The Chart That Keeps Ben Bernanke Up At Night

What changed in the last 30 days? Did the world just wake up to the idea that the only way out of this quagmire is a twisted currency war that appears to have re-ignited thanks to Abe’s efforts? Something appears to have snapped in the American psyche as the last 30 days have seen the largest physical gold sales on record. Between the search volume for ‘bulk ammo’ and this, we fear something is afoot and while Congress fiddles as our economy burns, Bernanke going ‘back to work’ is perhaps what the physical ‘horders’ are thinking… or maybe they understand, as we noted here, that just as Kyle Bass has confirmed previously, Paper Gold is just like allocated, unambiguously owned physical bullion… until it’s not.


(Source: US Mint)

(h/t Alex Gloy of Lighthouse Investment Management)

The Counter-revolution Spreads: First Egypt, Now Tunisia

Several months after the world rejoiced following the 2011 Arab Spring took the world by storm, and replaced one dictator in the MENA region with what appears to be another now that the US-endorsed “democratically elected” Mursi is better known as Morsillini, having granted himself “temporary” dictatorial powers, we warned that it was only a matter of time before the Arab Spring turns into an Arab Thermodorian Reaction, aka an Arab Counterrevolution. And this time the world is devoid of such romantic concepts as a season of the year to tie this logical reaction to, as it now appears certain that this is going to be a long and drawn out process, lasting not only longer than just one season, but stretching years. Sure enough, after Egypt succumbed to the inevitable power vacuum response, it is now the turn of the place that started it all: Tunisia, where the local national guard is firing against its own people once more.

Reuters reports that “Tunisian security forces fired tear gas and live rounds into the air on Saturday to try to disperse thousands of protesters in a town that has seen days of clashes over economic hardship. National guard forces belonging to the Interior Ministry fired tear gas and rounds from inside armoured personnel carriers in the town of Siliana, southwest of Tunis….At least 252 people have been wounded by birdshot, according to state news agency TAP. Medical sources say 17 have been blinded.” Sadly, when violence leads to hope and the hope fades, it is time to revert back to the violence.

From Reuters:

“Get out, get out!”, “With our blood and soul we sacrifice ourselves for you, Siliana” and “Siliana will be the graveyard of the Ennahda party” the protesters, who numbered about 3,000, chanted while throwing stones at security forces.


Police chased protesters down streets.


The Islamist Ennahda party that won Tunisia’s first post-Arab Spring election last year is struggling to revive the economy of the north African state due to lower trade with the crisis-hit euro zone.


Disputes also continue between secularists and hardline Salafi Islamists over the future direction of the country.


Tunisian President Moncef Marzouki asked the Islamist Prime Minister Hamadi Jebali in an address on state television on Friday to appoint a new cabinet in response to the protests.


On Saturday, Jebali seemed poised to remove the controversial Siliana governor to ease tensions. A statement on state news agency TAP said a deputy had been put in charge of the governorate’s affairs pending a “final decision”.


The protests are the fiercest since Salafis attacked the U.S. embassy in Tunis in September over an anti-Islam film made in California. Four people were killed in that violence.

And in a complete shock to everyone who believes in the now defunct concept of democracy, it appears that one dictator is no beter than another, in a world in which cheap plantiful credit is no longer available for anyone and everyone to emulate that much vaunted American lifestyle where the average credit card debt is tens of thousands per capita:

Navi Pillay, U.N. High Commissioner for Human Rights, said on Friday authorities must stop using firearms against demonstrators, in some of her harshest criticisms of the government elected after veteran ruler Zine al-Abidine Ben Ali fled was overthrown in January last year.


The tactics used to put down the protests have stirred anger among secular politicians in Tunisia, who say the new government is adopting the kind of harsh policing employed by Ben Ali.

So much for the Tunisian revolution. One can only hope that the CIA is more adept at placing a replacement puppet dictators who does  a better job than the previous guy.

As for Egypt

Egyptian President Mohamed Mursi called a Dec. 15 referendum on a draft constitution and urged a national dialogue on the “concerns of the nation” as the country nears the end of the transition from Hosni Mubarak’s rule.


Mursi was speaking after receiving the final draft of the constitution from the Islamist-dominated constituent assembly.


“I am issuing my decision to call people for a referendum on the draft constitution on Saturday, Dec. 15,” Mursi said in an address to the constituent assembly that approved its final draft on Friday before handing it to Mursi.


Mursi hopes approval of a full constitution approved in a popular referendum will end a crisis over his assumption of sweeping powers by decree.

Mursi may want to learn a lesson or two from the Eurozone: when usurping supreme control from the people, demanding a popular validation of such a fresh dictatorial aspiration is probably not a good idea. Recall how quickly poor former Greek PM G-Pap lost his job when he threatened to ask his people directly if they wanted to be part of a grand technocratic monetarist experiment lead by unelected central planners.

Which only means that the Egypt conflict will get even more acute until one day in the next 1-2 weeks someone remembers, as in 2011, that the Suez Canal is a rather critical point of geographic interest in times when political control in Egypt is falling apart.

Robert Wiedemer: Awaiting The Aftershock

Submitted by Adam Taggart of Peak Prosperity,

Bob Wiedemer, author of the best-seller The Aftershock Investor: A Crash Course in Staying Afloat in a Sinking Economy, regards the 2007 puncturing of housing market prices and the 2008 financial market swoon as the precedents to two much larger and much more dangerous bubbles.

These more pernicious threats are the dollar bubble (“printing money”) and the government debt bubble (“borrowing money”). While both are expanding at a sickening pace, in the near term they deceptively make things seem much better than they are.

But, like all bubbles, they are unsustainable. And when these collapse, they are going to take the entire financial system, and very possibly the currency, with them (a.k.a. the “aftershock”)

Bob predicts the rupture of both these bubbles will most likely happen in the next 2-4 years and accelerate astonishingly rapidly once it begins. Part of the reason for this is that the Fed, now boxed in by its committed course of action, will print like mad to slow the process down — which ultimately will serve instead as fuel for the fire. This will be the point at which the Fed loses control of interest rates.

Wiedemer is fairly confident that the Fed is well-aware of this dire probability, but finds itself increasingly stuck to avoid it. At this point, the major financial markets (stocks, bonds, housing) are so dependent on Fed liquidity that any efforts to withdraw the punchbowl will send prices lurching downwards, threatening the weak global economy. It’s now a binary choice between damned-if-it-does and dammned-if-it-doesn’t.

As Chris summarizes, the Fed’s main strategic consists completely of “hope”. It’s backup strategy? “Panic” 

Not surprisingly, Bob and Chris discuss the wisdom of focusing on preservation of purchasing power, and positioning one’s financial assets safely before the aftershock arrives. For many, that will include working with a financial adviser who understands the nature of the risks in play and can help you allocate your assets accordingly (a reminder that we know a few, if you’re looking).

The main thesis in Aftershock is that these bubbles – this dollar bubble and this government debt bubble – will burst. It is not as if it will not burst for 15 or 20 years. We say it is somewhere in two to four years. You need to be prepared for it.

The debt will always be funded as long as the Federal Reserve stands willing to buy all the bonds that the government sells. At some point, that creates inflation: that pushes up interest rates. The Fed will fight those interest rates going up. At first, they can do it. They just print more money. That keeps interest rates down, but ultimately that inflation will force them up. We cannot just pull the money out and raise interest rates now; it’s going to pop the real estate and stock bubbles.


What is going to happen is the Fed is going to lose control of those interest rates. When you print too much money, it gets you control short-term, but it is a recipe for losing control long-term. With those interest rates going up, what is going to pop? The stock market and real estate bubbles. All of that is what kicks off the big problem going forward. Normally you would say the bond market is going to be the problem, but I would tell you that it is actually going to be more stocks and eventually even real estate combined. Then ultimately, the bond market starts to go down, and down quickly once it starts.


When the dam finally breaks, it will break quickly. Literally, it is in a matter of months or certainly no more than a year once it really starts to go.


You get very, very high inflation. We could have stock market holidays and things like that.


The big difference between now and the depression is that the government is also in trouble at this point. We are really not going to have a huge failure until the government kind of comes to its wits’ end. It will, but it comes as a last massive orgy of money printing to try to save everything – unlike anything you have seen yet. QE1, QE2, QE3 is nothing like what the Fed has to do when this thing starts to fall. They have to print, buy, and buy, and buy, and try to keep up the falling house. They will not be able to do it, but that will be the reaction.


Then at some point, it is not going to work and the whole thing goes.

Click the play button below to listen to Chris’ interview with Bob Wiedemer (40m:50s):

We Have Reached a Major Turning Point in Central Bank Intervention


I believe we are at a major turning point for the financial system.


For nearly four years, the entire financial system has been held together (just barely) by extraordinary interventions on the part of the world’s Central Banks.


These interventions have resulted in capital fleeing the markets (hence the low trading volume), moral hazard becoming the norm and a marketplace in which hope of more intervention has a greater impact than the actual intervention itself.


The problem with this, from day one, was that eventually we would reach the point at which additional intervention no longer had any effect. This would come about due to:


  1. Investors having grown so accustomed to Central Bank intervention that they no longer respond to additional measures.
  2. Central Banks facing a problem so massive that it is beyond their power to stop it.


Few people understand just how close we came to #2 early this past summer. Indeed, there was a brief period there, where we were literally on the verge of systemic collapse courtesy of the Spanish banking system imploding.


It all started with the collapse of Spain’s Bankia in May 2012. Bankia was formed by merging seven smaller bankrupt banks. In early May 2012 Bankia had to be nationalized. This was a potential Lehman moment that kicked off a massive bank run and resulted in the ECB putting the entire Spanish banking system on life support to the tune of over €300 billion Euros (the entire equity base for every bank in Spain is only a little over €100 billion).


At that time, the Spanish Ibex (stock market) broke out of its 20-year bull market and nearly took down all of Europe with it.


The one thing that held the system together was ECB President Mario Draghi promising that he may provide unlimited buying (which would give Spanish banks a chance to dump their assets in exchange for cash to fund liquidity needs… they were in that bad a shape). That pulled the system back from the edge and things rallied.


The ECB did indeed announce an unlimited bond buying program on September 6 2012. The Federal Reserve then announced an open-ended QE program a week later on September 13 2012.


And that’s when everything changed.


Instead of blasting off into the stratosphere, stocks fell soon after this announcement. That was the first sign that the game has changed: after every other announced program in the past four years, the markets fell briefly but then rallied hard and didn’t look back.


Not this time.


And so we experienced the first item I listed above (investors grew accustomed to Central Bank intervention that they no longer respond to additional measures).


We now are also experiencing #2 (Central Banks are facing a problem so massive that it is beyond the power to stop it). That problem is the fiscal cliff which Bernanke himself has admitted that the Fed cannot contain. “I don’t think the Fed has the tools to offset [the fiscal cliff].”


This is Ben Bernanke, arguably one of the most powerful if not the most powerful man in the Western financial system, admitting that the Fed doesn’t have the tools to address an issue. This has never happened before. For every single issue that has arisen going back to 2006, Bernanke claimed he had things under control.


Not this time.


So, we have investors now so accustomed to Central Bank intervention that even the promise of unending intervention doesn’t appease them… at the exact same time that an issue so great (the fiscal cliff) appears that even the Fed has admitted it cannot manage it.


No one is picking up on this because everyone is focusing on Black Friday and the Santa rally which I mentioned in last issue. But things have changed. And they have changed in a big way.


And no one has a clue how to deal with what’s coming.


Ever since the EU Crisis began in earnest in January 2010, EU leaders have maintained the following strategy:


  1. Engage in endless meetings/ discussions, none of which resolve anything.
  2. Announce that the situation is resolved.
  3. Wait for the world to realize nothing has been fixed.
  4. Repeat.


The prime example is Greece. There have been no less than 30 “Greece is saved” press releases/ announcements, accompanied by market rallies only to discover that Greece is not saved and in fact is worsening by the week.


We’ve now had two formal Greece bailouts. We’re currently working on a third/ debt buyback program, the stated goal of which is to get Greece’s Debt to GDP ratio to 120% by 2020.


Again, the goal for the current proposal is to get Greece to the point at which it will still be totally broke in eight years. It’s amazing no one laughs out loud at EU meetings.


Actually they did… the below came from a recent Q&A session with Jean-Claude Juncker, current Prime Minister of Luxembourg.



Question: Is the goal still to get Greece's debt to 120%?

Juncker: The fact is that the target of 120% will remain, but the target as far as the time frame is concerned has been postponed to 2022.

[Laughter in the room]

Juncker: That was not a joke!

            Source: ZeroHedge


The reality is that no politician wants to implement actual solutions (total default, wipe out of all bad debt, and massive economic structural changes) because all of them are 100% politically toxic.


Meanwhile Greek unemployment worsens while its GDP continues to collapse. Indeed, from peak to today, Greek GDP has fallen nearly 20%. This collapse is equal to that of Argentina in 2001, when it had a full-scale systemic implosion.


Again, this is the country that political leaders and financial luminaries claim has been “saved” dozens of times.


If you’re looking for ideas on how to navigate this mess, we have produced a FREE Special Report available to all investors titled What Europe’s Collapse Means For You and Your Savings.


This report features ten pages of material outlining our independent analysis real debt situation in Europe (numbers far worse than is publicly admitted), the true nature of the EU banking system, and the systemic risks Europe poses to investors around the world.


It also outlines a number of investments to profit from this; investments that anyone can use to take advantage of the European Debt Crisis.


Best of all, this report is 100% FREE. You can pick up a copy today at:


Best Regards,


Graham Summers


PS. We also offer a FREE Special Report detailing the threat of inflation as well as two investments that will explode higher as it seeps throughout the financial system. You can pick up a copy of this report at:









Workers Of The World, Unite!… But First Consider This

The conflict between labor and capital is a long and illustrious one, and one in which ideology and politics have played a far greater role than simple economics and math.

And while labor enjoyed a brief period of growth in the the past 100 years first due to the anti-trust and anti-monopoly, and pro-union laws and regulations taking place in the early 20th century US, and subsequently due to the era of “Great Moderation”-driven “trickling down” abnormal growth in the developed world, it is precisely the unwind of this latest period of prosperity, loosely known as “The New Normal”, and in which economic growth will persist at well sub-optimal (<2%) rates for the foreseeable future, that is pushing the precarious balance between labor and capital costs – in their purest economic sense, and stripped of all ethics and ideology – to a point in which labor will likely find itself at a persistent disadvantage, leading to the same social upheaval that ushered in pure Marxist ideology in the late 19th century.

Only this time there will be a peculiar twist, because while in relative terms labor costs as a percentage of all operating expenses are declining around the world, when accounting for benefits, and entitlement funding, labor costs are rising in absolute terms if at uneven rates (a particularly touchy topic in the Eurozone where lack of labor competitiveness for the periphery is probably the single thorniest issue for the European Disunion) and are now at record highs.

Which sets the stage for what may probably be the biggest push-pull tension of the 21st century for the simple worker: declining relative wages, which however are increasing in absolute terms when factoring in the self-funded components paid into an insolvent welfare system.

But the rub comes when one considers the biggest disequilibrium creator of all: central bank predicated cost of capital “planning”, whereby Fed policies may be the most insidious and stealth destroyer of all of labor’s hard won gains over the past century. 

First, observe the declining labor costs as a percentage of total corporate operating expenses…

Which however is cold comfort to firms which report earnings on a nominal basis, and for which the absolute increase in blended all in labor compensation is now the highest in history…

… a variable cost “discontinuity” driven by a key fixed cost: social insurance expenditures and labor-related taxes. In other words workers are increasingly forced to prefund their own “entitlements”…

… Which finally means that increasingly the simplest solution will likely be the correct one: places in which the cost of labor is higher than that of capital will increasingly shed labor until there is once again an equilibrium between labor and capital. An approximate breakdown between these two primary drivers is shown in the chart below.

Before we present some of the startling conclusions from the above, here are some thoughts on the basis of labor costs as we enter the New Normal from Goldman Sachs:

The ability to cut these depends very much on the nature of the business (labour-intensive versus capital-intensive), the scale and balance sheet strength of the company, the flexibility to move operations, domicile regulations and political pressures, and the clarity of management foresight. One option CEOs have is to become more efficient through automation, i.e., substituting labour with capital. We expect to see a lot more of this type of restructuring in the developing economies, as real wages rise and the difference in the relative cost of capital versus developed economies shrinks.


The balance between labour and capital reflects a tension between maintaining flexibility and achieving efficiency. Remaining labour-intensive can allow companies to react in a more agile manner to structural shifts or prolonged cyclical softness,  giving them the option to increase or decrease headcount (albeit at a price) or re-train personnel in the case of obsolescence, which is particularly important in fast-moving industries. On the other hand, automation increases production efficiency, speed and quality, often at a lower operational cost, at the expense of having a larger chunk of capital tied to fixed assets.


Over the last decade, cheap labour was perhaps the primary motivation for location-based restructuring. But looking forward, greater EM competition, IP risks, regulation, energy cost disparity, supply chain complexity and the need to be closer to the  end consumer should also force companies to reconsider where they are based. But we shouldn’t forget that prescribing change is not the same as achieving it, especially for companies that employ a large number of people in domestic Europe. These companies are likely to encounter greater political pressure, while the fear of losing skills also make companies reluctant to cut their headcount. Capital intensity could also be an exit barrier; e.g., its difficult for physical retailers to exit real estate quickly. And finally, there is the zero sum game argument, or at best a fleeting competitive advantage, which can be observed in the very short periods of returns leadership in many industries.

And while superficially all of the above is correct, the one increasingly dominant factor is that of pure cost of capital, from a simple ROE basis, when corporate executives make a decision whether to invest in wages and workers or efficiency improvements, i.e., capital. It is here that one needs to appreciate that cost of capital is increasingly synonymous with simple cost of borrowing as shown on the last chart above.

What needs no explanation is that in “the New Normal”, the cost of borrowing is declining progressively and in more and more parts of the world is approaching zero: a standard byproduct of ZIRP, or a paradigm in which virtually all credit risk (and soon – equity risk as well as the Japan Model is adopted by all) is borne by the money printers themselves, or in the case of the US: the Federal Reserve.

And with cost of debt and thus capital virtually non-existent, the decision of where to allocated increasingly scarcer cash flows will become a very simple one, and the outcome will be one which will infuriate more and more workers around the world.

What does all of the above mean practically? Two things:

  1. The ever more insolvent “welfare state” world is seeing increasingly more of the fixed cost contribution to pre-funding entitlements fall on the shoulders of the same workers whose wages are increasingly declining on a relative basis (best seen when looking at the year over year change in average hourly earnings, which just posted the smallest nominal rise on record.

    The problem with this is that laborer intuitively realize that the “welfare state” model no longer works, and is broken: there are simply too many unfunded liabilities that current and future generations of workers have to fund concurrently for there to be anything left over in the sinking fund to prepay their own pension, retirement and welfare benefits. As a result more and more workers will demand instant gratification in the form of upfront cash now, and will no longer accept the excuse that their employers are making up the difference in declining earnings by funding future welfare costs, as extracted in turn by ever more insolvent governments.
  2. The Fed, in its attempts to rekindle the credit bubble with its ZIRP policy, which will last at least through the end of 2015 (but likely, in perpetuity, or at least until hyperinflation force Bernanke to prove if his bluff that he can end any inflationary episode in 15 minutes or less), has stumbled upon yet another unintended consequence- it is making the balance between labor and capital progressively more distressing for current workers, as the Fed is effectively funding – thanks to no cost borrowings – corporate improvements in productivity and capital replacement, which in turn make layoffs and wage cuts the default decision by most corporate treasurers and CFOs.

These two bullet points will garner increasingly more attention in the coming months as more and more people are laid off, if for no reason of the underlying economy which may or may not be getting stronger (or certainly weaker), but simply as as the cost of corporate debt, especially for Investment Grade quality corporations, plummets to zero when used to fund capital improvements, and thus increased profitability when coupled with labor “efficiency.”

Because what few appreciate is that Marxism in the New Normal will not be a carbon copy of that from 150 years ago: instead the primary driver paradoxically of the next labor movement will be in response to the destructive policies (at least for workers, if not for corporate profitability and shareholders) of the central planners. That, and the fact that the entire Welfare state ponzi, now pervasive to all developed world countries, is on its last breath: a conclusion which even the simple workers of the world can appreciate.

Or not: because as the recent example of the outright Hostess liquidation demonstrated, when negotiating labor equivalency outcomes from a Game Theoretical perspective in the New Normal, labor no longer has the upper hand, especially when the opportunity cost of wiping out future (fully or partially) prepaid entitlement benefits are to be considered – a lesson which the Twinkie baking union learned the very hard way.

It also means that as more instances of labor unions vs corporations come to the fore in bankruptcy court, and as labor losses mount, it will once again be the evil corporations that are scapegoated by virtually everyone involved.

Yet the truth is far more complicated, and as the above shows, while workers of the world may, indeed, soon be uniting once more, don’t forget to reserve some of that righteous indignation not only for executive corner office dwellers, but for those in charge of government and of various central banks, whose actions over the past century (now that we are just 31 days away from the 100 year anniversary of the Fed) have led to a world in which there are hundreds of trillions in unfunded, insolvent entitlements, as well as a central planner policy response aimed squarely at obliterating any residual negotiating position labor may have had.

To summarize: as fury at corporate CEOs rises, don’t forget to save some where it also most certainly belongs: the Federal Government and the Chairman.

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