Mish's Global Economic Trend Analysis

Trash is Cash (and the economic madness that proves it)
Bloodbath in Muni Bond Funds; Reasons for the Muni Selloff; Will it Continue?
Response to Zero Hedge "Deflationists Take Note"
An Awful Time to Invest; Reflections on "Lost Opportunities"
Still More Hype Regarding Silver; Just the Math Maam

Trash is Cash (and the economic madness that proves it)

Posted: 14 Dec 2010 08:07 PM PST

The saying used to be "cash is trash". Now, with 15 million unemployed willing to do anything for a buck, the correct wording is "trash is cash".

In fact, trash is so much cash that New York City is ticketing and impounding the vehicles of unauthorized persons hauling away discarded trash left in driveways.

Please consider Big Appliances Set Out as Trash Are Vanishing, Puzzling City

Over the last several months, 22,741 New Yorkers contacted the city's Department of Sanitation and arranged for the pickup of refrigerators, air-conditioners and freezers. In more than 11,000 instances, the machines vanished before sanitation workers arrived in their white trucks to pick them up.

The sheer magnitude of the thefts — 11,528 appliances, to be precise — over a relatively brief period suggests to some in city government and the recycling industry that a more organized enterprise may be at work as well.

Deepening the mystery, these were neither the latest Sub Zero behemoths, sleek Bosch nor stylish retro Smeg refrigerators. They were garbage, quite literally — discarded appliances left at the curb for pickup by the Sanitation Department.

And while the value of one discarded appliance may seem marginal at best, in the scrap industry, the fluctuations of commodity prices and volume add up to real money.

Indeed, the big loser in what might be called New York's Appliances Caper appears to be a multinational recycling conglomerate, a subsidiary of which has a large city contract to recycle the hundreds of thousands of tons of metal, glass and plastic generated each year by New Yorkers, including bulk metal, like appliances.

In response, the officers have stepped up their enforcement, Inspector D'Angelo said, and while the theft of curbside recyclables warrants only a summons, the sanitation officers impound the vehicles and their cargo — frequently a jumbled load of refrigerators, air-conditioners, Venetian blinds, office partitions and stoves.

This year through Dec. 1, the task force has seized more than 270 vehicles, according to records provided by the department. But the small force does not have the resources either to track the thieves to the scrapyards where they sell their haul or to determine whether there are connections among any of the people.

But on most nights, the officers move through the city neighborhoods in small teams, working in plain clothes and unmarked cars, circling block after block in the areas they know provide good hunting for their targets, lying in wait and then pouncing, with lights and sirens, when they see someone remove material from curbside, which under law belongs to the city.

Notice the insanity of it all. How much does it cost to keep teams of undercover police in plain clothes and unmarked cars working round the clock to prevent the "theft" of items people are throwing away?

The first thing to do is rework the trash collection contract so that the city is not responsible for protecting discarded trash. The second thing to do is fire a bunch of clearly unneeded trash protection police. The third thing to do is to put city garbage collection out for bid, and grant that contract to to the lowest qualified bidder.

The city's response is economic madness.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bloodbath in Muni Bond Funds; Reasons for the Muni Selloff; Will it Continue?

Posted: 14 Dec 2010 01:00 PM PST

Inquiring minds are watching a huge selloff in Municipal Bond Funds. Here are a few charts.

NPI Nuveen Premium Income Municipal Fund

NPP Nuveen Perform Plus Municipal Fund

NPP Nuveen Municipal Advantage Fund

NPP Nuveen Municipal Market Opportunity Fund

NQI Nuveen Insured Quality Opportunity Fund

NQS Nuveen Select Quality Municipal Fund

NPF Nuveen Premier Municipal Income Fund

NZX Nuveen Georgia Dividend Advantage Municipal Fund

NIO Nuveen Insured Municipal Opportunity Fund

NPI Nuveen Premium Insured Municipal Fund

A tip of the hat to reader "Captain America" for all the symbols.

My first thought is good grief, how many freakin' muni funds does one need? Nuveen offers at least 10 different ways to invest in munis. That is just Nuveen. Is there a bubble in the number of muni funds?

Reasons for the Muni Selloff

1. Unwinding of the "sure-thing" Quantitative Easing trade
2. Selloff in bonds in general because of budget and inflation concerns
3. End of the Build America Bond program (BABs)
4. Increasing default risk

Of the above reasons, 3 and 4 are the most important on intermediate and ongoing basis.

BABs was excluded from Obama's compromise tax proposal. Hopefully it stays that way. I discussed why in Time to Kill Build America Bonds (BABs)

The short version is "Taxpayers are already on the hook for hundreds of billions of dollars of Fannie Mae and Freddie Mac debt. We should not extend the insanity to government guarantees of municipal bonds"

However, now that the government guarantee is gone, yields are poised to rise, especially with increased default risk rising.

Here are several examples of rising default risk:

Detroit Mayor Plans to Halt Garbage Pickup, Police Patrols in 20% of City; Expect Bankruptcy, Massive Municipal Bond Turmoil in 2011

Miami Commissioner Says Bankruptcy is City's Best Hope; Chris Christie Says New Jersey Careens Towards Becoming Greece

Oakland California Bankrupt - Councilwoman Pat Kernighan Calls Rest of Council "Crazy and Irresponsible"

L.A. Controller Says City Could Run Out of Cash by May 5

Chicago's Mayor Daley Discusses Bankruptcy For City Pensions

All it takes is one brave municipality to lead the way and others will follow. When that happens, the baby will likely be thrown out with then bathwater. There is no reason to like Munis here.

By the way, bankruptcies are a very deflationary event.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Response to Zero Hedge "Deflationists Take Note"

Posted: 14 Dec 2010 10:46 AM PST

Numerous people have asked me to respond to the Zero Hedge post Deflationists Take Note: Bernanke Succeeds In Offsetting Shadow Banking Collapse

In essence, I had already addressed the issue in Williams Calls for "Great Hyperinflationary Great Depression"; A Very Easy Rebuttal when I said ...

My call does not change. The US will go in and out of deflation for a considerable period of time, just as Japan did. The determining factor is mark-to market valuation of credit and money supply.

Right now, the Fed has temporarily overcome massive deflationary forces. For how long remains to be seen.

Some asked for a further explanation and emails still come in asking for a reply. In response, I added an addendum to my "hyperinflationary depression" rebuttal to address topics covered by ZH in his post.

If you missed it, please click on the previous link to see a detailed response specifically to the "Deflationists Take Note" article.

Bottom line: All things concluded, there is ample reason to believe the US is still following the path of Japan, and on a marked-to-market credit aspect basis the US will likely hop in and out of deflation for the foreseeable future.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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An Awful Time to Invest; Reflections on "Lost Opportunities"

Posted: 14 Dec 2010 09:05 AM PST

John Hussman has another excellent column this week that is a must read for investors. Short-term traders, especially day traders, need not bother. Everyone else could use a refresher course in risk management.

Please consider Warning - An Updated Who's Who of Awful Times to Invest

In recent weeks, the U.S. stock market has been characterized by an overvalued, overbought, overbullish, rising-yields syndrome that has historically been hostile to stocks. Last week, the situation became much more pointed. Past instances have been associated with such uniformly negative outcomes that the current situation has to be accompanied by the word "warning."

The following set of conditions is one way to capture the basic "overvalued, overbought, overbullish, rising-yields" syndrome:

1) S&P 500 more than 8% above its 52 week (exponential) average
2) S&P 500 more than 50% above its 4-year low
3) Shiller P/E greater than 18
4) 10-year Treasury yield higher than 6 months earlier
5) Advisory bullishness > 47%, with bearishness < 27%

Hussman lists nine occasions that met those criteria. The best of them suffered a quick 7% loss. Over half of them had losses of 17% or greater in a 3 month or longer time horizon. One third of them had losses 34% or greater in as short as 3 months.

Yet, the market climbs. And it may continue to climb. And if it does, it will not mean that prudence was unwarranted.

Some people will not roll the dice when the odds are against them. Others understand nothing but momentum. Still others, the vast majority, don't really understand anything at all. Instead, they follow whatever the cheerleaders on TV say.

Hussman continues...

From our standpoint, the return/risk profile of the equity market is the most negative that we ever observe historically, so we are willing to speculate neither on the hope for government wisdom, nor on the hope for government recklessness. Investors who are convinced that monetary and fiscal actions will drive the market ever higher can easily offset our hedges by establishing exposure to the S&P 500 or more speculative alternatives. What I can't do on behalf of those investors is violate our discipline and take a speculative exposure in an environment where the historical evidence indicates an extraordinarily hostile return-to-risk tradeoff.

Still, it would be an understatement to say this has been an unusual cycle. Given the broader set of Market Climates we have defined, I am confident that we will periodically observe more favorable market environments - possibly even in the coming months, without major changes in market valuation - where we will be able to accept risk in the expectation of positive returns. From my perspective, this is emphatically not one of them.

The last thing we want is to be inadequately hedged in an indiscriminate selloff because we believed our stocks did not have much "beta."

Catching Every Rally Is Easy

Catching every rally is actually easy. All you have to do is buy a basket of index funds and hold them. Of course doing so will occasionally result in losses of 40% or greater as happened in 2008.

Had you bought the S&P 500 10 years ago and held on for dear life, you would have caught every rally and over those 10 years you would be about even. Had you done that in the Nasdaq, you would be down 40% still.

Of course, had you put everything on gold, silver, and energy and walked away you would have been a huge winner. However, that is not the way general funds invest or should invest. Secondly, that may have been a quite reasonable thing to do a few years back, it is much tougher to make the same case now.

Diversification No Savior

Diversification did not help in 2008. Given similar market correlations, it is highly unlikely that diversification in a basket of US and foreign stocks will do much better on the next move lower.

Rallies Very Enticing

Rallies are very enticing. Everyone loves to party. The last big parties were the stock market in 2007, housing 2001-2005, the Nasdaq in 2000, and now. In every previous instance, the prudent thing to do was to sidestep the party and stay sober in thinking.

There will be better times to invest, perhaps even at higher levels. In the meantime, market internals remind me of 2007, and taunts once again are coming out of the woodwork.

Things are so preposterous that "investors" chased 3-year Walmart bonds yielding .7% simply because they yielded more than the same-duration treasuries. That was a mere 6 weeks ago or so. A quick check now shows 3-year treasuries yield over 1%.

Does that represent value even yet? Compared to the stock market it does. I believe there is a strong likelihood stocks will be lower 3 years from now than they are today. Admittedly that's a guess, but one based on hard evidence and rational thinking, not wishes.

Here are two things that I do know.

1. Historically speaking, this is an extremely poor time to be an unhedged investor
2. It's far easier to make up for lost opportunities than to make up for catastrophic losses

I keep wondering, was 2008 that long ago? I guess it must be because people seem to have forgotten the message.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Still More Hype Regarding Silver; Just the Math Maam

Posted: 14 Dec 2010 01:01 AM PST

Hype regarding silver continues to go viral, and the Financial Times unexpectedly adds to that hype. The Financial Times reports JPMorgan cuts back on US silver futures

JPMorgan has quietly reduced a large position in the US silver futures market which had been at the centre of a controversy about its impact on global prices for the precious metal.

The decision by JPMorgan was an attempt to deflect public criticism of the bank's dealings in silver, a person familiar with the matter said. The person added that the bank's position in silver would from now on be "materially smaller" than in the past.

A person "familiar with the matter" from where? JPMorgan, some hedge fund, who?

JPMorgan said in a statement: "It is absolutely incorrect to say or imply that the Nymex, CFTC or any other exchange or regulator has instructed or asked us to reduce our position." The bank declined to comment on whether it had reduced its position in the silver market.

On the basis of the above statement, I highly doubt the "person familiar with the matter" is from JPMorgan or if the statement alleging JPMorgan has reduced its short position is even true.

Just the Math Ma'am

It might help if people understood the math. In the futures world, for every long there is a short. A very important corollary is: If speculators do not want to close out their futures contracts, nothing but a rule change by the CFTC can force them.

In this case, (given speculators are net long) it is up to those longs to close their positions or take delivery. Otherwise, open interest (the number of open futures contracts) cannot drop.

For example, if JPM bought futures to close its short position (unless it was buying those futures from a willing seller already on the long side), open interest would not drop, and the silver conspiracy buffs would still bitch about the massive number of shorts (while hypocritically ignoring the equally massive number of longs)

Simple Questions

If JPM is hurting as the silver bulls claim, pray tell why does it not show up somewhere? Where is the proof JP Morgan is naked short silver?

To be fair, I do wish JPMorgan would comment on this. Why don't they?

Regardless, I happen to believe JPMorgan is not net short silver to any significant degree. They have various means of hedging including the simple provision of buying SLV or obtaining physical storage somewhere. Yes, I understand that SLV is "paper silver" but so are futures contracts.

The key question is: if JPMorgan is naked short and has been for years as conspiracy theorists claim, why didn't JPMorgan blow up long ago?

In an effort to be completely fair, let's ignore the obvious implications of that last question and assume the conspiracy theorists are correct. That leads to the next extremely important question.

How Should The CFTC React?

Since silver conspiracy advocates have all gathered round the campfire singing the praises of CFTC Commissioner Bart Chilton, there is a very simple solution.

Let's let Chilton specify the number of contracts it is OK for JPM to be short. It should be a reasonable number, certainly far less than the amount of silver in the world.

Let's also state that in any solution imposed by the CFTC, that speculators should have a limited influence on price in comparison to actual consumers of the metal (industrial users, jewelry, coin makers, etc). Thus, the CFTC would (and should) rule in accordance with the above sentence in the event of a serious market disruption (or in this case, to prevent a serious market disruption).

Having done that, we would then need a method to shrink open interest to the point specified by Chilton, in a manner that would either be market neutral or would give favoritism to producers and consumers of silver, not speculators (should one side need to be given preference).

The Hunt Solution

The easiest way for the CFTC to accomplish the silver conspiracy advocates' goal of eliminating the massive short position of JPM would be to up the margin maintenance on silver futures and not let anyone buy any more futures until open interest shrinks sufficiently.

Ring a bell? It should. If not, please consider Hunt's Attempt to Corner the Silver Market and how the story ended.

I am not proposing that solution, I am merely warning silver conspiracy advocates including Ted Butler and GATA that they better be careful about what they are asking.

In my opinion, if controls are placed, those controls WILL be on the long side (which of course will affect the short side) and everyone screaming for controls will get what they ask – forced long liquidation via inability to buy futures, only sell them.

Where Exactly Is The Conspiracy?

That speculators rally everyone hoping to produce a short squeeze that would destroy JPMorgan is itself a massive conspiracy, albeit a legal one. Moreover, the fact that huge numbers of co-conspirators accuse others of conspiracy is really quite humorous!

As a side note, most conspiracies are right out in the open, plain and easy for everyone to see (just as the conspiracy to sink JPMorgan is). The only difference between Hunt and what's happening today is the number of participants.

Does it matter though?

As I said in Viral Nonsense About Silver I highly doubt JPMorgan cares which way the price of silver goes. Otherwise, JPMorgan would have blown up long ago.

Many claim that JPMorgan's concentrated short in and of itself is manipulative. However, if JPMorgan is hedged, then it does not care which way the price goes. By extension, the price-suppression theory goes straight into the ashcan.

If JPMorgan does care to any great degree, then not only is JPMorgan in trouble, but so are speculators who will get hit in any solution imposed by the CFTC. Add that to the growing pile of ironies.

Capitulation Nonsense

The fact that gold and silver is going up does not prove that JPM is capitulating. Nor would declining open interest. Anyone who claims otherwise does not know how markets work or worse yet, ignores how markets work for the sake of openly promoting hype.

Assuming as I do that JPMorgan is hedged, there is no logical reason for JPMorgan to want to conspire to suppress the price of silver and gold. Quite frankly, the idea is completely potty.

If someone can prove JPMorgan is not hedged and is indeed getting killed in these markets, I reserve the right to change my opinion.

Ironies Stack Up

Properly hedged, JPMorgan would be just as likely to have an opportunity to gain by pushing the price higher rather than lower! If you are counting, that is the third big irony in these price-suppression claims.

The fourth irony, assuming that JPMorgan could and did suppress the price of something below its natural value, is that everyone should be happy, not bitching about the opportunity to buy something of value at a cheap price!

Not Defending JPMorgan

Please note that I am not defending JPMorgan per se. I do not care for the bank, and I certainly do not believe in too big to fail.

Would it surprise me in the least if JPMorgan took short-term opportunities to profit in both directions? Of course not. There is certainly no huge reason to think JPMorgan is an angel. Indeed, I am quite sure they are not an angel. Nor is Goldman Sachs, Citigroup, or any of the other market makers.

The key point however, is the silliness of the idea that JPMorgan or anyone else can suppress the price of anything over the long haul, decades in fact. The price-suppression for decades idea is not just silly, it's outright loony.

Again, I am not defending JPMorgan. I simply point out how the process must mathematically work and who will get hit if the CFTC does step in to rectify a market dislocation or to prevent one as the conspiracy advocates ask.

Be Careful of What You Wish

This is a definite case of "You better be careful of what you wish. You just might get it."

In distinct contrast to those openly seeking to halt alleged price suppression of silver and gold, my opinion is "As an owner of precious metals, if this is what price suppression does, let's have more of it, not beg the CFTC for a smackdown".

Disclosure

As a deflationist who believes Gold is Money (see Misconceptions about Gold for a discussion), I am long both silver and gold and have been for years. Moreover, I agree with Ted Butler and others who recommend that people take physical delivery when possible.

In that regard, I believe GoldMoney is a very good way, if not the best way, to own physical gold and silver. However, I am obliged to point out that I have a relationship with them.

Anyone interested in a discussion about ways to own physical gold and silver can email me via the "contact button" on the upper left of my blog.

Gold as a Deflation Hedge

Gold fares well in deflation and times of currency stress. Gold does poorly in times of ordinary inflation as evidenced by its collapse from 850 to 250 over the course of 20 years, with inflation every step of the way.

That gold is soaring in all currencies is certainly a sign of fiat-stress, not just the US dollar stress specifically.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Tuesday, December 14, 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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