THERE IS A POSSIBILITY, AS WE CAN SEE IN THE GRAPH ABOVE THAT FUTURE GDP NUMBERS COMING END OF 2010 AND BEGINNING OF 2011 COULD BE NEGATIVE.

IS THE MARKET READY FOR THAT POSSIBILITY ?

Courtesy of MIKE SHEDLOCK :

“It is not often you see bond managers openly embrace Ponzi schemes, but that is exactly what Bill Gross did in his post Run Turkey, Run.

There’s another important day next week and it rather coincidentally occurs on Wednesday – the day after Election Day – when either the Donkeys or the Elephants will be celebrating a return to power and the continuation of partisan bickering no matter who is in charge. Wednesday is the day when the Fed will announce a renewed commitment to Quantitative Easing – a polite form disguise for “writing checks.” The market will be interested in the amount (perhaps as much as an initial $500 billion) as well as the targeted objective (perhaps a muddied version of “2% inflation or bust!”). The announcement, however, has been well telegraphed and the market’s reaction is likely to be subdued. More important will be the answer to the long-term question of “will it work?” and perhaps its associated twin “will it create a bond market bubble?”

The Fed’s second round of QE, therefore, more closely resembles an attempted hypodermic straight to the economy’s heart than its mood elevator counterpart of 2009. If QEII cannot reflate capital markets, if it can’t produce 2% inflation and an assumed reduction of unemployment rates back towards historical levels, then it will be a long, painful slog back to prosperity. Perhaps, as a vocal contingent suggests, our paper-based foundation of wealth deserves to be buried, making a fresh start from admittedly lower levels. The Fed, on Wednesday, however, will decide that it is better to keep the patient on life support with an adrenaline injection and a following morphine drip than to risk its demise and ultimate rebirth in another form.

We at PIMCO join with Ben Bernanke in this diagnosis, but we will tell you, as perhaps he cannot, that the outcome is by no means certain. We are, as even some Fed Governors now publically admit, in a “liquidity trap,” where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole. Just ask Japan.

Ben Bernanke, however, will try – it is, to be honest, all he can do. He can’t raise or lower taxes, he can’t direct a fiscal thrust of infrastructure spending, he can’t change our educational system, he can’t force the Chinese to revalue their currency – it is all he can do, and as he proceeds, the dual questions of “will it work” and “will it create a bond market bubble” will be answered. We at PIMCO are not sure.

Still, while next Wednesday’s announcement will carry our qualified endorsement, I must admit it may be similar to a Turkey looking forward to a Thanksgiving Day celebration. Bondholders, while immediate beneficiaries, will likely eventually be delivered on a platter to more fortunate celebrants, be they financial asset classes more adaptable to inflation such as stocks or commodities, or perhaps the average American on Main Street who might benefit from a hoped-for rise in job growth or simply a boost in nominal wages, however deceptive the illusion. Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic. Granted, the U.S. has, at times, paid down its national debt, but there was always the assumption that as long as creditors could be found to roll over existing loans – and buy new ones – the game could keep going forever. Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.

Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead.

The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame.

A Sammy scheme is temporarily, but not ultimately, a bondholder’s friend. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead-end where those prices can no longer go up. Having arrived at its destination, the market then offers near 0% returns and a picking of the creditor’s pocket via inflation and negative real interest rates. A similar fate, by the way, awaits stockholders, although their ability to adjust somewhat to rising inflation prevents such a startling conclusion. Last month I outlined the case for low asset returns in almost all categories, in part due to the end of the 30-year bull market in interest rates, a trend accentuated by QEII in which 2- and 3-year Treasury yields approach the 0% bound. Anyone for 1.10% 5-year Treasuries? Well, the Fed will buy them, but then what, and how will PIMCO tell the 500 billion investor dollars in the Total Return strategy and our equally valued 750 billion dollars of other assets that the Thanksgiving Day axe has finally arrived?

We will tell them this. Certain Turkeys receive a Thanksgiving pardon or they just run faster than others! We intend PIMCO to be one of the chosen gobblers. We haven’t been around for 35+ years and not figured out a way to avoid the November axe. We are a survivor and our clients are not going to be Turkeys on a platter.

Grossly Arrogant

Gross openly endorses Bernanke’s admitted Ponzi scheme because “to be honest, all he can do”.

Excuse me for asking but why does the Fed have to do anything? Better yet, why can’t the Fed and politicians admit the truth. The truth is there is no easy way out of this mess, and it is beyond foolish to attempt Ponzi schemes because there is nothing else to try.

Please remember that Ponzi schemes must collapse by definition. Yet Bill Gross arrogantly believes PIMCO can avoid such a collapse even though he also thinks the bond bull market is over. Yes, PIMCO has a great track record over the years, but making money in bond bull markets is a lot different than making money in bond bear markets and collapsing Ponzi schemes.

Fed’s Morning After Pill

The morning after the election the Fed will at long last announce exactly what its QE policy will be. Allegedly the Fed picked that date so as to not interfere in the election, yet the result has been massive speculation in stocks and commodities with economic pundits tossing around ever-increasing QE targets up to $4 trillion dollars.

In hindsight, the Fed’s self-induced guessing game was arguably more election manipulative than if it had done whatever it was going to do in advance. Whether on purpose or not, I suggest the Fed got more bang for the buck by encouraging speculation about what it would or would not do.

Sell the News?

Several weeks ago I suggested it might be a sell the news reaction. Instead, the runup in commodities and equities has been so massive it would not surprise me one bit to see a massive selloff before the news is even announced.

How can anything under $4 trillion not be priced in by now? “

After the Phoney War, Things Really Got Nasty
October 21, 2010
By John R. Taylor, Jr.
Chief Investment Officer

Not too many traders remember ‘the phoney war,’ or the Sitzkrieg, as it happened 71 years ago. After Hitler invaded Poland on the first day of September 1939, Poland’s European allies France and England declared war on Germany, but nothing significant happened on that front until the following May when the German Army rolled through Luxembourg, the Netherlands, and Belgium and into France. Although the horror started in Poland in the fall of 1939, for a few months, the rest of Europe was spared that horror, which eventually lasted through the next five years. Strangely, this past September (2010), the US equity market rose by about 8.8%, its best return for that month, since that same September (1939). To me the parallels are ominous. What were those people thinking back in 1939? Could a coming world war have that positive an impact on the economy and on markets? They must have been crazy – of course equities gave up their gains and were cratered in May 1940 when Germany invaded the west. But, what are we thinking of now? A war has just begun. Didn’t Bernanke and the Fed announce in late August at Jackson Hole (and multiple times since then) that the US was going to enter QE2 and debase its currency setting off a currency war. Bernanke, like Hitler seven decades ago, had been warning everyone who would listen for years.

On November 21, 2002 he said that he would debase the US dollar if the American economy looked as though it would go through the same lost decades that the Japanese have recently endured. Now, it is clear that he has been true to his word and the currency war has begun. Although it took Guido Mantega the Finance Minister of Brazil to state the obvious saying that “an international currency war” had broken out, the reaction at the recent IMF meetings and among analysts of all stripes make it clear that this situation is well comprehended by everyone who is paying attention. The US has thrown a rock through the world’s plate glass window. This country will be severely disrupting the current global monetary system because the Federal Reserve – and not necessarily the Obama administration – believes that the status quo is not in the interest of the American people.

Right now the world is in the ‘phoney war’ period as the US has only just begun the process of flooding the world with excess dollars. The recent IMF meetings had and the coming G-20 meeting will see lots of venting and some skirmishes but no real attacks. Countries are complaining loudly because Bernanke’s excess dollars are being sold and their own currencies are being purchased, rising as the dollar declines. As most are trying to slow that rise by buying the dollars as reserves, reserves are climbing, their money supplies are ballooning, and inflation will surely follow. With inflation and strong currencies, these countries will see their trade positions destroyed. The real war will begin as countries place restrictions on capital flows. Mantega seems as though he will make a good economic general as Brazil is one of the first to move, taxing bond inflows. Interestingly the Brazilian leaders will miss the G-20 meeting in Seoul, avoiding any direct discussion of their actions.

Capital controls are likely to spring up in Asia and in other attractive economies during the next few months, but the really destructive war begins when tariffs appear. This should happen next year – maybe in May, mirroring 1940 – because by then the next recession should be in full force in both the US and in Europe, forcing many millions more out of work. The political pressure for raising tariffs in the US is intensifying and the new Tea Party supported Congressman will help tip the political scales in that direction.

This war will not be fought for territory, but for markets and wealth, and when tariff walls are raised the destruction of livelihoods and property will be almost as dramatic as in the old fashioned shooting wars. With the loss of economic value, the global debt structure must collapse and entitlement promises will not survive.

CONSUMER METRICS INSTITUTE :

“In the above chart, the day-by-day course of the 2008 and 2010 contractions are plotted in a superimposed manner, with the plots aligned on the left margin at the first day during each event that our Daily Growth Index went negative. The plots then progress day-by-day to the right, tracing out the changes in the daily rate of contraction in consumer demand for two events.

The true severity of any contraction event is the area between the gray “zero” axis in the above chart and the line being traced out by the daily contraction values. By that measure the “Great Recession of 2008″ had a total of 793 percentage-days of contraction over the course of 221 days, whereas the current 2010 contraction has already exceeded 690 percentage-days — already over 87% as bad. And the 2010 contraction has already lasted for 261 days, 40 days longer than the entire 2008 event. Additionally, within the past week the 2010 event has reached levels of daily contraction worse than anything recorded in 2008.

But looking ahead, should the 2010 event recover from its bottom exactly like the 2008 event did, it would still experience nearly another 490 percentage-days of contraction before ending — resulting in a grand total of 1180 percentage-days of contraction for the 2010 event, fully 49% more severe than the “Great Recession of 2008.” ”

Do we really believe that US GDP = C + I + G + (X-M) OR  GDP = private consumption + gross private investment + government spending + (exports − imports) is going to grow without C, that represents more than 70% of it ¿?¿?¿?¿?

From DER SPIEGEL :

Rediscovering Protectionism

“The trade conflict between Beijing and Washington has thus entered a new, acute phase. One month before the high-stakes mid-term congressional elections, America’s representatives, alarmed by nearly 10 percent unemployment and a gloomy economic outlook, have rediscovered an old friend: protectionism.

At the same time, they have pointed the finger once again at their favorite enemy: China. They are demanding that China finally adjust its currency so that Chinese products are no longer much cheaper than those manufactured by its US competitors.

Things are heating up in the conflict between the US and China: verbally, legally and politically. The economic power of the 20th century wants to cut the 21st century’s economic giant down to size. The question is whether it is even still strong enough to do so — and whether such a conflict won’t end up harming everyone.

For a long time, the US economy has been dependent on cheap products made by the Chinese and on their currency reserves that bolster the value of the dollar. Until now, both sides have benefited from this system. One side lived beyond its means and paid with printed pieces of paper called dollars, the other side used this paper to purchase US government bonds, allowing it to accumulate huge currency reserves.

But things can’t continue like this forever. Imbalances in world trade are growing increasingly large, and the global currency system is getting out of control.”

Global imbalances and fights for competitiveness are eerily similar to the 30s…