The first rule of Fightclub....

"The first rule of Fightclub is you do not talk about Fightclub.  The second rule of Fightclub is you DO NOT talk about Fightclub."   -Tyler Durden

One benefit of getting back to the gym is I subject myself to mainstream propaganda on the stairmaster, which has the same motivational effect as Heavy Metal music for me.  I spotted this today and had to pass it on.  To preface for those who don't follow finance,  Rick Santelli is usually the "champion of the little guy" on CNBC.  However,  he cashes his paycheck from you-know-who so he can't just come out and say "IT".   Jim Iuorio is a trader and frequent guest (maybe not after this).  This piece details the announcement by the Federal Reserve yesterday to bail out Europe by printing more money, and what that will mean to everyone.  The whole piece is only 7 minutes and worth your time, but it gets very interesting at the 4:50 mark.  Watch the look on Rick's face when Jim unloads some reality on him after this exchange.  It's the look you get when you go a little too far in the "Your momma!" insults game...

The Fedi Mind Trick

There is no inflation here....

Ben Bernake, Fed chairman

These are not the price increases you're looking for...

Ben Kenobi, Jedi Master

Move along...

Inflation: A process of continuously rising prices or equivalently, of a continuously falling value of money. 

Well, if a falling value of money is the definition of inflation maybe we should check on how the U.S. Dollar has been doing the last decade.  Hmmmm...if a 45% decline in 10 years  isn't "continuously falling"  I'm not sure what is. 

This your dollar on "Bernake" drugs... 

Your purchasing power has been cut in half in the last decade, but it's not front-page news.  You are told inflation is "contained" and "within acceptable limits".  We get technical goobledygook like the consumer price index (CPI) and "Core CPI" to validate there is little, if any, inflation.  The dollar chart, however, disagrees.

Curious.

The claim that "inflation is contained" is one of the biggest frauds the Federal Reserve, complicit with our corrupt politicians, have perpetrated on the American public.  Here is how Ben Bernake  can look the American public straight in the teleprompter and lie like a Persian rug about the effect increasing the money supply through quantitative easing (money printing) has on inflation and our daily lives.

Two Very Different Streets

Average Joe Sixpack, Main Street USA

About 25% of the average family's budget goes to food and fuel.  The charts below illustrate what has been happening to 90% of America the last decade and accelerated dramatically as a result of the bank bailouts in 2008 and over $2.4 trillion in "Quantitative Easing" since then.

Savers gutted by $500 billion per year

Gas Prices up 46%.

Food Prices up 60%

Working harder for less

Real Wages declining constantly

Unemployment completely unaffected by all the "stimulus"

 What happened to that $2.4 trillion we printed to combat "unemployment" since it obviously didn't go there?  Why are protestors occupying Wall Street?  Glad you asked.  Here's where the money went and why 90% of Americans are or should be very pissed off.

Top 10% that own 85% of all equities
 Wall Street, USA.

A 106% rise in the SP-500, courtesy of the Federal Reserve increasing bank reserves via Quantitative Easing begun in March 2009.   You might believe the company line that printing trillions of dollars to bail out Wall Street, "save the system"and manipulate the stock market "higher than it otherwise would be"  is "good" for everyone.  You would be wrong to do so.  Look very carefully at the next two charts and you'll see EXACTLY who gets the benefits.  We're pretty clear on who's getting the shaft from the charts above.

click to enlarge

Gee...I look just like the incomes of the top 10%!

 The FED can't force the markets up by increasing the money supply without the price of everything else rising as well.  Including food and gas.  If  you are a Wall Street bank, a savvy trader, or have large amounts of stock holdings you get the temporary benefit of increased wealth and earnings from printing money.  However, Average Joe Sixpack gets higher prices across the board without the benefit of higher wages and stock holdings to offset them.  He gets stuck paying for the expensive dinner, but doesn't get to eat it. 

If this sounds like a "raw deal" for Joe, it's because it is.  In order to sell it our masters need a good sales pitch. 

The FEDI MIND TRICK.

The preferred measure by the Federal Reserve of core inflation in the United States is the Core Personal Consumption Expenditures Price Index (PCE).  When our masters smugly lecture us  commoners about low inflation, this is what they base those lies on.  It's easy to get a "low" inflation reading if you strip out rising prices, overweight the falling prices, or simply ignore reality.  Not one to do things half-ass, the Fed conveniently does all three.

Eh?

1.Strip out the risers.  Anytime you hear about the Consumer Price Index (CPI) on the news, you'll hear two versions...CPI and "Core" CPI.  "Core" means "excluding food and energy".  It's always the lower of the two numbers.  Food and Energy are too "volatile" (up and down) according to the Fed, and therefore unfit for their inflation calculations.  I'm not seeing a lot of "down" in these charts...are you?
           Food           

Energy

2. Overweight falling prices. 
The heaviest weighting in CPI calculation is...housing, at 40%.  Home prices are falling, so this is a real positive development for keeping inflation "in check" for the Fed.  Average Joe feels much better being $100,000 underwater on his house knowing it's helping to fight inflation.

3. Ignore Reality or simply create your own Reality to suit you.  Joe no longer buys steak, since he can't afford it.  He buys hamburger instead.  This is called "substitution" in Fed lingo.  Joe prefers hamburger.  It's a choice.  Joe also derives intense pleasure from paying more for new appliances.  How much pleasure?  Well if the toaster is 10% more than last year you can bet the pleasure is at least 10%  more.  This is called "hedonics".

Per Investopedia:  Substitution
"The idea is that as prices rise (or incomes decrease) consumers will replace more expensive items with less costly alternatives.  Although beneficial to some (i.e. discount retailers), in general, the substitution effect is very negative in nature, as it limits choice. This is true not only for products, but also for services. Examples of the substitution effect in action can sometimes be observed over the winter holiday season, where, in lean economic times, discount retailers often hold up well."

Per Shadowstats.com:   Hedonics
When gasoline rises 10 cents per gallon because of a federally mandated gasoline additive, the increased gasoline cost does not contribute to inflation. Instead, the 10 cents is eliminated from the CPI because of the offsetting hedonic thrills the consumer gets from breathing cleaner air.  That new washing machine you bought did not cost you 20% more than it would have cost you last year, because you got an offsetting 20% increase in the pleasure you derive from pushing its new electronic control buttons instead of turning that old noisy dial, according to the BLS.
Here is the actual text of the Fed's preference for using the PCE indicator to measure inflation.  I took the liberty of highlighting the funny parts.

Since February 2000, the Federal Reserve Board’s semiannual monetary policy reports to Congress have described the Board’s outlook for inflation in terms of the PCE. Prior to that, the inflation outlook was presented in terms of the CPI. In explaining its preference for the PCE, the Board stated: The chain-type price index for PCE draws extensively on data from the consumer price index but, while not entirely free of measurement problems, has several advantages relative to the CPI. The PCE chain-type index is constructed from a formula that reflects the changing composition of spending and thereby avoids some of the upward bias associated with the fixed-weight nature of the CPI. In addition, the weights are based on a more comprehensive measure of expenditures. Finally, historical data used in the PCE price index can be revised to account for newly available information and for improvements in measurement techniques, including those that affect source data from the CPI; the result is a more consistent series over time. —Monetary Policy Report to the Congress, Federal Reserve Board of Governors, Feb. 17, 2000

In explaining its preference for the PCE, the Board stated:
"The PCE chain-type index is constructed from a formula that reflects the changing composition of spending and thereby avoids some of the upward bias associated with the fixed-weight nature of the CPI. The PCE rises about one-third percent less than the CPI, a trend that dates back to 1992. This may be due to the failure of CPI to take into account substitution. Core inflation eliminates products that can have temporary price shocks (i.e. energy, food products). Core inflation is thus intended to be an indicator and predictor of underlying long-term inflation"

The Federal Reserve deliberately modifies it's inflation calculations to lessen the obvious effects of inflation and publicly defend their actions.  They cause inflation by increasing the money supply, thus debasing our currency by the exact amount they printed.  90% of America has no access to this "generosity" but get to pay the price regardless.  If inflation has the gall to appear in their "modified" calculations,  they can change those calculations retroactively to adjust the..."upward bias".   In December of 2010 inflation per the CPI was .01%.  As measured in 1980 it would be 8%.   As measured in 1990 it would be 4%.   The congressional super-committee tasked with reducing the defecit is planning on "adjusting" the CPI yet again.  At last, bi-partisan support for something.

No Way!

There's no inflation here..

Move along...

The Legal Ponzi Scheme

The 14th Amendment reads, "The validity of the public debt of the United States, authorized by law ... shall not be questioned."

What happens when Congress fails to make new laws to keep the Ponzi scheme going (raising the debt ceiling) as is now being threatened? You need to understand the definition of this scam to to think about it, so I present the definition of the fraud made famous by Charles Ponzi back in 1910, with some tweaks by yours truly to bring it up to this century:

A Ponzi scheme is a fraudulent government budget investment operation that pays returns to Wall Street, Banks, Medicaid, Medicare, Social Security, Defense, Federal employees, Congress, Unions, Special interests, Welfare, Food Stamps, Grants, Student Loans, separate investors, not from any actual current generation's taxes profit
earned by the organization, but from their own money or money paid by subsequent generations investors. The congressional budget Ponzi scheme usually buys votes to stay in power or gain office entices new investors by offering returns other people that actually have to pay for it
investments cannot guarantee, in the form of outrageous salaries, pensions, perks, promises, programs short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that our government a Ponzi scheme advertises and pays requires an ever-increasing flow of money from the banking oligarchy comprised of privately held central banks disguised as legitimate government entities with names like "Federal Reserve" who print the money out of thin air and charge us interest on it investors to keep the scheme going.

The system is destined to collapse because the earnings of the present generation earnings, if any, are less than the spending and promises of past generations payments to investors .

If the White House were to declare the debt ceiling unconstitutional, it could continue to meet its financial obligations. However, "Obama would have a hard time justifying issuing new debt to pay old debt" according to George Bush's former Office of Legal Council head Steve Bradbury.
A hard time? Extending fraud that is punishable by prison time in the real world would be "hard"? Well, I guess that's why Congress has quietly raised the debt ceiling 10 times in the last 12 years. If it's LEGAL via Congress, it's OK. Otherwise, you get the Madoff Treatment. Fear not, citizens. Our tireless leaders will find a "compromise" somehow, someway. Otherwise, the reality that as a country we are already in default and can't possibly pay off our debts or even meet our current obligations would surface. That cannot be allowed. Is it just me or does that can not go quite as far when you kick it these days?

It's almost too QEasy

When I last updated it was March of 2011 and the Bernak was dutifully manipulating markets "higher than they otherwise would be" via Quantitative Easing 2. Not unlike Microsoft Windows these things need to be updated constantly to kick the can further keep up with the times. Versions 1 and 1.5 didn't do it, so 2.0 was unveiled in August of 2010.In March the Smart money was just starting to move out of the market as seen in the above chart, and I made my calculations...

The Bernak has tried to make investing "so easy a caveman can do it" FED QE. You buy long. so I decided to chart how far $2.1 Trillion buys you in SP-500 points in the last post. Please reference the math in that if you'd like but the nuts and bolts was a close below SP1295 (it actually hit 1249. Darn Tsunamis). Then, a vertical gap-reversing non-stop march to new highs with a target of 1385. Kind of like this one that went to the rally high of 1370. QE2 Ends in June, just 8 trading days and a paltry $30-50 billion of Market Manipulatin' goodness left.
So where does that leave us? Now that EVERYONE knows how the game works, the time-trusted practices of statistical analysis, mean reversion, FUNDAMENTALS (what the hell are those?) that have been rendered mute by the Bernak will re-emerge, however briefly. How briefly? Glad you asked. David Tepper, manager of the Appaloosa Hedge Fund, famously called the QE2 rally spot on. The money quote when asked "what's going to go up?" "EVERYTHING". And how. Since last August gas has doubled, corn has quadrupled, cotton is up 50%, wheat is up 70%, oh crap wait that's not because of the FED. Ben said so, and he wouldn't lie. The SP-500 went up another 35%. THAT was because of the FED. None of the other stuff. Got it?

I digress. The market will not be making new highs without Mr. Ponzi or "the Ponz" as I like to call him making another apperance in the form of QE3. The bottom 90% of America has only been participating in the "Recovery" by massive defaults on nearly every form of debt, not earning more money. They're getting really pissed about all those price increases in food, fuel, basic necessities and everyfuckingthing except their paycheck that the Bernak is NOT responsible for. (On that note Ben says that without wage inflation, there is no inflation, if that makes you feel any better.) The "political will" isn't there for another "stimulus". Ben famously referenced Milton Freidman's "dropping money from helicopters" in regards to helping the economy and earned the moniker "helicopter Ben". In the interests of logistical honesty let's call him B-52 Ben because how in the hell would you fit $2.2 trillion in choppers?. B-52 Ben has had to close the money-bomb bay doors for a time to let things cool off. While this goes on, the SP-500 will fall. Why? The classroom rule the Bernak has instituted FED QE. YOU BUY LONG. has predictably created the inverse rule as well in the real world FED NO QE. YOU NO BUY LONG. What else would you expect when asset prices are, in Bernake's own words, "higher than they otherwise would be"? This result seems painfully obvious even beforehand to anyone that didn't grow up in the vacuum of academia, but seems to elude the Bernak, at least publicly. In his world, only good things (stocks up) come from printing money. Must be nice (if you're getting the money).

Here is the current SP-500 with the 50% Fibonacci retrace of the QE rallies. David Tepper was on CNBC recently and was asked when (not if) there would there be QE3. He said a 200 point-ish drop in the SP-500 ought to do it. When David speaks, Ben listens. At 1295 today, 200 points would drop us right onto the 38% Fib retrace at 1090, with the technical brick-wall 50% retrace below that at 1020. David Tepper doesn't say things on CNBC flippantly, so it's no coincidence the technical levels are right there at the "200-point-ish" range. Expect QE3 when the SP-500 gets to this range. I'd say late in the year October/November right when Wall Street bonus season kicks off. Get folks feeling "wealthy" for Christmas. Then short the ultrashort ETF's until 2-3 months before QE3 is scheduled to end. So easy a caveman can do it, right GEICO?

Addendum: As the market has been going the down in anticipation of no more free money for a few months, Bloomberg pointed out today (6/27/11)that while QE2 is ending, QE 2.5 is only just beginning.
Fed to buy $25 billion a month in Treasuries after QE2

Ponzi ON!

The market is, predictably, up nearly 1.5% on this news. Expect it to behave exactly like QE1.5 (the period between QE 1 ending and QE 2 beginning where the FED did the same thing). High volatility, frequent gaps (usually upwards for no apparent reason) and essentially a suicide environment for shorts and short term trades. Longer term, the market will be going nowhere, fast and mostly overnight. If you value your depreciated cash, you'll wait for QE3 like the big boys. After all...we know it's coming.
Addendum 10/26/11
Markets at 85% Correlation an 80 year high

FED up with trading?

For those of you weary (like me) of a market that defies decades of proven tactics and makes anyone with a Cramer mentality (BUYBUYBUY!) and some cash deployed long an "expert" via a market that only goes up, I have some help. The Bernak has decreed that stocks will not fall on his watch. He has tethered his money-printing Quantitative Easing to unemployment, which is largely unaffected by the stock market rising. The Market is up about 100% from the March 2009 lows. Unemployment, if you believe the BLS data, is down about 1.5% from it's peak and stands at 9%. Please ignore the fact that 15% of the population (44 Million) is on food stamps but unemployment is only 9%.

The important thing here is the Bernak believes printing money and giving it to the big banks outright via the discount window for .025% interest (free) or buying treasuries outright (QE1 and QE2) will, by allowing the top 10 % of the population that own 85% of all equities to make outrageous returns via currency devaluation, create jobs. The "trickle-down" wealth effect. He has said numerous times he'll do "whatever it takes" (read: print more cash) to get unemployment down.

Never before have we had such crystal-clear insanity from our monetary masters, and the market reflects this new dynamic. It goes up. And up. And up. There is no fear, because the Bernak has stated he will print some more money if things don't improve. Or stocks go down. Either one. Wall Street is all to happy to play along, hence you get 93% win percentages out of the big hedge funds (JPM and Goldman Sachs) every quarter we have QE. "Just win, baby!" as Al Davis says. The only quarter they didn't do the (previously) statistically impossible? Q2 2010, when the Bernak had the audacity to let QE1 end in April. Alright enough talk here's the setup. The numbers on the chart are defined below. I simply calculated how much the FED monetized and what the market did and is doing as a result.

1-4. The FED announces various and sundry "Mortgage-backed security" buybacks where they agree to buy all the crappy loans from the big banks. On number 4, they announce the "Nuclear" option of buying another 1.25 Trillion. The fix is in, the top 10% knows it, and it's game on.

SM-The market, making only a few quick reversals to screw the bejezzus out of any shorts that try to play goes straight to 1150. Here we get a 9% correction exactly 3 months before the scheduled end of QE1. The Smart Money is taking some money off the table.

5. QE1 ends, and without free money from the FED everyone takes their ball and goes home. At the same time. FLASH CRASH and the Dow is down 1000 points in a day in May 2010, bounces, the market loses 17%, breaks key support, gets all the surviving bears on board and then...

6. QE2 Baby! The Bernak puts in the bottom in August with QE2 hints. Fry some shorts in hot oil and away we go again...until

SM. Smart Money seems to be pulling cash in mid-February 2011 with a mild correction...3.5 months before the scheduled end of QE2. Weird. So weird I thought I'd do the math. Here it is.

QE1 = 1500 billion = 83% rise in SP-500(March 2009 low of 666 to April 2010 high of 1220) The 666 bottom until first real correction at 1150 was a move of 72%.

We know how much the FED monetized (1.5 trillion), when they started (March of 2009) and when they ended (April 2010). We also see the market now stops going down when the Bernak fires up the printing press, and stops going up when he turns it off, and 1.5 Trillion buys you 83% higher SP-500. Enter QE2:

6. QE2 announced in August 2010, official in November. 600 billion. QE2 is 40% of QE1. The non-stop flight from 6. to the "Smart Money" correction should be 40% of QE1. QE1 went 72% so 40% of that is 28.8% . The February correction started at 1344.

1344 is 29.2% higher than 1040, the August "QE2" speech low. Cool.

The QE1 correction was 9%. 40% of that is 3.6%. Take 3.6% from 1344 and you get a correction target of 1295 on the SP-500. It hit a low of 1294.26 on February 24th. Cool again. Now, if QE2 continues to rhyme with Qe1 we'll have some sort of "event" to knock SP back down near that 1295 level, where the 50-day lurks. It will likely close below that, suck in some bears, and then gap-reverse /short squeeze it's way to new highs. This has been the pattern since March 2009. 40% of an 83% move would be 33.2%. Add that to the 1040 QE2 start point in August and you get a 1385 target for SP-500. Assuming QE3 isn't announced before QE2 ends (Bernake's already hinting, but he'll have a hard time convincing everyone $3.50 gas isn't his fault. On the other hand, maybe not Fed's lockhart says higher oil prices might lead to QE3). The fix is in...trade accordingly. The smart money's moving out now and won't be back til QE3 though...

Easy Money

For those of you frustrated by the stratospheric .025 % CD or Money Market returns available to the Average Joe courtesy of the Bernak, da Wall Street boyz have got a sure-fire path to higher returns. For them, that is.

Reverse Convertibles are short-term bonds generally marketed to individuals that convert into stock if a company’s share price plummets.
Banks sold more than $6 billion of bonds linked to the performance of stocks last year, promising returns of as much as 64 percent at a time when interest rates were at historic lows.

Instead of reaping such extraordinary gains, reverse convertibles, as the products are known, lost 1 percent on average.

Those were the lucky ones. Here's some of the unlucky ones: Click on the charts for a larger picture.

Royal Bank of Scotland Group Plc sold $1.15 million in three-month notes tied to Eastman Kodak Co. on June 10 that paid 24 percent annualized interest. That’s 24 times the average rate on one-year certificates of deposit.
Buyers couldn’t lose money unless shares of the camera maker fell to below $3.54 from $5.06. Kodak dropped to $3.50 on Aug. 31 in New York trading. RBS converted the bonds into stock and investors lost about 18 percent even with the high interest rate.

Sheeeiitt. Can you believe it? 3.54 was the stop, and it made it to 3.49 for one day only, kicking all those poor investors in the balls and converting their bonds into Kodak shares at multi- year lows. It's at 5.74 now. Curse the luck!

On May 11, JPMorgan sold $800,000 of reverse convertibles linked to TiVo Inc. that paid 64 percent a year in interest. 64%? Woo-Hoo! I'm gonna be rich!


Three days later, TIVO dropped 42 percent after an adverse court ruling. Investors ended up losing 42 percent, including interest. The bank charged 1.75 percent in commission on the two-month notes.

Now, that's just darned unlucky in my opinion. Want to see how unlucky? Check out the chart....
Hmmm. TIVO's puttering around $10 per share, then somebody decides it's worth A LOT more on March 4th. JP Morgan sells 800K worth of Reverse Convertibles in May. Then darned if we don't get the old adverse court ruling and it's right back down again.



Curious. No one thought TIVO was worth more than $12 a share for 6 years. Then in one day it goes to $18. JPM sells some convertibles, then a 42% gap-down three days later. Now it's back to the old range. Weird.

Word to the wise, if anyone promises 64% returns, even someone as forthright and trustworthy as JP Morgan Chase, you might want to think twice. Mom and Pop traders can't gap stocks 40% in both directions, or manipulate prices just far enough to hit paydirt. The largest Hedge Fund/Too Big To Fail Casinos can though. And they do. Every day. When you see those 2010 Wall Street bonuses roll in at all-time highs try not to be the one whose paying them.