus that is used to pay down the debt. I doubt it.
3. Razing millions of existing homes. Not likely.
4. An unexpected spike of inflation or loss of faith in US currency. With real median family incomes still declining, inflation looks like a low risk. A loss of faith in US currency, maybe, but I hope not since that will usher in many worse things than a rate hike.

That 80s Show

The employment population ratio (fuzzy unadjusted version for fun) has settled into a range last seen in the 1980s. It could even be argued that we are watching that 70s show since the range is not far from the 1970s experience. If we start watching that 60s show again, about 2 percentage points lower, it means the jobs engine is firmly in reverse. Maybe moptops will come back in style.

US Debt leaps $125.2 billion in one day

In the 24 hours between December 30, 2013 and December 31, 2013, the US debt leaped $125.2 billion. This happens from time to time as treasury sales are settled.

Not to worry, I am thinking that starting this year, the US will not have to spend any of the roughly $2.3 trillion it gets in tax revenue and other sources, and pay down the debt to around $15 trillion, if they suspend all interest payments. Then, after doing that for 7 more years, spending nothing and skipping all interest payments, the debt will be gone by 2022!

On the other hand, I might be too optimistic on how efficiently the government will be run.