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What a Wild World!

The following is part of Pivotal Events that was published for our subscribers January 3, 2013.


Signs of the Times

"Class War in the New Gilded Age"

"Americans of all stripes are increasingly aware that they have been getting the shaft, while big banks, corporations and money have been pocketing the gold. Large majorities believe their legislatures are essentially corrupt - more responsive to their donors than their voters."

~ Reuters, December 21

For a major news service this is rather libertarian. One can't help but wonder about the corruption of liberalism. Prior to the mid-1960s it meant individual freedom and limited government. Then "liberals" began to change the meaning away from liberty. And in reviewing the "fiscal cliff" story this week, the liberal mob has become fiscal libertines.

"America's Boomtown"

"While the Economy Sputters, Washington Flourishes"

"By any way you calculate it, the Feds will spend more than $3.5 trillion this year, and a lot of money will be spilled in the District of Columbia."

~ Wall Street Journal, December 27

"Cuba cuts state payroll, private sector jobs grow 23 percent in 2012." - Reuters, December 28

"French Court Says 75% tax rate on rich is unconstitutional - Fails to Guarantee Taxpayer Equality"

~ Bloomberg, December 29

"I think myself that we have more machinery of government than is necessary, too many parasites living on the labor of the industrious."

~ Thomas Jefferson, Letter to William Ludlow (6 September 1824)



Perspective

What a wild world!

Communist Cuba reduces the number of state employees by 5.7 percent and the number of private sector jobs increases by 23 percent. The story did not mention if regulators were laid off, but Cuba could be on to something. Would a 12 percent drop in parasites prompt a 43 percent increase in private-sector employment?

In the meantime, Washington D.C. continues to boom at the expense of a private workforce suffering not just high taxation, but chronically high unemployment. The worst since the 1930s.

Also in the meantime, consumer confidence numbers remain relatively high and the administration is enjoying a 57% approval rating.

As we like to note: "So long as the price of the 'penny dreadful' is going up the public will believe the most absurd story." This applies to credit expansions and central banks as well. Until the end of the year a number of the junior golds ran out of "belief" as confidence in the Fed manipulations improved.

Out of the general dismay in early November, stocks, corporate bonds and commodities were expected to improve into January. And then there has been the case for small caps outperforming from mid-December until this week, which has been a winner. Ross is updating the trade.

The "deal" represents a huge advance for authoritarians of all stripes and the equivalent setback to fiduciary responsibility. But it has galvanized the "risk on" trade. On the longer-term this will add to financial instability. On the near-term, normally on approaching a timing target we would start watching for signs of being overdone. Let's keep in mind that this move started in mid-November.

Using the 10-year Spanish bond, Euroland yields have been declining from a panicked 7.5% in July to 5.03% this week. A few weeks ago there was a report that Spanish regional governments had racked up EU13 billion in unpaid supplier bills. That was for the first nine months of the year and it is difficult to see how lower rates can do much for insolvent countries.

Not only is Spain stiffing suppliers now it, with other governments, is stiffing at least two generations of future taxpayers.

The above quote about "parasites" by Jefferson was written in 1824. The most outstanding bubble since 1720 blew out in 1825 and during that preceding era of reckless finance Europe suffered the French Revolution and Napoleon's dictatorship. Political change during that post-bubble contraction gradually reduced that experiment in unlimited government.

Napoleon scorned England as a "nation of shopkeepers". Thankfully, that nation of shopkeepers was instrumental in ending those brutal experiments in authoritarian governments in France and in Spain. Ironically, in 1989 East Germans helped end that experiment in totalitarian government by insisting on going "cross-border" shopping.

Border guards lost the will to prohibit shoppers from shopping and laid down their AK- 47s.

Will American shopkeepers forcefully react to Obama and his "Rules for Radicals" government? An admiring reviewer describes Alinsky's book: "The Prince was written by Machiavelli for the Haves to hold power. Rules for Radicals is written for Have- Nots on how to take it away." The concept is to destroy the private economy by overwhelming the welfare system. Widening understanding of Obama's disruptive intentions seems inevitable.

In a traditional liberal democracy the power is in the hands of the consumer-taxpayer. Not in the hands of Chicago-style community organizers.


Currencies

A couple of weeks ago, the USD again bounced off support at the 79 level. Considering the extreme dysfunction of the US federal government this is remarkable. Perhaps some of the support is due to the old problem of servicing debt into the financial center - this time New York.

The popular view is that White House bullying on the fiscal thing has prompted the same-old "risk on" play. Our view is that it is an acute accelerant to financial disaster and we are uncertain how long it will take before it is widely realized.

Whatever - a low for the USD has been expected in January and it is uncertain if the low of a couple weeks ago was it.

The Canadian unit was expected to rally into January and this week's jump seems a step towards a good high. The low was 99.43 in mid-November and at 101.7 now there is overhead resistance at the 102 level.


Credit Markets

Central bank compulsions remind of St. Augustine's prayer "Oh, Master, please make me chaste and celibate - but not yet!".

As we have been noting a couple of US central bankers have been calling for an end to radical policies, but it is not happening. Recklessness will continue; the mission is sooo important. For some it is the intense ambition to prove that interventionist theories have been and still are correct. Others are merely trying to save the world.

Along with the good times in stocks and some commodities, the long bond has declined from 151.66 in early November to 145.25 earlier today. In the past six months this is the fifth decline to this level.

Will it hold one more time?

Perhaps not, the daily RSI is not oversold and as the following chart shows - a twentymonth uptrend line has been violated and not regained. If 145 is taken out, the next support is at the 135 level.

After a significant hit Munis (MUB) have rebounded to serious overhead resistance.

The Spanish yield has decline to 5.02%. Going back to July 2011 there is substantial support. In so many words, at low yields central bankers and their fellow traveling fund managers have been buying high.

It seems that Euro-bond yields could rise.


The Future of the Bond?

US Treasury Bond - Daily Chart - The Future of the Bond?

 


Link to January 5, 2013 'Bob and Phil Show' on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2013/01/this-week-in-money-65

 

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