Most people seem to viscerally recognize that the absence of an immediate crisis does not mean we will not eventually face one. They are wary of believing promises by those who failed to predict previous crises in housing and in highly leveraged financial institutions.
They regard with skepticism those who don't accept that we have a debt problem, or insist that inflation will remain under control. (Indeed, they know inflation is not well under control, for they know how far the purchasing power of a dollar has dropped when they go to the supermarket or service station.)
When an economist tells them that growing the nation's debt over the past 12 years from $6 trillion to $16 trillion is not a problem, and that doubling it again will still not be a problem, this simply does not compute. They know the trajectory we are on.
And when you tell the populace that we can all enjoy a free lunch of extremely low interest rates, massive Fed purchases of mounting treasury issuance, trillions of dollars of expansion in the Fed's balance sheet, and huge deficits far into the future, they are highly skeptical not because they know precisely what will happen but because they are sure that no one else--even, or perhaps especially, the policymakers—does either.
Crushing Student Loans, Worthless College Degrees And The Millennials
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
The existing social and financial order is crumbling because it is unsustainable on multiple levels. The central state is not the Millennials' friend, it is their oppressor.
The Millennial generation, also known as Gen-Y (Gen-Y comes after Gen-X), is generally defined as those born between 1982 and 2004.
The oldest Millennials were children during the first Iraq War in 1991 (Desert Storm) and just coming of age in 2001 (9/11 and the war in Afghanistan) and the start of the second Iraq War (2003).
The Millennials have entered adulthood in a era characterized by permanent low-intensity wars and central-bank/state managed financial bubbles--2001 to the present. In other words, the only experience they have is of centralized state mismanagement on a global scale.
The gross incompetence of the government and central bank--not to mention the endless power grabs by these centralized authorities--has not yet aroused a political consciousness that the system is irrevocably broken, not just for older generations but most especially for them.
Anecdotally, it appears the Millennial generation is still operating on the fantasy that all they need to do to get a secure, good-paying job and a happy life is go to college and enter the Status Quo machine of government/corporate America.
There are two fatal flaws in this fantasy: the $1+ trillion student loan industry and a transforming economy. The higher education industry in the U.S. operates as a central state-enabled and funded cartel, limiting supply while demand (based on the fantasy that a college degree has critical value) soars. This enables the cartel to keep raising prices even as the value of its product (a diploma) sinks to near-zero.
Since the Federal government issues and guarantees all student loans, the higher education cartel is (like sickcare, national defense and the mortgage industry) effectively socialized, i.e. funded and managed by the central state.
If you understand the student loan system is predatory, parasitic and exploitive, you have reached first base of a meaningful political awareness. If you understand the central state (Federal government) funds and enforces this system, you've reached second base. If you understand the vast majority of college degrees do little to prepare you to be productively employed in the real economy, you have reached third base.
If you understand the Status Quo is unsustainable and does not operate according the the fantasy model you've been told, congratulations, you're close to home base.
I have covered all the salient issues repeatedly:
The Fatal Disease of the Status Quo: Diminishing Returns (May 1, 2013)
College Grads: It's a Different Economy (May 3, 2013)
Present Shock and the Loss of History and Context (May 22, 2013)
Generation X: An Inconvenient Era (guest post) (May 23, 2013)
The Nearly-Free University (November 15, 2012)
The central state is not your friend, it is your oppressor. The loan shark that won't let you discharge your student loan debt without appealing each ruling against you three times is the government (and its hired-gun proxies).
The oppressor who demands you work your entire life to pay interest on public debt squandered on neocolonial wars and various cartels (sickcare et al.) is your central state.
The entity who demands you pay higher taxes so the generation entering retirement gets all that it was promised, even though the world has changed and the promises are no longer sustainable? The central state.
The oppressor that will devote its enormous resources to investigate and crush you if you actively resist the bankers and financiers who pull the political lackeys' strings? The central state.
At some point, the Millennial generation will have to awaken to the fact that the only way to change its fate is to grasp political power and redirect the policy and mindset of the nation. Centralization is the black hole that is destroying the nation's social and economic vigor. Decentralization, transparency, accountability, adaptability, social innovation, a community-based economy--these are the key features of a sustainable social order.
The existing social and financial order is crumbling because it is unsustainable on multiple levels. The Status Quo will cling to its false promises and corrupt centers of power until the moment the whole thing implodes.
Related links of interest:
Dear Class of ‘13: You’ve been scammed How the College-Industrial Complex drove tuition so high
Overdue Student Loans Reach Record as U.S. Graduates Seek Jobs
Bureaucrats Paid $250,000 Feed Outcry Over College Costs
Welcome, Robot Overlords. Please Don't Fire Us?
My Generation’s Disease
Podcast with Mike Swanson of WallStreetWindow.com on student loan debt and the Nearly Free University: Charles Hugh Smith On the Forces of Centralization and Soaring Education Costs. I always enjoy discussing issues with Mike, a polymath with a wide range of interests and experiences.
"There is also concern about the possibility of a breakout of inflation, although current inflation risk is not considered unmanageable, and of an unsustainable bubble in equity and fixed-income markets given current prices."
"Uncertainty exists about how markets will reestablish normal valuations when the Fed withdraws from the market. It will likely be difficult to unwind policy accommodation, and the end of monetary easing may be painful for consumers and businesses. Given the Fed’s balance sheet increase of approximately $2.5 trillion since 2008, the Fed may now be perceived as integral to the housing finance system."
As the CHART OF THE DAY illustrates, swings in pension-fund returns may give them an incentive to act. The chart tracks the iBoxx U.S. Pension Index, designed to mirror the performance of a typical plan with defined benefits.
The index had a 6.1 percent loss for the year as of two days ago, when Lyons wrote her report. The decline followed a
0.2 percent gain for all of last year -- and a 31 percent surge the year before.
Volatility in funds’ asset value and relatively low interest rates “have made managing pensions increasingly difficult,” the New York-based strategist wrote. “Corporate managers are evaluating whether or not they want to be in the asset-management business.”
One possibility is switching to defined-contribution programs, especially 401(k) plans, the report said. Another is shifting into bonds and away from stocks. Ford Motor Co. will “walk toward” raising fixed-income investments to 80 percent of pension assets from 55 percent at the end of last year, Treasurer Neil Schloss said in March.
Ford and General Motors Co. offered pension buyouts to retirees last year, and Lyons cited the lump-sum payments as a third option for “de-risking.” GM also used a fourth approach, transferring obligations to an insurance company through the purchase of a group annuity.
CFTC says oil speculators cut WTI net long position by 21,689 contracts to 250,531
CFTC says net USD long position USD 42.6bln increases 4.6%
Fixed Income
US Treasuries tumbled following the release of much better than expected US University of Michigan and Chicago PMI data as the Fed tapering fears reignited. 10y yields saw their biggest monthly gain in more than 3 years, breaking above the 2.20% psychological level as the move lower in T-notes accelerated post data triggering sell stops at 129.04. Prices were further weighed on by chatter doing the round of hefty hedge fund selling as today’s session, the last of the month saw the usual month-end position squaring. Heading to the close, T-notes saw a 14 tick bounce and at the pit close, T-notes settled at 129.07, down ticks 8 ticks.
Source: Newswires
Commodities
The entire Energy complex came under pressure today from the market talk of a disappointing Chinese PMI reading and an uneventful OPEC meeting where it was decided to leave output unchanged. These factors combined with USD strength and risk off sentiment to add momentum to oil price losses. Front month NatGas futures at closed under USD 4/MMBTU for first time since May 16th after in fifth straight losing session.
WTI crude futures broke the USD 92.00 handle to the downside to trade lower into theNYMEX pit close for the week. This price-action is often observed on a Friday heading into the close as positions are squared ahead of the weekend and month end.
Source: Newswires
The NY Fed plans to buy $45 billion in treasury securities in the month of June. Here is the list of June's Pomo schedule: http://www.newyorkfed.org/markets/tot_operation_schedule.html
FX Flows
- CFTC says net EUR long position USD 13.6bln increases 4.5%
- CFTC says net JPY short position USD 12.2bln increases 3.3%
- CFTC says net AUD short position USD 4.1bln increases 20%
Analysis details:
- Of note, net USD long position largest since at least 2007.
Metals
- COMEX silver speculators switch to net long position by 63 contracts, adding 250 contracts in week to May 28th.
- COMEX copper speculators trim net short position by 160 contracts to 8,872 in week to May 28th.
It seems pretty clear (especially with volume the last few days) that managers were hedging into the highs as opposed to chasing...
Commodities were plundered early on (even though the USD was getting smoked) but bounced back after the European close (UK was open) and extended gains after the Fed...
and FX markets reversed their USD plunge on this morning's data and then extended the reversal on the FOMC...
and Treasury yields made new 2013 lows at 1.6120%...
Energy, Materials, and Homebuilders were the high-beta laggards today. but the Transports were hammered relative to the rest of the market...
In the last few minutes, copper collapsed to Lowest Since Oct. 2011...
Broadly speaking, risk assets led stocks lower all day, as Capital Context's CONTEXT model shows below...
In hindsight, the higher grocery bill shouldn’t have come as a surprise: prices are higher, and increase faster, in certain foods rather than others. The expected results from the drought last summer are only one example: corn, poultry, and produce prices are expected to surge as the corn shortage comes full circle. The USDA’s food CPI forecast for 2013, which you can find here, predicts a 3-4% rise in its basket of goods in 2013, with dairy product and fresh fruit & vegetable prices rising more than 4%. These foods supposedly make up 13.3% of the USDA’s “basket” (in relative importance) for the year.
Unfortunately, these weightings don’t seem to accurately represent the real world baskets Americans bring to the checkout at their local supermarkets. The top 10 purchased items in US food stores, according to various surveys, are (1) milk, (2) bread, (3) eggs, (4) beef, (5) chicken, (6) cereal, (7) salty snacks, (8) lettuce, (9) cheese, and (10) non-alcoholic beverages (juice and soda). While the USDA reports only 0.1% food inflation (seasonally-adjusted) for February 2013, these top items actually rose an average of 1.3% over last month. It would seem, then, that our shopping carts are getting more expensive than the headlines numbers might indicate. If, as these surveys suggest, we purchase items growing faster in price more often than those that decline or stagnate, these foods could have a disproportionate – and in this case, inflationary – impact on what we expect overall inflation to be. This is what economists call, unsurprisingly, “Inflationary expectations” and everyone from Fed Chairman Bernanke on down to the most junior staffer at a regional Fed worry intensely over these popular perceptions of future inflation.
We perused the USDA CPI data to find out which food (or foods) is costing us more, and which might help us save a few bucks. Healthy eaters beware: the data is not on your side.
Lettuce and apples have risen the most in price compared to February 2012, up 24.5% and 11.1%, respectively. Both items are, admittedly, out of season in February; but remember, these are like-month comparisons. The rising cost of lettuce in particular may hurt the American consumer, as it is one of the most frequently purchased items. Lean meats have also grown much more in price than their more “fattening” counterparts: chicken is up 5.0% over last year and turkey 5.1%, while pork is down -1.5% and ham up only 1.0%.
Lettuce, hot dogs and fresh fruit grew the most in price from January to February 2013, up 6.4% on average.
Potatoes, sweeteners, and bread products, on the other hand, are less expensive than they were just last year, down an average of -4.6%. Lamb and mutton products are the single cheapest item in comparison to last February, down -16.6%; coffee is also surprisingly lower, down -4.1%. The products that fill out the less-expensive group, however, are not necessarily what you might consider “healthy”: butter, sugar, and fats & oils, are all among the top “losers” in price.
Compared to the month prior, tomatoes, frozen fish, and peanut butter have declined the most in price, down an average of -3.8%.
It may also cost you to be “health-conscious” when choosing different iterations of a certain product, according to the BLS’s CPI data. Wheat bread, for example, rises in price much faster than white bread, and buying whole milk is becoming more expensive than less-fat versions. Fresh produce is constantly climbing in price (especially out-of-season fruits and veggies), while frozen and canned versions are dropping in cost. Unfortunately, health-conscious is not akin to price-conscious.
While food away from home typically climbs at a faster rate than food at home (+2.3% over last year vs. 1.6% for at-home), the USDA predicts that home-cooked food will actually grow faster in 2013: 3-4% vs. 2.5-3.5%. Fresh produce and dairy products are expected to be the most expensive in 2013 compared to last year, up 3.5%-4.5%. Somewhat surprisingly, though, poultry prices are not expected to grow more than the market basket as a whole, despite worries of a surge thanks to the corn shortage.
Finally, according to the USDA’s farm price spread reports, retail prices at grocery stores in 2012 were well on their way back to pre-recession highs in 2011 (the latest data available). By this unwelcome measure the U.S. economy has clearly “recovered” quite well.
Poundage-wise, Americans take in the majority of our food in fruits and vegetables, followed closely by dairy products. The single most-consumed item by weight is milk; oranges come second. This data point is surprising, given the stories of declining milk consumption, like this one from the WSJ. It is also notable considering neither of these two items is one of the top purchased items at grocery stores.
The biggest food consumers, based on poundage of food eaten per year, are Caucasian, college-educated, high-income male adults between the ages of 20 and 39 who maintain a healthy weight. According to the data, high-income households (300% above the poverty line) consume 13% more pounds of food each year; males eat 24% more than females; and college-educated persons eat 22% more than those with less than a high school diploma. Those identifying as Hispanic tend to eat the most at home, while Caucasians eat the most away from home.
Most surprisingly, persons with a “healthy weight” eat 7% more pounds of food per year than obese persons. The key here, as you might expect, is substance: obese persons eat the least fruit and more meat than overweight or healthy-weight people. Interestingly, though, they come up to par on veggies, fats & oils, and grains.
These observations, combined with the data from the USDA’s CPI, point to one simple conclusion: we’re all going to feel (and might already be feeling) the pinch at the grocery store, even if we don’t elsewhere. Some of us, according to the USDA data, may feel it more than others: those with male children between the ages of 2-11, for example, might expect to spend a bit more on produce, as these kids are the single biggest consumers of those quickly inflating apples in the country. College-educated women between the ages of 40-59, meanwhile, might find themselves eating less salad: the biggest consumers of lettuce may not enjoy a 25% increase in price.
All of this analysis ultimately comes back around to that econo-geeky topic of “Inflationary expectations.” Though food CPI is certainly the most tangible inflation indicator to most Americans, it is important to know it is not the only one; there’s a reason the BLS prints an “all items less food” number. That’s not to say it should be ignored, of course. It wouldn’t do to overlook price increases in the commodities that take up a full 15% of our income, on average. We just may need to extrapolate it from how we view inflation overall. And if there is a real bout of food inflation brewing – with some major demographics feeling a distinct pinch – that may well be enough to change the level of consumers’ expectations for future price increase in and out of the grocery store.
Where Would Gold's Support Price Be if Gold Was Just a Commodity?
Last year, the average cost of production was $673/oz, and the marginal cost of production (90th percentile) was $1104/oz (Gold cash costs drive higher, 22 March 2013).
Assuming sustaining capex at around $200/oz, this indicates cost support at around $1300/oz, based on last year’s data; our global database encompasses 35% of global production.
Should prices dip below marginal cost, around 10% of production under our cost curve becomes cash-negative, representing an estimated 262 tonnes of cash-negative gold production globally. The bulk of this at-risk production is from South Africa, according to our database. Also putting pressure on gold prices is the acceleration of ETP outflows, which have already reached 66.5 tonnes for the month-to-date (until 12 April 2013). Nearly 320 tonnes of gold ETP holdings are cash negative below $1400/oz (assuming only those shares created above $1400/oz have been redeemed above $1400/oz, thus, this estimate is likely to be greater).
Although a reduction in mine supply would need to counter the supply from ETP outflows, this has raised the question whether producer hedging could gain traction. Hedging activity over the past couple of years has predominantly been related to project financing.
Looking at the 20-year price low in 1999, when prices dipped to $252/oz, prices traded a third above the annual average cash cost. The average cost of production was quite stable in the 1990s but has risen by an average 16% y/y over the past five years. The marginal cost of production has risen by 69% over the past five years, rising by 15.2% last year.
Our cycle average forecast is $1125/oz (which denotes the cost-driven estimate of the minimum sustainable price over a business cycle) before taking into consideration sustaining capex, therefore, given that cost pressures are rising and labor disruptions persist, from a fundamental perspective, support comes into play initially at around $1300/oz before a substantial quantity of mine production is put at risk.
How long until Intel (and every other company's) ROA shrinks and shrinks and shrinks some more (as every last cent of "capital intensity" is extracted), before both its top line and cash flow starts getting crushed? That too will be some other management's team's concern. And yes, the current management team just cut the full year capex forecast from $13 billion to $12 billion.
Why is lack of CapEx spending a very big issue? The chart below explains best:
Gold Crashes Most in 30 Years … What Does It Really Mean?
Zero Hedge notes:
Adding insult to injury, the Shanghai Gold Exchange overnight announced that following the tumbling precious metal prices and limit down drop in early trading, it may raise trading margins for its gold and silver forward contracts.
(Margin calls tend to trigger further selling.)
Some Say It Is a Good Time to Buy
While most financial advisers are screaming “sell!”, there are some well-known contrarians.
For example, Bill Gross still recommends buying gold.
Marc Faber says:
“I love the fact that gold is finally breaking down because that will offer an excellent buying opportunity” …. “The bull market in gold is not completed.”
John Hathaway of Tocqueville Funds (with $10 billion under management) says that the selloff in gold is “a contrarian’s dream scenario”:
The evidence shows strong macro fundamentals for gold, investor sentiment at a negative extreme and compelling valuations in the mining shares. It seems like a contrarian’s dream scenario to us.
And Zero Hedge notes that – from the perspective of technical analysis – gold is the most oversold it has been in 14 years.
The Bearish Explanation
But why has gold crashed?
Bloomberg blames:
“Optimism that a U.S. recovery will curb the need for stimulus”; and
“The prospect that beleaguered members of the euro zone might be forced to sell gold to raise part of the funding, and there are much bigger holders in that category than Cyprus.”
Citigroup opines:
Gold decline may have been related to some break in technical levels and the general improvement in global risk appetite.
Business Insider argues:
[Gold's price collapse] vindicates the economic ideas of the economic elites.
***
To respond to the economic crisis, economists and mainstream policy makers have favored highly unusual policy measures (massive Fed balance sheet expansion, massive stimulus, etc.). These ideas are usually based on years of traditional economic research (Keynesianism, monetarism, etc.).
All of these ideas have been slammed by heterodox types like Austrian economists, who have warned of hyperinflation, and gold going to $10,000.
So the collapse in gold is not about gold, but about vindication for a large corpus of belief and economic research, which has largely panned out. It’s great that our economic elites know what they’re talking about, and have the tools at their disposal to address crises without creating some new catastrophe.
Things aren’t great in the economy, but the collapse/hyperinflation fears haven’t panned out, and the decline in gold is a manifestation of that.
Barry Ritholtz writes:
History shows Gold trades differently than equities. Why? It comes back to those fundamentals.
It has are none.
This is not to say gold is not affected by Macro issues. But that is very different than saying Gld has a fundamental value, an intrinsic worth. It does not. That led to this heretical advice: Gold is not, and can never be, an investment. It has no true intrinsic value, no cash flow, no earnings, no coupon. no yield. What people call fundamentals are nothing more than broad macro analysis (and how have your macro funds done lately?). Gold is the ultimate greater fool trade, with many of its owners part of a collective belief theory rife with cognitive errors and bias.
I do not want to engage in Goldenfreude — the delight in gold bugs’ collective pain — but I am compelled to point out how basic flaws in their belief system has led them to this place where they are today.
Gold does trade technically, and is especially driven by the collective belief system of the crowd. When that falter, well, you know what happens . . .
The Gold Bugs View
Gold bugs, on the other hand, see things quite differently.
Andrew Maguire says that the crash is solely in the paper gold market … and that there is actually a shortage of physical gold. Many other sources make the same claim.
Egon von Greyerz – founder and managing partner at Matterhorn Asset Management – argues:
They shouldn’t be concerned about the temporary pressure on gold. This decline has nothing to do with the physical market because enormous demand for gold continues.
The paper market in gold is not a real market, and at some point in the near future paper gold holders will wake up and realize they are holding are worthless pieces of paper. This is when the world will witness one of the greatest short squeezes in history as investors panic in to physical and the price of gold explodes to the upside.”
London bullion dealer Sharps Pixley thinks that the crash was largely initiated by a single entity:
The gold futures markets opened in New York on Friday 12th April to a monumental 3.4 million ounces (100 tonnes) of gold selling of the June futures contract in what proved to be only an opening shot. The selling took gold to the technically very important level of $1540 which was not only the low of 2012, it was also seen by many as the level which confirmed the ongoing bull run which dates back to 2000. In many traders minds it stood as a formidable support level… the line in the sand.
Two hours later the initial selling, rumoured to have been routed through Merrill Lynch’s floor team, by a rather more significant blast when the floor was hit by a further 10 million ounces of selling (300 tonnes) over the following 30 minutes of trading. This was clearly not a case of disappointed longs leaving the market – it had the hallmarks of a concerted ‘short sale’, which by driving prices sharply lower in a display of ‘shock & awe’ – would seek to gain further momentum by prompting others to also sell as their positions as they hit their maximum acceptable losses or so-called ‘stopped-out’ in market parlance – probably hidden the unimpeachable (?) $1540 level.
The selling was timed for optimal impact with New York at its most liquid, while key overseas gold markets including London were open and able feel the impact. The estimated 400 tonne of gold futures selling in total equates to 15% of annual gold mine production – too much for the market to readily absorb, especially with sentiment weak following gold’s non performance in the wake of Japanese QE, a nuclear threat from North Korea and weakening US economic data.
***
By forcing the market lower the Fund sought to prompt a cascade or avalanche of additional selling, proving the lie \; predictably some newswires were premature in announcing the death of the gold bull run doing, in effect, the dirty work of the shorters in driving the market lower still.
Gold Core’s Mark O’Byrne agrees.
James Rickards thinks the Fed is manipulating the gold market (and every other market).
Former assistant Treasury Secretary Paul Craig Roberts says:
Rapidly rising bullion prices were an indication of loss of confidence in the dollar and were signaling a drop in the dollar’s exchange rate. The Fed used naked shorts in the paper gold market to offset the price effect of a rising demand for bullion possession. Short sales that drive down the price trigger stop-loss orders that automatically lead to individual sales of bullion holdings once their loss limits are reached.
***
According to Andrew Maguire, on Friday, April 12, the Fed’s agents hit the market with 500 tons of naked shorts. Normally, a short is when an investor thinks the price of a stock or commodity is going to fall. He wants to sell the item in advance of the fall, pocket the money, and then buy the item back after it falls in price, thus making money on the short sale. If he doesn’t have the item, he borrows it from someone who does, putting up cash collateral equal to the current market price. Then he sells the item, waits for it to fall in price, buys it back at the lower price and returns it to the owner who returns his collateral. If enough shorts are sold, the result can be to drive down the market price.
***
Bullion dealer Bill Haynes told kingworldnews.com that last Friday bullion purchasers among the public outpaced sellers by 50 to 1, and that the premiums over the spot price on gold and silver coins are the highest in decades. I myself checked with Gainesville Coins and was told that far more buyers than sellers had responded to the price drop.
***
In addition to short selling that is clearly intended to drive down the gold price, orchestration is also indicated by the advance announcements this month first from brokerage houses and then from Goldman Sachs that hedge funds and institutional investors would be selling their gold positions.
***
I see the orchestrated effort to suppress the price of gold and silver as a sign that the authorities are frightened that trouble is brewing that they cannot control unless there is strong confidence in the dollar.
Roberts also says:
This is an orchestration (the smash in gold). It’s been going on now from the beginning of April. Brokerage houses told their individual clients the word was out that hedge funds and institutional investors were going to be dumping gold and that they should get out in advance. Then, a couple of days ago, Goldman Sachs announced there would be further departures from gold. So what they are trying to do is scare the individual investor out of bullion. Clearly there is something desperate going on….
Indeed, this may tie into the Federal Reserve leak of insider information. Specifically, Roberts writes:
The Federal Reserve began its April Fool’s assault on gold by sending the word to brokerage houses, which quickly went out to clients, that hedge funds and other large investors were going to unload their gold positions and that clients should get out of the precious metal market prior to these sales. As this inside information was the government’s own strategy, individuals cannot be prosecuted for acting on it. By this operation, the Federal Reserve, a totally corrupt entity, was able to combine individual flight with institutional flight. Bullion prices took a big hit, and bullishness departed from the gold and silver markets. The flow of dollars into bullion, which threatened to become a torrent, was stopped.
As Congressman Grayson pointed out in a recent letter, right after the Federal Reserve’s Open Market Committee leaked valuable inside information to big banks, Goldman told its clients:
We recommend initiating a short COMEX gold position ….
