Wall Street

The Dow And S&P 500 Soar To Irrational Heights – Meanwhile The Ultra-Wealthy Rush To Buy Gold Bars

October 8, 2014September 18, 2014 by Michael

Did you know that the number of gold bars being purchased by ultra-wealthy individuals has increased by 243 percent so far this year? If stocks are just going to keep soaring, why are they doing this? On Thursday, the Dow Jones industrial average and the S&P 500 both closed at record highs once again. It is a party that never seems to end, and there are a lot of really happy people on Wall Street these days. But those that are discerning realize that we witnessed the exact same kind of bubble behavior during the dotcom boom and during the run up to the last financial crash in 2007. The irrational exuberance that we are witnessing right now cannot go on forever. And the bigger that this bubble gets, the more painful that it is going to be when it finally bursts. Those that get out at the peaks of the market are the ones that usually end up making lots of money. Those that ride stocks all the way up and all the way down are the ones that usually end up getting totally wiped out.

To get an idea of how irrational the markets have become, all one has to do is to look at Twitter.

Would you value “a horribly mismanaged company” that is less than 10 years old and that has never made a yearly profit at 31 billion dollars?

Well, that is precisely how much the financial markets say that Twitter is worth at this moment.

Even though Twitter will probably never be much more popular than it is right now, it continues to bleed money profusely. On a GAAP (generally accepted accounting principles) basis, Twitter lost an astounding 145 million dollars during the second quarter of 2014…

Twitter’s GAAP net loss totaled $145 million, up from $42 million a year ago. On a GAAP basis, Twitter lost $0.24 per share. Investors, however, were not expecting Twitter to be profitable by GAAP measurements, so the loss isn’t too much of a drag.

Why would anyone want to invest in such a money pit?

Here are some more disturbing financial numbers about Twitter from David Stockman…

Currently, Twitter (TWTR) is valued at $31 billion.That’s 18X revenue, but the catch is that the revenue in question is it’s lifetime bookings over the 18 quarters since Q1 2010.

When it comes to profits, the numbers are not nearly so promising! For the LTM period ending in June, TWTR booked $974 million of revenue and $1.7 billion of operating expense. That why “NM” shows up in its LTM ratio of enterprise value to EBITDA. It turns out that its EBITDA was -$704 million. In fact, its R&D expense alone was 83% of revenues.

Of course the truth is that Twitter should be able to make money.

And it probably would be making money if it was being managed better.

The following is what Silicon Valley venture capitalist Peter Thiel said about Twitter on CNBC the other day…

“It’s a horribly mismanaged company — probably a lot of pot-smoking going on there.”

But because Twitter is a “hot tech stock” investors are literally throwing money at it.

And there are many other tech companies that have similar stories. Off the top of my head, Snapchat, LinkedIn, Yelp and Pinterest come to mind.

Fueled by the quantitative easing policies of the Federal Reserve, U.S. stocks have enjoyed an unprecedented joy ride.

However, as David Stockman recently told Yahoo Finance, the subsequent crash is likely to be enormously painful…

“I think what the Fed is doing is so unprecedented, what is happening in the markets is so unnatural,” he said. “This is dangerous, combustible stuff, and I don’t know when the explosion occurs – when the collapse suddenly is upon us – but when it happens, people will be happy that they got out of the way if they did.”

The behavior that we are observing in the stock market simply does not reflect what is happening in the economy overall whatsoever.

In many ways, U.S. economic fundamentals just continue to get even worse. Small business ownership in the United States is at an all-time low, the labor force participation rate is the lowest that it has been in 36 years, and the U.S. national debt has grown by more than a trillion dollars over the past 12 months.

But on Wall Street right now, there is very little fear that the party is going to end any time soon.

The following is how Seth Klarman recently described the market complacency that he is seeing at the moment…

To put it a bit differently, writer and investor John Mauldin is right when he says that there is “a bubble in complacency.” Fear has effectively been banished. The members of the Fed know it. Stock traders who chase the market to new highs almost daily know it. Implied volatilities (and realized volatilities) are historically low (the VIX Index recently hit a seven-year low), and falling. The Bank for International Settlements recently cautioned that financial markets are euphoric and in the grip of an aggressive search for yield. The S&P has gone over 1,000 days without a 10% decline, according to Birinyi Associates. Dutch and French 10-year government bond yields are at 500 and 250 year lows, respectively; Spain, 225 years. Spanish debt yields were recently inside of U.S. levels.

But as Klarman also observed, just because “investors have been seduced into feeling good” does not mean that this current bubble is any different from what we witnessed back in 2007…

It’s not hard to reach the conclusion that so many investors feel good not because things are good but because investors have been seduced into feeling good—otherwise known as “the wealth effect.” We really are far along in re-creating the markets of 2007, which felt great but were deeply unstable when shocks started to pile up. Even Janet Yellen sees “pockets of increasing risk-taking” in the markets, yet she has made clear that she won’t raise rates to fight incipient bubbles. For all of our sakes, we really wish she would.

Meanwhile, the ultra-wealthy are making moves to protect themselves from the inevitable chaos that is coming.

For example, the Telegraph recently reported that sales of gold bars to wealthy customers are up 243 percent so far in 2014…

The super-rich are looking to protect their wealth through buying record numbers of “Italian job” style gold bars, according to bullion experts.

The number of 12.5kg gold bars being bought by wealthy customers has increased 243 percent so far this year, when compared to the same period last year, said Rob Halliday-Stein founder of BullionByPost.

“These gold bars are usually stored in the vaults of central banks and are the same ones you see in the film ‘The Italian Job’,” added David Cousins, bullion executive from London based ATS Bullion.

Do they know something that we don’t?

The ultra-wealthy are able to stay ultra-wealthy for a reason.

They are usually a step or two ahead of most of the rest of us.

And any rational person should be able to see that this financial bubble is going to end very, very badly.

Wall Street Admits That A Cyberattack Could Crash Our Banking System At Any Time

August 28, 2014 by Michael

Wall Street banks are getting hit by cyber attacks every single minute of every single day. It is a massive onslaught that is not highly publicized because the bankers do not want to alarm the public. But as you will see below, one big Wall Street bank is spending 250 million dollars a year just by themselves to combat this growing problem. The truth is that our financial system is not nearly as stable as most Americans think that it is. We have become more dependent on technology than ever before, and that comes with a potentially huge downside. An electromagnetic pulse weapon or an incredibly massive cyberattack could conceivably take down part or all of our banking system at any time.

This week, the mainstream news is reporting on an attack on our major banks that was so massive that the FBI and the Secret Service have decided to get involved. The following is how Forbes described what is going on…

The FBI and the Secret Service are investigating a huge wave of cyber attacks on Wall Street banks, reportedly including JP Morgan Chase, that took place in recent weeks.

The attacks may have involved the theft of multiple gigabytes of sensitive data, according to reports. Joshua Campbell, supervisory special agent at the FBI, tells Forbes: “We are working with the United States Secret Service to determine the scope of recently reported cyber attacks against several American financial institutions.”

When most people think of “cyber attacks”, they think of a handful of hackers working out of lonely apartments or the basements of their parents. But that is not primarily what we are dealing with anymore. Today, big banks are dealing with cyberattackers that are extremely organized and that are incredibly sophisticated.

The threat grows with each passing day, and that is why JPMorgan Chase says that “not every battle will be won” even though it is spending 250 million dollars a year in a relentless fight against cyberattacks…

JPMorgan Chase this year will spend $250 million and dedicate 1,000 people to protecting itself from cybercrime — and it still might not be completely successful, CEO Jamie Dimon warned in April.

“Cyberattacks are growing every day in strength and velocity across the globe. It is going to be continual and likely never-ending battle to stay ahead of it — and, unfortunately, not every battle will be won,” Dimon said in his annual letter to shareholders.

Other big Wall Street banks have a similar perspective. Just consider the following two quotes from a recent USA Today article…

Bank of America: “Although to date we have not experienced any material losses relating to cyber attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future.”

Citigroup: “Citi has been subject to intentional cyber incidents from external sources, including (i) denial of service attacks, which attempted to interrupt service to clients and customers; (ii) data breaches, which aimed to obtain unauthorized access to customer account data; and (iii) malicious software attacks on client systems, which attempted to allow unauthorized entrance to Citi’s systems under the guise of a client and the extraction of client data. For example, in 2013 Citi and other U.S. financial institutions experienced distributed denial of service attacks which were intended to disrupt consumer online banking services. …

“… because the methods used to cause cyber attacks change frequently or, in some cases, are not recognized until launched, Citi may be unable to implement effective preventive measures or proactively address these methods.”

I don’t know about you, but those quotes do not exactly fill me with confidence.

Another potential threat that banking executives lose sleep over is the threat of electromagnetic pulse weapons. The technology of these weapons has advanced so much that they can fit inside a briefcase now. Just consider the following excerpt from an article that was posted on an engineering website entitled “Electromagnetic Warfare Is Here“…

The problem is growing because the technology available to attackers has improved even as the technology being attacked has become more vulnerable. Our infrastructure increasingly depends on closely integrated, high-speed electronic systems operating at low internal voltages. That means they can be laid low by short, sharp pulses high in voltage but low in energy—output that can now be generated by a machine the size of a suitcase, batteries included.

Electromagnetic (EM) attacks are not only possible—they are happening. One may be under way as you read this. Even so, you would probably never hear of it: These stories are typically hushed up, for the sake of security or the victims’ reputation.

That same article described how an attack might possibly happen…

An attack might be staged as follows. A larger electromagnetic weapon could be hidden in a small van with side panels made of fiberglass, which is transparent to EM radiation. If the van is parked about 5 to 10 meters away from the target, the EM fields propagating to the wall of the building can be very high. If, as is usually the case, the walls are mere masonry, without metal shielding, the fields will attenuate only slightly. You can tell just how well shielded a building is by a simple test: If your cellphone works well when you’re inside, then you are probably wide open to attack.

And with electromagnetic pulse weapons, terrorists or cyberattackers can try again and again until they finally get it right…

And, unlike other means of attack, EM weapons can be used without much risk. A terrorist gang can be caught at the gates, and a hacker may raise alarms while attempting to slip through the firewalls, but an EM attacker can try and try again, and no one will notice until computer systems begin to fail (and even then the victims may still not know why).

Never before have our financial institutions faced potential threats on this scale.

According to the Telegraph, our banks are under assault from cyberattacks “every minute of every day”, and these attacks are continually growing in size and scope…

Every minute, of every hour, of every day, a major financial institution is under attack.

Threats range from teenagers in their bedrooms engaging in adolescent “hacktivism”, to sophisticated criminal gangs and state-sponsored terrorists attempting everything from extortion to industrial espionage. Though the details of these crimes remain scant, cyber security experts are clear that behind-the-scenes online attacks have already had far reaching consequences for banks and the financial markets.

In the end, it is probably only a matter of time until we experience a technological 9/11.

When that day arrives, will your money be safe?

The Odds Are Never In Our Favor

March 31, 2014 by Michael

How would you feel if you went to the store to buy something, and someone rushed ahead of you and purchased it first and then sold it to you at a higher price? Well, in the financial world this happens millions upon millions of times. In fact, this practice has become so popular that it has spawned an entire industry known as “high frequency trading”. At this point, high frequency trading makes up about half of all trading volume on Wall Street, and it is costing the rest of us billions of dollars a year. And the funny thing is that this is all perfectly legal. High frequency trading firms are exploiting a glitch in the system, and by allowing this to go on, the authorities have essentially given them a license to steal from the rest of us. Sadly, this is just another example that shows that the odds are never in our favor. The “little guy” never seems to be able to win, and those at the top of the food chain like it that way.

Making money in the stock market is supposed to be about making wise investment decisions. It isn’t supposed to be about finding a glitch in a video game and exploiting it. But that is essentially what these high frequency traders have done. They have spent an extraordinary amount of time and energy figuring out ways to make pennies (or sometimes just fractions of a penny) on the trades that the rest of us make.

Fortunately, this practice was exposed in front of the entire world by 60 Minutes the other night. Steve Kroft interviewed a former trader named Michael Lewis that just released a new book entitled “Flash Boys” that is all about the evils of high frequency trading. The following is an excerpt from that interview…

Steve Kroft: And this is all being done by computers?

Michael Lewis: All being done by computers. It’s too fast to be done by humans. Humans have been completely removed from the marketplace.

“Fast” is the operative word. Machines with secret programs are now trading stocks in tiny fractions of a second, way too fast to be seen or recorded on a stock ticker or computer screen. Faster than the market itself. High-frequency traders, big Wall Street firms and stock exchanges have spent billions to gain an advantage of a millisecond for themselves and their customers, just to get a peek at stock market prices and orders a flash before everyone else, along with the opportunity to act on it.

Michael Lewis: The insiders are able to move faster than you. They’re able to see your order and play it against other orders in ways that you don’t understand. They’re able to front run your order.

Steve Kroft: What do you mean front run?

Michael Lewis: Means they’re able to identify your desire to, to buy shares in Microsoft and buy ’em in front of you and sell ’em back to you at a higher price. It all happens in infinitesimally small periods of time. There’s speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds. But it”s enough for them to identify what you’re gonna do and do it before you do it at your expense.

Steve Kroft: So it drives the price up.

Michael Lewis: So it drives the price up, and in turn you pay a higher price.

You can watch the entire interview right here. Unlike most mainstream media news reports, this one is actually worth your time. I have watched the entire thing, and I highly recommend it.

Of course there have been many that have been screaming about high frequency trading for many years. Zero Hedge is just one example. This practice has gone on year after year and the federal government has looked the other way.

These high frequency trading firms do not add anything to society. As Barry Ritholtz noted recently, one of these firms has an average holding period for stocks of just 11 seconds, and at one point it stated that it had “not had a losing day of trading in four years“…

The only surprising thing about Lewis’s assertion was that anyone could be even remotely surprised by it.

The math on trading is simple: It is a zero-sum game. One trader’s gain is another trader’s loss. Only in the case of HFT, the losers are the investors — by way of their pension funds, retirement accounts and institutional funds. The HFT’s take — the “skim” — comes out of these large institution’s trade executions.

The technology behind HFT may be complex, but the math is that simple. Once the Securities and Exchange Commission allowed stock exchanges to share with traders all of the unexecuted incoming orders, it was hard not to make money by skimming a few cents or fractions of a cent from each trade. Several years ago, the founder of Tradebot, one of the biggest high-frequency firms, had said that the firm had “not had a losing day of trading in four years.” The firm’s average holding period for stocks is 11 seconds.

How in the world does that kind of behavior add any value to society?

They are just skimming money that should be going to others. Billions of dollars is essentially being stolen from pension funds and retirement accounts, and it is time that people started getting outraged about this.

Unfortunately, even if this practice is outlawed, the truth is that the odds will still never be in our favor.

There are millions of Americans that dream of getting ahead, but they never seem to be able to get there. They work incredibly hard, but the more they earn, the more the government taxes them. If somehow you do manage to scrape together a little bit of money to invest in the financial markets, any profits that you make will be endlessly eroded by fees, commissions and even more taxes.

And it is important to remember that in the financial world, the “little guy” is regarded as easy prey by the hungry wolves that are all too eager to find a way to transfer your money into their own pockets. If you don’t know what you are doing, it is all too easy to get absolutely slaughtered.

On Wall Street, there are winners and there are losers.

Most of the time, “the little guys” end up losing.

But at least they could try to have a system that at least has the appearance of fairness. As long as high frequency trading exists, that will never be the case.

Why Is Goldman Sachs Warning That The Stock Market Could Decline By 10 Percent Or More?

January 13, 2014 by Michael

Why has Goldman Sachs chosen this moment to publicly declare that stocks are overpriced? Why has Goldman Sachs suddenly decided to warn all of us that the stock market could decline by 10 percent or more in the coming months? Goldman Sachs has to know that when they release a report like this that it will move the market. And that is precisely what happened on Monday. U.S. stocks dropped precipitously. So is Goldman Sachs just honestly trying to warn their clients that stocks may have become overvalued at this point, or is another agenda at work here? To be fair, the truth is that all of the big banks should be warning their clients about the stock market bubble. Personally, I have stated that the stock market has officially entered “crazytown territory“. So it would be hard to blame Goldman Sachs for trying to tell the truth. But Goldman Sachs also had to know that a warning that the stock market could potentially fall by more than 10 percent would rattle nerves on Wall Street.

This report that has just been released by Goldman Sachs has gotten a lot of attention. In fact, an article about this report was featured at the top of the CNBC website for quite a while on Monday. Needless to say, news of this report spread on Wall Street like wildfire. The following is a short excerpt from the CNBC article…

A stock market correction is approaching the level of near certainty as Wall Street faces a major paradigm shift in how to achieve price gains, according to a Goldman Sachs analysis.

In a market outlook that garnered significant attention from traders Monday, the firm’s strategists called the S&P 500 valuation “lofty by almost any measure” and attached a 67 percent probability to the chance that the market would fall by 10 percent or more, which is the technical yardstick for a correction.

Of course Goldman Sachs is quite correct to be warning about an imminent stock market correction. Right now stocks are overvalued according to just about any measure that you could imagine…

The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings.

There is a lot of technical jargon in the paragraph above, but essentially what it is saying is that stock prices are unusually high right now according to a whole host of key indicators.

And in case you were wondering, stocks did fall dramatically on Monday. The Dow fell by 179 points, which was the biggest decline of the year by far.

So is Goldman Sachs correct about what could be coming?

Well, the truth is that there are many other analysts that are far more pessimistic than Goldman Sachs is. For example, David Stockman, the Director of the Office of Management and Budget under President Reagan, believes that the U.S. stock market is heading for “a pretty rude day of awakening”…

“This (2014) is the year of the end game. The party is over. We are now just at the point where they are rounding up the Wall Street drunks who are swilling on the fifth consecutive seasonally maladjusted phony recovery. That will become evident in the weeks and months ahead. Then I think the markets are going to have a pretty rude day of awakening.”

For many more forecasts that are similar to this, please see my previous article entitled “Dent, Faber, Celente, Maloney, Rogers – What Do They Say Is Coming In 2014?”

There are also some other signs that we are rapidly heading toward a major “turning point” in the financial world in 2014. One of those signs is the continual decline of Comex gold inventories. Someone out there (China?) is voraciously gobbling up physical gold. The following is a short excerpt from a recent article by Steve St. Angelo…

After a brief pause in the decline of Comex Gold inventories, it looks like it has continued once again as there were several big withdrawals over the past few days. Not only was there a large removal of gold from the Comex today, the Registered (Dealer) inventories are now at a new record low.

And of course the overall economy continues to get even weaker. The Baltic Dry Index (a very important indicator of global economic activity) has fallen by more than 40 percent over the past couple of weeks…

We noted Friday that the much-heralded Baltic Dry Index has seen the worst start to the year in over 30 years. Today it got worse. At 1,395, the the Baltic Dry index, which reflects the daily charter rate for vessels carrying cargoes such as iron ore, coal and grain, is now down 18% in the last 2 days alone (biggest drop in 6 years), back at 4-month lows. The shipping index has utterly collapsed over 40% in the last 2 weeks.

So does this mean that tough times are just around the corner?

Maybe.

Or perhaps things will stabilize again and this little bubble of false prosperity that we have been enjoying will be extended for a little while longer.

The important thing is to not get too caught up in the short-term numbers.

If you look at our long-term national “balance sheet numbers” and the long-term trends that are systematically destroying our economy, it becomes abundantly clear that a massive economic collapse is on the way. Our national debt is on pace to more than double during the Obama years, our “too big to fail” banks are now much bigger and much more reckless than they were before the financial crash of 2008, and the middle class in America is steadily shrinking. In other words, our long-term national “balance sheet numbers” are worse than ever.

We consume far more wealth than we produce, and our entire nation is drowning in a massive ocean of red ink that stretches from sea to shining sea.

This is not sustainable, and it is inevitable that the stock market will catch up with economic reality at some point.

It is just a matter of time.

The Stock Market Has Officially Entered Crazytown Territory

December 26, 2013 by Michael

It is time to crank up the Looney Tunes theme song because Wall Street has officially entered crazytown territory. Stocks just keep going higher and higher, and at this point what is happening in the stock market does not bear any resemblance to what is going on in the overall economy whatsoever. So how long can this irrational state of affairs possibly continue? Stocks seem to go up no matter what happens. If there is good news, stocks go up. If there is bad news, stocks go up. If there is no news, stocks go up. On Thursday, the day after Christmas, the Dow was up another 122 points to another new all-time record high. In fact, the Dow has had an astonishing 50 record high closes this year. This reminds me of the kind of euphoria that we witnessed during the peak of the housing bubble. At the time, housing prices just kept going higher and higher and everyone rushed to buy before they were “priced out of the market”. But we all know how that ended, and this stock market bubble is headed for a similar ending.

It is almost as if Wall Street has not learned any lessons from the last two major stock market crashes at all. Just look at Twitter. At the current price, Twitter is supposedly worth 40.7 BILLION dollars. But Twitter is not profitable. It is a seven-year-old company that has never made a single dollar of profit.

Not one single dollar.

In fact, Twitter actually lost 64.6 million dollars last quarter alone. And Twitter is expected to continue losing money for all of 2015 as well.

But Twitter stock is up 82 percent over the last 30 days, and nobody can really give a rational reason for why this is happening.

Overall, the Dow is up more than 25 percent so far this year. Unless something really weird happens over the next few days, it will be the best year for the Dow since 1996.

It has been a wonderful run for Wall Street. Unfortunately, there are a whole host of signs that we have entered very dangerous territory.

The median price-to-earnings ratio on the S&P 500 has reached an all-time record high, and margin debt at the New York Stock Exchange has reached a level that we have never seen before. In other words, stocks are massively overpriced and people have been borrowing huge amounts of money to buy stocks. These are behaviors that we also saw just before the last two stock market bubbles burst.

And of course the most troubling sign is that even as the stock market soars to unprecedented heights, the state of the overall U.S. economy is actually getting worse…

-During the last full week before Christmas, U.S. store visits were 21 percent lower than a year earlier and retail sales were 3.1 percent lower than a year earlier.

-The number of mortgage applications just hit a new 13 year low.

-The yield on 10 year U.S. Treasuries just hit 3 percent.

For many more signs like this, please see my previous article entitled “37 Reasons Why ‘The Economic Recovery Of 2013’ Is A Giant Lie“.

And most Americans don’t realize this, but the U.S. financial system and the overall U.S. economy are now in much weaker condition than they were the last time we had a major financial crash back in 2008. Employment is at a much lower level than it was back then and our banking system is much more vulnerable than it was back then. Just before the last financial crash, the U.S. national debt was sitting at about 10 trillion dollars, but today it has risen to more than 17.2 trillion dollars. The following excerpt from a recent article posted on thedailycrux.com contains even more facts and figures which show how our “balance sheet numbers” continue to get even worse…

Since the fourth quarter of 2009, the U.S. current account deficit has been more than $100 billion per quarter. As a result, foreigners now own $4.2 trillion more U.S. investment assets than we own abroad. That’s $1.7 trillion more than when Buffett first warned about this huge problem in 2003. Said another way, the problem is 68% bigger now.

And here’s a number no one else will tell you – not even Buffett. Foreigners now own $25 trillion in U.S. assets. And yet… we continue to consume far more than we produce, and we borrow massively to finance our deficits.

Since 2007, the total government debt in the U.S. (federal, state, and local) has doubled from around $10 trillion to $20 trillion.

Meanwhile, the size of Fannie and Freddie’s mortgage book declined slightly since 2007, falling from $4.9 trillion to $4.6 trillion. That’s some good news, right?

Nope. The excesses just moved to a new agency. The “other” federal mortgage bank, the Federal Housing Administration, now is originating 20% of all mortgages in the U.S., up from less than 5% in 2007.

Student debt, also spurred on by government guarantees, has also boomed, doubling since 2007 to more than $1 trillion. Altogether, total debt in our economy has grown from around $50 trillion to more than $60 trillion since 2007.

So don’t be fooled by this irrational stock market bubble.

Just because a bunch of half-crazed investors are going into massive amounts of debt in a desperate attempt to make a quick buck does not mean that the overall economy is in good shape.

In fact, much of the country is in such rough shape that “reverse shopping” has become a huge trend. Even big corporations such as McDonald’s are urging their employees to return their Christmas gifts in order to bring in some much needed money…

In a stark reminder of how tough things still are for low-income families in America, McDonalds has advised workers to dig themselves “out of holiday debt” by cashing in their Christmas haul.

“You may want to consider returning some of your unopened purchases that may not seem as appealing as they did,” said a website set up for employees.

“Selling some of your unwanted possessions on eBay or Craigslist could bring in some quick cash.”

This irrational stock market bubble is not going to last for too much longer. And a lot of top financial experts are now warning their clients to prepare for the worst. For example, David John Marotta of Marotta Wealth Management recently told his clients that they should all have a “bug-out bag” that contains food, a gun and some ammunition…

A top financial advisor, worried that Obamacare, the NSA spying scandal and spiraling national debt is increasing the chances for a fiscal and social disaster, is recommending that Americans prepare a “bug-out bag” that includes food, a gun and ammo to help them stay alive.

David John Marotta, a Wall Street expert and financial advisor and Forbes contributor, said in a note to investors, “Firearms are the last item on the list, but they are on the list. There are some terrible people in this world. And you are safer when your trusted neighbors have firearms.”

His memo is part of a series addressing the potential for a “financial apocalypse.” His view, however, is that the problems plaguing the country won’t result in armageddon. “There is the possibility of a precipitous decline, although a long and drawn out malaise is much more likely,” said the Charlottesville, Va.-based president of Marotta Wealth Management.

So what do you think is coming in 2014?

Please feel free to share your thoughts by posting a comment below…

How Far Will Stocks Fall This Time When The Fed Decides To Slow Down Quantitative Easing?

December 10, 2013 by Michael

When QE1 ended there was a substantial stock market correction, and when QE2 ended there was a substantial stock market correction. And if you will remember, the financial markets threw a massive hissy fit a few months ago when Federal Reserve Chairman Ben Bernanke suggested that the Fed may soon start tapering QE3. Clearly Wall Street does not like it when their supply of monetary heroin is interrupted. The Federal Reserve has tricked the American people into supporting quantitative easing by insisting that it is about “stimulating the economy”, but that has turned out to be a massive hoax. In fact, I just wrote an article that contained 37 statistics that prove that things just keep getting even worse for ordinary Americans. But quantitative easing has been exceptionally good for Wall Street. During QE1, the S&P 500 rose by about 300 points. During QE2, the S&P 500 rose by about 200 points. And during QE3, the S&P 500 has risen by about 400 points. The S&P 500 is now in unprecedented territory, and stock prices have become completely and totally divorced from reality. In essence, we are in the midst of the largest financial bubble this nation has ever seen. So what is going to happen when the Fed starts pulling back the monetary crack and the bubble bursts?

A lot of people out there are claiming that the Federal Reserve will never end this round of quantitative easing. They are suggesting that the Fed may hint at tapering from time to time, but that when push comes to shove they will just keep printing more money.

There is just one big problem with that theory.

The rest of the world is watching, and they are very troubled by quantitative easing. Therefore the Fed must end it at some point because they desperately need the rest of the world to keep playing our game.

Our current economic prosperity greatly depends upon the rest of the planet using our dollars as the reserve currency of the world and lending trillions of dollars to us at ultra-low interest rates. If the rest of the world decides to stop going along with the program, the system would come crashing down very rapidly.

That is why it was so alarming when China recently announced that they are going to quit stockpiling more U.S. dollars. For a long time China has been warning us to quit recklessly printing money, and now China is starting to make moves that will make them more independent of us financially.

If the Fed does not bring quantitative easing to an end soon, other nations may start doing the same thing.

So the Fed knows that they are on borrowed time. Faith in the U.S. financial system is declining very fast.

But the Fed also knows that ending QE3 is going to be very tricky for the financial markets. The other times that the Fed has ended quantitative easing, it has turned out to be very painful for Wall Street.

So this time, the Fed seems to be trying to do what it can to use the media to mentally prepare investors ahead of time. For example, the following is what Jon Hilsenrath of the Wall Street Journal wrote just a few days ago…

Markets are positioned more to the Fed’s liking today than they were in September, when it put off reducing, or “tapering,” the monthly bond purchases. Most notably, the Fed’s message is sinking in that a wind down of the program won’t mean it’s in a hurry to raise short-term interest rates. Futures markets place a very low probability on Fed rate increases before 2015, in contrast to September, when fed funds futures markets indicated rate increases were expected by the end of 2014. The Fed has been trying to drive home the idea that “tapering is not tightening” for months and is likely to feel comforted that investors believe it as a pullback gets serious consideration.

In case you missed the subtle messages contained in that paragraph, here is a rough translation…

“Don’t worry. The Federal Reserve is your friend and they say that everything is going to be okay. Investors believe what the Fed says and you should too. Pay no attention to the man behind the curtain. Tapering is not tightening, and when the Federal Reserve does decide to taper the financial markets are going to take it very calmly.”

The Fed (and their messengers) very much want to avoid a repeat of what has happened before. As you can see from the chart posted below, every round of quantitative easing has driven the S&P 500 much higher. And when each round has ended, there has been a substantial stock market correction. The following chart was originally produced by DayOnBay.org…

And of course the chart above is incomplete. As you can see below, the S&P 500 is now sitting at about 1,800…

So let’s recap.

From the time that QE1 was announced to the time that it ended, the S&P 500 rose from about 900 to about 1,200.

When QE1 ended, the S&P 500 fell back below 1,100.

In a panic, the Federal Reserve first hinted at QE2 and then finally formally announced it. That round of QE drove the S&P 500 up to a bit above the 1,300 mark.

Once QE2 ended, there was another market correction. The S&P 500 fell all the way down to 1,123 at one point.

In another panic, the Federal Reserve first announced “Operation Twist” and then later added QE3. Since that time, the S&P 500 has been on an unprecedented tear. At this point, the S&P is sitting at about 1,800.

And of course those massively inflated stock prices have absolutely no relation to what is going on in the U.S. economy as a whole. In fact, the truth is that economic conditions for most of the country are steadily getting worse. Just today we found out that for the week ending November 30th, U.S. rail traffic was down 16.3 percent from the same week one year earlier. That is a hugely negative sign. It means that the flow of goods is slowing down substantially.

So the Federal Reserve has created this massive financial bubble that is totally disconnected from reality. The only way that the Federal Reserve can keep this bubble going is to keep printing lots more money, but they also know that they cannot do that indefinitely because the rest of the world is watching.

In essence, the Federal Reserve is caught between a rock and a hard place.

When the Fed does ultimately decide to taper (whether it be December, January, February, etc.), the consequences are likely to be quite dramatic for the financial markets. The following is a brief excerpt from a recent article by Howard Kunstler…

But even in a world of seemingly no consequence, things happen. One pretty sure thing is rising interest rates, especially when, at the same time as a head-fake taper, foreigners send a torrent of US Treasury paper back to the redemption window. This paper is what other nations, especially in Asia, have been trading to hose up hard assets, including gold and real estate, around the world, and the traders of last resort — the chumps who took US T bonds for boatloads of copper ore or cocoa pods — now have nowhere else to go. China alone announced very loudly last month that US Treasury debt paper was giving them a migraine and they were done buying anymore of it. Japan is in a financial psychotic delirium scarfing up its own debt paper to infinity. Who’s left out there? Burkina Faso and the Kyrgystan Cobblers’ Union Pension Fund?

The interest rate on the US 10-year bond is close to bumping up on the ominous 3.0 percent level again. Apart from the effect on car and house loans, readers have pointed out to dim-little-me that the real action will be around the interest rate swaps. Last time this happened, in late summer, the too-big-to-fail banks wobbled from their losses on these bets, providing a glimpse into the aperture of a black hole compressive deflation where cascading chains of unmet promises blow financial systems past the event horizon of universal default and paralysis where money stops moving anywhere and people must seriously reevaluate what money actually is.

What Kunstler is talking about is something that I have written about previously many times. When QE3 slows down (or ends), that is likely going to cause the yield on 10 year U.S. Treasuries to rise substantially, and that would have a whole host of negative consequences for the U.S. economy.

Most notably, it would threaten to blow up the quadrillion dollar derivatives casino that Wall Street usually manages to keep so delicately balanced.

The truth is that we are going to have massive problems no matter what the Federal Reserve does now.

If the Federal Reserve keeps wildly printing money, our financial system will become a massive joke to the rest of the planet and other nations will stop using our dollars and will stop lending us money.

That would be absolutely disastrous.

If the Federal Reserve stops wildly printing money, the massive financial bubble that Wall Street is enjoying right now will burst and we could have a financial crisis even greater than what we experienced back in 2008.

That would also be absolutely disastrous.

So does anyone out there see an easy way out of this under the current system? If you think that you have such a plan, please feel free to share it below…

The Most Homeless Children In New York City Since The Great Depression

December 9, 2013December 9, 2013 by Michael

At a time when Wall Street is absolutely swimming in wealth, New York City is experiencing an epidemic of homelessness. According to the New York Times, the last time there was this many homeless children in New York City was during the days of the Great Depression. And the number of homeless children in the United States overall recently set a new all-time record. As I mentioned yesterday, there are now 1.2 million public school kids in America that are homeless, and that number has gone up by about 72 percent since the start of the last recession. As Americans, we like to think of ourselves as “the wealthiest nation on the planet”, and yet the number of young kids that don’t even have a roof over their heads at night just keeps skyrocketing. There truly are “two Americas” today, and unfortunately most Americans that live in “good America” don’t seem to really care too much about the extreme suffering that is going on in “bad America”. In the end, what kind of price will we all pay for neglecting the most vulnerable members of our society?

If you live in “good America”, I very much encourage you to read an excellent piece about homelessness in New York City that was just published in the New York Times. What some young kids have to go through on a nightly basis should break all of our hearts…

She wakes to the sound of breathing. The smaller children lie tangled beside her, their chests rising and falling under winter coats and wool blankets. A few feet away, their mother and father sleep near the mop bucket they use as a toilet. Two other children share a mattress by the rotting wall where the mice live, opposite the baby, whose crib is warmed by a hair dryer perched on a milk crate.

Could you imagine having your own family live like that? The name of the little girl in the story is Dasani, and every night her family sleeps in a city-run homeless shelter that sounds like it is straight out of a horror movie…

Her family lives in the Auburn Family Residence, a decrepit city-run shelter for the homeless. It is a place where mold creeps up walls and roaches swarm, where feces and vomit plug communal toilets, where sexual predators have roamed and small children stand guard for their single mothers outside filthy showers.

It is no place for children. Yet Dasani is among 280 children at the shelter. Beyond its walls, she belongs to a vast and invisible tribe of more than 22,000 homeless children in New York, the highest number since the Great Depression, in the most unequal metropolis in America.

You can read the rest of that excellent article right here. Sadly, there are countless other children just like Dasani that live like this day after day, month after month, year after year.

Shouldn’t we be able to do better than this as a society? After all, the stock market has been hovering near record highs lately, and Wall Street is absolutely drenched with wealth for the moment.

With so much wealth floating around, why are New York City subways being “overrun with homeless” right now?

Something has gone horribly wrong.

I think that a recent editorial by David Simon, the creator of the Wire, summarized things pretty well. We are not “one America” anymore, and most of the people that live in “good America” don’t really care much about those living in “bad America”…

America is a country that is now utterly divided when it comes to its society, its economy, its politics. There are definitely two Americas. I live in one, on one block in Baltimore that is part of the viable America, the America that is connected to its own economy, where there is a plausible future for the people born into it. About 20 blocks away is another America entirely. It’s astonishing how little we have to do with each other, and yet we are living in such proximity.

There’s no barbed wire around West Baltimore or around East Baltimore, around Pimlico, the areas in my city that have been utterly divorced from the American experience that I know. But there might as well be.

Once upon a time, things were different in America. Nobody resented businessmen for building strong businesses and making lots of money. And successful businessmen such as Henry Ford hired large numbers of American workers and paid them very well. He felt that his workers should make enough money to buy the cars that they were building. In those days, businessmen were loyal to their workers and workers were loyal to those that employed them.

Unfortunately, those days are long gone. Today, in business schools all over America students are taught that the sole purpose of a corporation is to make as much money as possible for the stockholders. Not that there is anything wrong with making money. But at this point we have elevated greed above all other economic goals. Taking care of one another isn’t even a consideration anymore.

In the old days, big businesses actually needed our labor. But that is now no longer the case. Today, corporations are shipping millions of our jobs overseas and they are replacing as many of us with technology as they possibly can. The value of the labor of the working man is declining with each passing day.

As a result, the fortunes of big business and American workers are increasingly diverging. For example, the disconnect between employment levels and stock prices has never been greater in this country. If you doubt this, just check out this chart.

And instead of fixing things, Barack Obama is negotiating a secret treaty which will result in millions more American jobs being shipped overseas. The following is a brief excerpt about this secret treaty from an Australian news source…

The government has refused the Senate access to the secret text of the trade deal it is negotiating in Singapore, saying it will only be made public after it has been signed.

As the final round of ministerial talks on the Trans-Pacific Partnership resumed on Sunday, Nobel prize-winning economist Joseph Stiglitz wrote to each of the 12 participating nations warning that the deal and the secrecy surrounding it presented ”grave risks”.

So why aren’t we hearing much about this secret treaty from U.S. news sources?

If this is going to affect millions of American jobs, shouldn’t the mainstream media be making a big deal out of this?

And even if we weren’t losing millions of jobs to the other side of the planet, we would still be losing millions of jobs to advancements in technology. In fact, a CNBC article that was posted earlier this week seems to look forward to the day when nobody will have to worry about the low pay that fast food workers get anymore because they will all be replaced by droids…

Maybe so, but as fast food workers protest low wages and the president of the United States equates hard work with the right to decent pay, the rise of technology once again proves to be no stunt, or laughing matter. McDonald’s, where food production is already about as mechanized as food science allows, stopped updating the famous number “served” figure at its restaurants back in 1994—just short of 100 billion—but how long will it be before trillions are served their burgers and fries by a drone, after being cooked by a droid? Those machines work for cheap, and the best thing is, they have no concept of hard work, or dignity, or the foresight to consider whether or not the “cool” things they can do ultimately contribute, or detract, from a strong, consumer-dependent economy.

So what is the solution to all of this?

Where will the millions of desperately needed jobs for “bad America” come from?

Well, it appears that good ideas are in short supply these days. In fact, some of the ideas being promoted by our “leaders” are absolutely insane. For example, one prominent entrepreneur recently suggested that the solution to our employment crisis is for Congress to pass an immigration bill which would bring in 30 million more low-skilled workers over the next ten years…

Middle class Americans face a tough future because robots and machinery are eliminating their jobs, according to Steve Case, an entrepreneur who earned roughly $1 billion by creating the first successful internet firm, America Online.

But Congress could help the situation by passing an immigration bill that would import some foreign entrepreneurs and almost 30 million low-skilled workers over the next decade, Case told an audience of D.C. lobbyists and lawyers gathered on Tuesday by the business-backed Bipartisan Policy Center.

Exactly how would this improve the employment situation in this country?

I still cannot figure that one out.

But there are people out there that actually believe this stuff.

Meanwhile, many parts of Europe are suffering through similar things.

The unemployment rate in the eurozone recently hit a new all-time high, and the number of people living in poverty in Europe just continues to grow…

Over 124 million people in the European Union – or almost a quarter of its entire population – live under the threat of poverty or social exclusion, a report by EU’s statistical office has revealed.

Last year, 124.5 million people, or 24.8 percent of Europe’s population were at risk of poverty or social exclusion, compared to 24.3 percent in 2011 and 23.7 percent in 2008, the Eurostat said in a document published earlier in the week.

So what is going to fix this?

Where are the good jobs for workers in North America and Europe going to come from in the years ahead?

If you have a potential solution, please feel free to share it below…

Federal Reserve Whistleblower Tells America The REAL Reason For Quantitative Easing

November 12, 2013 by Michael

A banker named Andrew Huszar that helped manage the Federal Reserve’s quantitative easing program during 2009 and 2010 is publicly apologizing for what he has done. He says that quantitative easing has accomplished next to nothing for the average person on the street. Instead, he says that it has been “the greatest backdoor Wall Street bailout of all time.” And of course the cold, hard economic numbers support what Huszar is saying. The percentage of working age Americans with a job has not improved at all during the quantitative easing era, and median household income has actually steadily declined during that time frame. Meanwhile, U.S. stock prices have doubled overall, and the stock prices of the big Wall Street banks have tripled. So who benefits from quantitative easing? It doesn’t take a genius to figure it out, and now Andrew Huszar is blowing the whistle on the whole thing.

From 2009 to 2010, Huszar was responsible for managing the Fed’s purchase of approximately $1.25 trillion worth of mortgage-backed securities. At the time, he thought that it was a dream job, but now he is apologizing to the rest of the country for what happened…

I can only say: I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.

When the first round of quantitative easing ended, Huszar says that it was incredibly obvious that QE had done very little to benefit average Americans but that it had been “an absolute coup for Wall Street”…

Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank’s bond purchases had been an absolute coup for Wall Street. The banks hadn’t just benefited from the lower cost of making loans. They’d also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed’s QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way.

You’d think the Fed would have finally stopped to question the wisdom of QE. Think again. Only a few months later—after a 14% drop in the U.S. stock market and renewed weakening in the banking sector—the Fed announced a new round of bond buying: QE2. Germany’s finance minister, Wolfgang Schäuble, immediately called the decision “clueless.”

That was when I realized the Fed had lost any remaining ability to think independently from Wall Street.

Of course the fact that the Fed cannot think independently from Wall Street should not be a surprise to any of my regular readers. As I have written about repeatedly, the Federal Reserve was created by the Wall Street bankers for the benefit of the Wall Street bankers. When the Federal Reserve serves the interests of Wall Street, it is simply doing what it was designed to do. And according to Huszar, quantitative easing has been one giant “subsidy” for Wall Street banks…

Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets.

But Huszar is certainly not the only one on Wall Street that acknowledges these things. For example, just check out what billionaire hedge fund manager Stanley Druckenmiller told CNBC about quantitative easing…

“This is fantastic for every rich person,” he said Thursday, a day after the Fed’s stunning decision to delay tightening its monetary policy. “This is the biggest redistribution of wealth from the middle class and the poor to the rich ever.”

“Who owns assets—the rich, the billionaires. You think Warren Buffett hates this stuff? You think I hate this stuff? I had a very good day yesterday.”

Druckenmiller, whose net worth is estimated at more than $2 billion, said that the implication of the Fed’s policy is that the rich will spend their wealth and create jobs—essentially betting on “trickle-down economics.”

“I mean, maybe this trickle-down monetary policy that gives money to billionaires and hopefully we go spend it is going to work,” he said. “But it hasn’t worked for five years.”

And Donald Trump said essentially the same thing when he made the following statement on CNBC about quantitative easing…

“People like me will benefit from this.”

The American people are still being told that quantitative easing is “economic stimulus” which will make the lives of average Americans better.

That is a flat out lie and the folks over at the Federal Reserve know this.

In fact, a very interesting study conducted for the Bank of England shows that quantitative easing actually increases the gap between the wealthy and the poor…

It said that the Bank of England’s policies of quantitative easing – similar to the Fed’s – had benefited mainly the wealthy.

Specifically, it said that its QE program had boosted the value of stocks and bonds by 26 percent, or about $970 billion. It said that about 40 percent of those gains went to the richest 5 percent of British households.

Many said the BOE’s easing added to social anger and unrest. Dhaval Joshi, of BCA Research wrote that “QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it.”

And this is exactly what has happened in the United States as well.

U.S. stocks have risen 108% while Barack Obama has been in the White House.

And who owns stocks?

The wealthy do. In fact, 82 percent of all individually held stocks are owned by the wealthiest 5 percent of all Americans.

Meanwhile, things have continued to get even tougher for ordinary Americans.

While Obama has been in the White House, the percentage of working age Americans with a job has declined from 60.6% to 58.3%, median household income has declined for five years in a row, and poverty has been absolutely exploding.

But the fact that it has been very good for Wall Street while doing essentially nothing for ordinary Americans is not the biggest problem with quantitative easing.

The biggest problem with quantitative easing is that it is destroying worldwide faith in the U.S. dollar and in the U.S. financial system.

In recent years, the Federal Reserve has started to behave like the Weimar Republic. Just check out the chart below…

The rest of the world is watching the Fed go crazy, and they are beginning to openly wonder why they should continue to use the U.S. dollar as the de facto reserve currency of the planet.

Right now, most global trade involves the use of U.S. dollars. In fact, far more U.S. dollars are actually used outside of the United States than are used inside the country. This creates a tremendous demand for U.S. dollars around the planet, and it keeps the value of the U.S. dollar at a level that is far higher than it otherwise would be.

If the rest of the world decides to start moving away from the U.S. dollar (and this is already starting to happen), then the demand for the U.S. dollar will fall and we will not be able to import oil from the Middle East and cheap plastic trinkets from China so inexpensively anymore.

In addition, major exporting nations such as China and Saudi Arabia end up with giant piles of U.S. dollars due to their trading activities. Instead of just sitting on all of that cash, they tend to reinvest much of it back into U.S. Treasury securities. This increases demand for U.S. debt and drives down interest rates.

If the Federal Reserve continues to wildly create money out of thin air with no end in sight, the rest of the world may decide to stop lending us trillions of dollars at ultra-low interest rates.

When we get to that point, it is going to be absolutely disastrous for the U.S. economy and the U.S. financial system. If you doubt this, just read this article.

The only way that the game can continue is for the rest of the world to continue to be irrational and to continue to ignore the reckless behavior of the Federal Reserve.

We desperately need the rest of the planet “to ignore the man behind the curtain”. We desperately need them to keep using our dollars that are rapidly being devalued and to keep loaning us money at rates that are far below the real rate of inflation.

If the rest of the globe starts behaving rationally at some point, and they eventually will, then the game will be over.

Let us hope and pray that we still have a bit more time until that happens.

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