Gas Prices Rise in Bolivia by Decree, Estonia to Enter the Euro, Will China’s Grand Experiment End with Runaway Inflation?

12/27/2010 Cochabamba, Bolivia – Pop in your mints…

We are back here at The Mint to ponder what is and what may be as the Gregorian calendar turns another year older.  We can be certain of two things for 2011.  Both Bonds and Fiat currencies (the most prominent of them the US Dollar) will decline in value.  Whether or not the decline will be severe is open to debate but every passing day under current circumstances and accompanying monetary and fiscal policy lead them ever closer to tumbling off a cliff.

What catches our attention today is that, last night here in Bolivia, the Vice President, Álvaro García Linera, who greatly admires and in appearance closely resembles the founder of Wikileaks, Julian Assange, came on TV to announce that the price of gasoline and diesel fuel, which are completely controlled via subsidies by the government, would go up 72% and 82% respectively effective immediately.  This takes the price from roughly $2.12 per gallon to roughly $3.66 per gallon.

Assange and Linera, seperated at birth?

The reasoning for the move, as explained by the government, is to kill the trafficking of “contraband” gasoline from Bolivia to, most notably, Chile.

Thoughts on Rest, The Peoples World Conference on Climate Change, and What Will Become of Municipal Bonds in 2011?

12/21/2010 Cochabamba, Bolivia – Pop in your mints…

As the days of 2010 wind down and the markets begin to calm down for the upcoming Holidays, we here at The Mint will take a few days to relax and unwind.  Relaxation, the art of doing nothing, either physically or mentally, is extremely underrated in today’s go-go society.  God gave us the Sabbath when He created all that we know and see and later commanded us to observe it.  The logic of relaxing at least one day a week is infallible.  Anyone who has worked weeks on end will tell you they are completely stressed out and tired.  Even plants and fields produce more abundantly for longer periods of time if you give them adequate rest, which would be every 7^th year.

Anyone who has been alive for a while and put their mind to the question will tell you that no, we humans are not logical beings.  Therefore, with few exceptions, we fail to observe Sabbaths (i.e. we don’t rest!)  Our weekends are full of activities which rarely count as restful.  Our Holidays and vacations are often more demanding than everyday life.  Yes, moments of pure, blissful rest are few and far between on this wonderful planet.

We are still here in Bolivia.  Our In-Law’s house, where we are staying, is a stone’s throw away from the stadium in Tiquipaya where Evo Morales, the first indigenous President in Bolivian History, recently held the “The People's World Conference on Climate Change and Mother Earth Rights.”

The Tiwanaku, Tension on the Korean Peninsula, And a War that will Benefit No One

12/20/2010 Cochabamba, Bolivia – Pop in your mints…

We are still whiling away the time here in Bolivia.  The food here is different, the result of years of more than 34 ethnic groups exchanging and mixing recipes.  “Silpancho”, for example, is a dish of rice and potatoes covered by a razor thin meat patty with a fried egg and chopped peppers on top.  It is like a meat pancake with egg on top.  Perhaps one day it will appear on the menu at IHOP. 

Bolivia is rich in History.  The most dominant culture in the “Altiplano” (High Plain) of the Andes Mountain Range which occupies much of Western Bolivia was the Tiwanaku.  The Tiwanaku, to which the present day Aymara of Western Bolivia trace their origins, began as a small agricultural village around 1500 BC.  Around 400 AD, the population began to urbanize and went from being a local force to a predatory state.  They learned the way of Empire.  What is the way of Empire, you may ask?  Simply put, it is to dominate by force, create trade agreements, create cults (religion), demand tribute, and control the “redistribution” of what is collected as tribute.  Does this sound familiar?

In the case of the Tiwanaku, their form of tribute was food.  They took the food production from regions located in what are now Peru, Bolivia, and Chile and then redistributed it according to the political need of the elites.  The Empire spread due to its continued food surpluses until a widespread drought occurred and food production began to slow and, consequently, the influence of the Tiwanaku began to weaken until, in 1000 AD, what was left of the Tiwanaku Empire simply disappeared.  Later to the region came the Incan and later the Spanish conquerors but before they came, this area lay desolate for nearly 450 years.

Armageddon on the Way, Nothing Normal about what is happening to Bond Markets

12/17/2010 Cochabamba, Bolivia – Pop in your mints…

We can’t shake the feeling that Armageddon is on the way for Bonds Markets in general and especially for any form of debt owed by a government of any size, no matter how powerful.  The Keynesians believe that government debt is simply a myth, just another data point in their mechanical view of the world.  Is private debt shrinking?  Public debt must expand.  In their fantasy world, as private debt is expanding, Public debt shrinks.

We do not know what planet Mr. Keynes lived on, but here on planet earth, government officials make promises to obtain votes.  These promises cost money.  Usually a lot more money than the government takes in.  Remember, the government, by definition, cannot do anything productive, economically speaking.  It can provide protection and justice, which has a price, but as for productive efforts, they are almost exclusively inept.  Ditto for “government investments.”  Investments worth making do not need government assistance.

Back to our point, public debt never shrinks as Keynes thought it would when the government in question runs a surplus.  Too many promises to keep, “investments” to make, wars to wage.  You see, Empires are built in the 21^st century by incurring debt, not by paying it off.

Austerity - Not Everyone is a Fan, Higher rates Crush Bonds and Pummel Stocks

12/16/2010 Cochabamba, Bolivia – Pop in your mints…

Ah, the price of austerity.  In a world where up was up and down was down, where all was what it seemed and things worked “as they should”, any attempt to save money or generally economize would be a good thing.  All the more if it meant that the government was retreating from intervening in the economy in areas where it can only do harm.  That would be 99% of government intervention with the remaining 1% being upholding valid contracts between parties.

Alas, this is not the world in which we live.  In Greece we see rioting as the government attempts to do the wise thing and cut back.  Like any bad credit risk, they are not cutting back by choice but rather at the behest of their creditors.  Like an addict needing intervention, so are the debt ridden nations of the western world.  Concretely, Greece wants to change its labor laws to give people incentive to work and by extension business incentives to hire them.  Naturally, this is an affront to “workers rights” that cannot be tolerated. 

Spain’s credit rating is on the verge of being lowered and generally the uncertainty of just what will occur in Europe has investors jittery.  In the US, at least we can count on the FED and Congress to continue to trash the currency.  The masters of the Euro are not so sure about trashing the currency but for some strange reason do not want to let any sovereign debt go bad.  Sorry EuroFEDS, you can’t have it both ways.

Bonds continue their descent with no end in sight.  This usually means that they may actually rise in the coming days.  Don’t be fooled.  Any strength in the Bond markets should be taken for nothing more than a hallucination and a selling opportunity.  Stocks were taken down today by the “Mega Maid” suction of the collapsing Bond Market.  Higher rates make re-financing or rolling over existing debt harder.  It must be either paid or written off.  The money for these activities must come from somewhere and, directly or indirectly, it comes out of equities.

Bond Market Tumbles Downhill and Why Bolivia May Avoid The Collateral Damage

12/15/2010 Cochabamba, Bolivia – Pop in your mints…

A quick look at the markets shows that Bonds are continuing a capitulation that is beginning to border on dramatic.  Market forces will always overpower any government, military, or central bank on the planet.  Never bet against them.  The case against Bonds has been clear for some time now.  The trick is guessing when what is obvious will become common knowledge.  It is at that point that the Market executes its judgment.

The verdict is in:  Bonds are guilty of gross oversupply.

From our perspective here at The Mint, we believe that this dramatic rise in Bond yields is one of the warm up acts to the grand finale which involves high rates of inflation (probably hyperinflation) and the disintegration of the US Dollar system that has dominated the financial world for nearly a century.

Now that we know how the play will end, what will be interesting to see is how the rest of the acts will play out.  But before sitting back to enjoy the fireworks, ensure that you have adequate protection for your assets, meaning a portion of them in real estate or preferably physical Silver and Gold.  A month’s worth of food could come in handy as well.  Once that is taken care of, you truly have little to worry about.  Now help your family, friends, and neighbors do the same.

A Victory for Freedom! Pondering Relative Wealth in The Plurinational State of Bolivia

12/14/2010 Cochabamba, Bolivia – Pop in your mints…

A quick glance at the news today reveals that a Judge in Virginia finally decided to read the constitution.  He has in essence ruled, in a matter that will certainly end up in the Supreme Court of the land, that Americans cannot be compelled to purchase something.  In this case, it is health insurance.  In 2014, if you do not purchase health insurance, then you have to pay a fine.  The requirement to purchase health insurance is logical if you want to make health care reform work.  Unfortunately, making health care reform “work” requires surrendering liberties to the government that we reckon a majority of gringos are not willing to let go of.

At The Mint we believe that Freedom is more important than universal health care and hope that this provision is struck down.  It is one thing to give incentives to purchase something, which the government shamelessly does as a backdoor subsidy to many industries via the tax code.  It is quite another to require the purchase of something and impose a penalty if you do not purchase it.  The latter reeks of totalitarian desperation to support a broken industry.

So chalk up one minor victory for Freedom!  Now on to our musing of the day…

We are relaxing down here in the southern hemisphere in what, in economic terms, may be one of the poorest countries on the planet.  How do you define poor?  It is all relative, of course.  If you are defining wealth in terms of an increase of US dollars or their equivalent that are traded in exchange for goods and services, then yes, you could call Bolivia poor.

Signs The FED is Failing on its Ill-Fated Mission, Bond Markets Imploding Like the Metrodome´s Roof

12/13/2010 Cochabamba, Bolivia – Pop in your mints…

We have spent the past couple of days attempting to get our wits about us.  After a 24 hour excursion to the southern hemisphere in multiple airplanes in between sea level and La Paz, which boasts the highest altitude commercial airport in the world, to Cochabamba, our home away from home.  You will forgive us if we are seeing things upside down.

Today we see that Bolivia was the only nation not to sign off on the climate pact in Cancun.  One thing we love about Bolivia is that it refuses to go along with the rest of the world.  Bolivia did not sign off because they did not feel that it went far enough to protect the "pachamama", or mother earth.  Oddly enough by not signing off on the deal, it could become home to anyone seeking a "pollution haven" similar to a "tax haven" in the bahamas.  We pray this does not happen but the speculation will help us prove a point about the effectiveness of government action.  Try to stay with us.

What we are witnessing we can hardly believe.  Not because it is happening but because in a strange way we were able to predict it.    We tried to communicate what we saw coming by using words like "Armageddon", by showing footage of "Mega-Maid", and other strange tactics.  As certain as we were of the logic of what we saw, we did not quite believe that it would come about so soon.  It used to be that once we were sure of something the only sure bet was against it.  Now, we cannot even be guided by trusting our own incompetence.  What to do?

Obama and The GOP Finally get Stimulus Right! The Benefits of Lower Taxes Explained Part II

12/10/2010 Santa Cruz, Bolivia – Pop in your mints…

We are arriving in Bolivia today for what will be a wonderful holiday with our in-laws who live in Cochabamba.  In the coming weeks these chronicles will come to you from the southern hemisphere.  Stay tuned.  For today we must end the suspense which we left off yesterday, if nothing else for our own benefit!  So where were we?  Ah yes, we left off yesterday by making an assertion and then seemingly disproving our own hypothesis.  What is going on?  We must rectify this immediately!  So we head back to the car lot where we revisit our 100,000 prospective car buyers. 

You recall, don't you, dear taxpayer, the 100,000 persons trying to determine whether or not to purchase a certain car that costs $20,000 facing a 10% sales tax if they were to make the purchase?  Do you recall that 30,000 of those who wanted a car could make the purchase if only the tax were 5% instead of the current 10% and are forced to delay their purchases?  Do you recall that the government would lose $40 Million of tax revenue by lowering the tax rate to 5%?  Do you recall the most famous reindeer of all?

Obama and The GOP Finally get Stimulus Right! The Benefits of Lower Taxes Explained Part I

12/9/2010 Miami, Florida – Pop in your mints…

We awoke Tuesday to some good news.  While we did not hear the tune of Kumbaya resounding out of Washington, details of a compromise on taxes between Democrats and Republicans did emerge.  On the surface it appears that this development is very promising and, dare we say, will turn out to be a truly effective form of stimulus.  We believe that it will be effective because it appears to do the only two things that a government can do to stimulate economic activity.  First, it provides a degree of certainty for key decision makers.  Currently, key decision makers had no choice but to plan for tax increases in 25 days.  Now, it appears that they can count on tax decreases for the next 755 days.  Second, and more importantly, is the nature of those tax decreases.  They include a 2% reduction in payroll taxes, which is roughly the equivalent of the government giving a nearly 2% pay increase to every worker.  It also provides businesses with a 100% tax break on all capital equipment purchased in 2011.

At The Mint we pray that this change in mentality will stick in Washington.  Over the past 3 years we have seen the government increasingly move in to manage the economy with increasingly disastrous results.  This tax deal would mean that the government is moving towards giving more power back to the people, where it rightfully should rest.

Free people are more productive.  This is simply a historical fact.  The fact is sometimes confused by applying the terms "Free" and "Democratic" to societies that, in terms of economic policy, are anything but free and democratic.

The Irish Take the Hatchet, Scalpel, and Plunger to The National Budget, JP Morgan to corner the Copper Market?

12/8/2010 Portland, Oregon – Pop in your mints…

Yesterday we awoke to some wonderful news regarding the US economy for which we are still pinching ourselves for fear of waking up.  We will explore this more in the coming days but it appears that Obama and the GOP have finally got stimulus right!

In other news we see that JP Morgan has been extremely busy accumulating Copper for its clients.  What does it see on the horizon?  Is it simply trying to offset its ever-increasing Silver liabilities?  One can only imagine.  But we do know one thing for sure, that so much of one commodity controlled by one entity, albeit in trust, is a very bad thing.  Keep your eye on the price of Copper, one of our Key Indicators here at The Mint.

Today we are feeling greener than usual, not environmentally conscious but rather, physically ill.  It appears the Irish and, by extension, other heavily indebted Euro-zone governments think that they can appease their creditors by hacking and slashing their operating budgets to the bone and increasing taxes on their populace.  This creates a viscous cycle and one that, through the latest tax deal, we appear to be averting here in the US.  Not that government belt tightening is a bad thing, it is, on the contrary, a wonderful thing for the general population.  On that note we are reminded of a hilarious Saturday Night Live skit aired during the last presidential campaign in which Obama and McCain debate as to whether they would take a Hatchet or Scalpel to the US Budget deficit.  You can enjoy it here

The FED Can’t Get Money Printing Right? Buy Silver, Crash JP Morgan!

12/7/2010 Portland, Oregon – Pop in your mints…

We can't believe it!  It appears that the Federal Reserve can't even get their insane money printing experiment right.  Apparently $110 billion of their new $100 bills have a small crease in them rendering them, well, worthless.  Not that they were worth much before, they only cost $0.12 each to make.  All the same, there is debate now as to what should be done.  Apparently 30% of the bills are bad.  Should they burn them all or sort through them and pull out the good ones?  We have an idea, invite the general, unemployed public to sort through a few stacks and let them keep 0.12% of the bills that they sort.  I'll bet the job would be done in a week.  But no, the overpaid bureaucrats are seizing the moment to blame each other and calculate that it could take them up to 30 years to sort them.  Apparently the "frustration level is off the charts" amongst those to blame for the error.

The FED's Printers go on the Fritz

The irony that these were to be the first bills printed with Timothy Geithner's signature is not lost on us.

But the American Feds aren't the only ones making large scale mistakes.  The National Australia Bank (NAB) had a huge computer system meltdown caused by a corrupted computer file in its payment system which left many of their customers without access to cash.  Property and Car deals couldn't go through, payroll direct deposits did not process, credit and debit cards did not work.  As the 4th largest bank, retailers were very concerned that commerce may screech to a halt over the weekend as shoppers could not access funds.

US Unemployment Rate Unsurpirsingly Jumps, Austerity Spanish Style

12/6/2010 Portland, Oregon – Pop in your mints…

The drama in Europe continues.  We see that our beloved Spain has decided to calm the markets by, among other things, selling a stake in AENA, its airport authority.  Not surprisingly, the Spanish air traffic controllers went on strike and the Military having to step in and do air traffic control.  Privatization would hit this special interest group (the air traffic controllers) extremely hard.  How hard?  Will they lose their jobs?  Will their lives be endangered?  Will they be asked to work excruciating, long hours?

Viva España!

Having lived and studied in Spain for three years we suspected that the reason for the strike probably had something to do with losing a ridiculous privilege.  This strike is no exception.  It seems that the 2,400 air traffic controllers made an average of $463,600 per year by clocking overtime for attending union meetings and probably time spent merely thinking about work.  Privatization, the selling of a grossly mismanaged state enterprise to a buyer motivated to generate profits would mean an abrupt end to their supposed racket.  Are they overpaid?  We are not to judge.  But with the average Spaniard making $26,500, you can bet many of their countrymen do!

Back in the US, on Friday the Board of Labor Statistics dropped what theoretically would have been a bomb on optimism as it reported that the Unemployment rate increase to 9.8% for the month of November, up from 9.6% in October.  What does it mean?  Is 9.8% unemployment too high?  Here at The Mint we track the BLS Non-farm payroll unemployment rate as a key statistic.  Not because we believe that it is a real indication of how many persons are unemployed, but because it tells us what the FED will do next with respect to monetary policy.

Italy Goes the Way of the PIIGS and Belgium Waffles

12/3/2010 Portland, Oregon – Pop in your mints…

Oh my, fellow taxpayer!  All of the action is in the Bond markets lately!  Specifically in Europe.  Our current working hypothesis as to what will unfold in Europe is that the financial crisis is serving the purpose of generally weakening the governments of the Euro zone to the point where they will be compelled to turn over most of their authority to a central government which is currently located in Brussels.  Whether it is premeditated or not is subject to a debate that we will not enter into at The Mint.  We are simply observing the data and following it to a logical conclusion.  And how entertaining the action is to watch!

The latest act in the drama of the emerging sovereign debt crisis is playing out with Italy and Belgium preparing to take center stage.  From the New York Times:

Italy and Belgium have a lot in common: both are less dependent on foreign creditors than Greece or Ireland. But each is plagued by severe political dysfunction, which has raised questions about whether they can ever repay a mountain of debt, respectively the second- and third-heaviest loads in the European monetary union after Greece.

Wikileaks Founder on the Run, Is the US prepping for Austerity? Backwardation returns to Copper and what is Silver really worth anyway?

12/2/2010 Portland, Oregon – Pop in your mints…

A quick view of the news finds the Wikileaks fiasco taking on a life of its own.  It is interesting to see that politicians really are as fickle and childish as we imagine them to be.  While we haven't read any of the leaked documents, we imagine it would be like reading a log of text messages amongst teenagers.  We are not sure if anyone on the planet thought that modern day politicians were trustworthy but the little we have heard about the leaked documents appears to leave no doubt that they are not.  So why do we give them so much power of the economy or the money supply?  This troubles us here at The Mint.

In other news we see that the debt reduction commission in the US is being taken seriously, at least by the mainstream media and the FED is urging it on.  Could it be that the FED sees that its balance sheet is no match for the coming onslaught in the Bond markets?  It is so severe that Obama has announced pay freezes for government workers and the government needs to unload its surplus property.  Leave it to government managers to sell property at the bottom of the market.  It must really need the money!  Does the US government see Armageddon on the horizon in the Bond Markets?  Is the Treasury beginning to wonder why the Federal Reserve is out-bidding everyone by a country mile at recent bond auctions?

Mega Maid! Collapsing Bond Market to Suck Air Out of Stocks!

12/1/2010 Portland, Oregon – Pop in your mints…

Writing is such sweet sorrow.  Sweet because there is no lack of things to write about.  Sorrow because the financial authorities have made such a mess of things that there is no lack of things to write about, grand errors to expose again and again until we get it.  The economy has been on adrenaline for almost 100 years and increasingly dangerous doses for the past 40.  The crash will be grand and we must understand what is going on.  If nothing else so that future generations can learn from the mistakes.

Back from the big picture to the problems of the moment.  When will it end?  We know more or less how, so we must look daily for the time to approach.  Is it on the horizon?  Your guess is as good as ours so we will consider what we know.  Just when you thought it was clear sailing ahead for stocks and bonds, another wrench is thrown into the works.  We have been focusing here at The Mint on the upcoming fireworks in the Bond Markets.  Not that we know exactly how or when the market will collapse, we only know that its collapse, in some way, shape, or form, is imminent.  Two of a myriad of reasons came into focus for us today which we will now attempt to pass along.

Iceberg! Right Ahead!!!! The Growing Moral Hazard in Bond Markets

11/30/2010 Portland, Oregon – Pop in your mints…

What in the world will become of the Bond Markets?  The question troubles us.  Equity and Commodity Markets are free to be basket cases.  It is their very nature, it comes with the territory.  One day you are up, one day you are down.  You would be a fool to take them too seriously.  But Bond Markets are another story.  People expect more out of Bonds.  Like an older child, they are expected to act "responsibly."  While a reasonable person may store his vacation funds in equities, he puts his retirement in Bonds.  Bonds are supposed to be reliable and only issued by parties who over time have made good on their word to return money to the lenders as agreed.

But what happens to this dynamic when the money itself becomes suspect?  As we have investigated in prior Mints, what passes today as money is in large part an impostor.  Like all impostors, it looks great from a distance but up close it is easy to see something is amiss.  Once the impostor is discovered, at a minimum the impostor is asked to leave the party.  If the impostor happens to be the host, the party ends altogether.  The current impostor money is hosting the party in the Bond Markets.  How much longer can it last?

The Productive Purpose of Speculation

11/29/2010 Portland, Oregon – Pop in your mints…

Today as tensions in Korea continue we find ourselves pondering an activity that is vilified in many circles yet is an indispensable part of everyday life, modern or otherwise.  This vilified activity is popularly called speculation.

What is speculation?  To read the financial news over the past two years, one could equate speculation with gambling.  In a way, they would be correct.  A speculative action involves accepting a known risk in exchange for a reward that is uncertain.  All that can be said for certain is that the speculator, the person taking the risk, believes that the reward to be received outweighs the risk that is accepted.  Only with the benefit of hindsight can one say that the speculation was brilliant or insane.  Before hand, all opinions as to the speculation are in and of themselves simply speculations with regard to the speculation that they are speculating about.

Bernanke Disses the Dollar in Frankfurt

11/26/2010 Portland, Oregon – Pop in your mints…

Isn't Thanksgiving wonderful?  It has all of the warmth of Christmas with a fraction of the chaos.  Most everything is closed and, with the normal pressures of everyday life aside, you can truly sit and enjoy a large meal with your family and friends?  What a great holiday.

Ben Bernanke made a speech in Frankfurt at the Sixth European Central Bank Central Banking Conference which is causing a stir.  He titled it "Rebalancing the Global Recovery.  After parsing the text, some are calling it one of the most significant speeches that the man has made, right up there with his infamous "Helicopter" speech in 2002.  As some of you may recall, in 2002 Bernanke stated that, if deflation were to occur, he would use the electronic version of a printing press to create enough dollars to assure that there was enough liquidity in the dollar system.  He went as far to say that they could drop US dollars from helicopters if necessary.

The Irish Whack the Euro, Tension on the Korean Peninsula

11/24/2010 Portland, Oregon – Pop in your mints…

We had hoped that the calm of yesterday would continue on through Thanksgiving.  We hoped that we would enjoy our favorite holiday at ease with the knowledge that the Plunge Protection Team would continue to save the world from the nasty side effects of Capitalism and the general upward progress that its operation brings to civilization.  Those nasty side effects, of course, entail the destruction of certain industries while new, more efficient industries take their place and the occasional destruction of overall capital in order to create new capital.

The Plunge Protection Team exists, for the most part, to ensure that on the surface the stock, bond, currency, and commodity markets as well as overall prices appear to remain the same or at least to move gently between one extreme and the other.  They strive to provide the false comfort that the status quo may be maintained or that any changes to it will occur in an orderly, predictable fashion.  In short, they try to create the illusion of stability.  Oddly enough, if the world simply adhered to the tenets of a stable currency structure and the institution of private property, meaning that each person would enjoy and/or freely exchange the fruits of their labor, the Plunge Protection Team would have no reason to exist.  It only came into begin during the Reagan years when the powers that be thought the world could no longer stomach capitalism running on a fiat currency.

Social Security, The Only Solvent US Government Program

11/23/2010 Portland, Oregon – Pop in your mints…

Today we awoke to the possibility of snow in Portland.  Unlike cities who experience snow on a regular basis, Portland is, by choice, utterly and completely defenseless to this winter phenomenon.  We say by choice because the environmental contingent which heavily influences, well, everything around here takes offense to the need to spread salt, chemicals, or simple gravel on the roads to make them passable when snow and ice hit.  The consequence is that the roads turn into a demolition derby of buses with chains and SUVs who have never left pavement let alone faced ice and snow beneath their 16 inch wheels.  Everything that can be delayed (schools, government services, bake sales) is and the city as we know it rests.

The financial markets, however, will not rest so we must continue to explore, pry, expose, and attempt to comprehend the incomprehensible.  On we plod, through rain and snow.  The markets today show no indication of collapse.  Could it be that they missed the Irish taking their bailout?  No, it is right there in the headlines.  What about large banks being $150 BILLION short of capital based on the new requirements that a group of world improvers saw fit to place upon them in Basil, Switzerland not many moons ago?  Not even flinching.  Could it be that the markets are seeing past these seismic events and see calm sailing ahead?

The Irish Take the Bait, Will Bad Debts Ever Go Away?

11/22/2010 Portland, Oregon – Pop in your mints…

We are excited for the upcoming Thanksgiving Holiday here at The Mint.  Thanksgiving is unique to America and I know of no other day that is simply set aside to give thanks, appreciation, for what one has.  One cannot give thanks and complain at the same time and since we hear so much of the latter, the former at least gets lip service one day a year.

At The Mint we are thankful that the Irish took the bailout.  We are thankful for the bailout because it means that the central thesis in the bond markets is intact.  That thesis is:  Any nation, state, government, bank, mortgage company, or group of special interests large enough to make the international news for its upcoming debt default will be bailed out by (insert name of larger, big brother type entity here).  In the Irish's case, the EU showed up at their neighbor's front door to force them to refinance.  "Brother please!  Save yourself some money and take on more debt!"  This insanity is excused by large phrases like "avoiding systemic risk" or in colloquial terms being "too big to fail."

Armageddon Coming to a Bond Market near You

11/19/2010 Portland, Oregon – Pop in your mints…

Activity in the markets today almost appeared normal.  Stocks and Commodities up, the dollar and bonds slightly down.  It is like watching waves lap gently onto the shore while under the water a vicious whirlpool is gaining steam and angry clouds form overhead.  What is in store?  A hurricane? An earthquake followed by a Tsunami?  Or will it all disappear and turn into just a lazy day at the beach?

Personally we were hoping that the lazy days had returned.  But after what we heard this morning, we are certain that a magnificent storm is on the way and it is best to at a minimum get out of the water and perhaps move inland.

The forecast took shape this morning as we attended a breakfast where the speakers focused on Cash Management Strategies.  For the most part the presentation was a basic review of the use of credit lines, bank accounts, CDs, spreadsheets, etc.  At The Mint, we are too focused on secondary effects to get much out of obvious practical steps and generally tune this part out and enjoy the free coffee and rolls.  We do, however, have our radar out to detect seismic events that appear disguised as innocuous comments during otherwise innocent breakfast presentations.  Today, halfway through our apple turnover, two large blips appeared on our radar.

First, the speaker noted that there are $14 billion of dollars worth of letters of credit that are up for renewal in 2011 in their industry alone.  A year over year increase of 700%!  Most of these letters of credit must be rolled over (renewed) for the bonds that they back to be worth anything.  The speaker considered her organization lucky to have been able to renew their organization's letter with Banco Santander as many of the US Banks are simply not writing them anymore.  As an additional kick in the pants, the organization is being asked to have 250 days of cash on hand, a much stricter covenant, up from 200 previously.  The bank originally requested 300.  Blip 1 on the radar!  Incoming threat to bond market.  Could be a bird.

Second, and more significantly if you follow large cash movements, the FDIC is changing their rules as of January 1, 2011 to permanently raise the insured limit up to $250,000 and to cover non-interest bearing accounts without limit.  Blip 2 on the Mint's radar!  Definitely not a bird! Approximately two months to evacuate the bond market!  Up until now, anyone who has a ton of liquidity in the form of dollars that they need to access on short notice has been forced to either find feeble comfort that their bank will not fail or to find a work around the FDIC limit to assure that all of the funds are secure (in other words, they will get all of their money back if their bank fails).  The "work around" for most firms takes the form of investing excess funds in what are known as "Repo's" which pay literally pennies of interest on millions of dollars that buy bonds overnight, before the bank may fail, and then sell them in the morning, providing liquidity while the bank is safely open.  This arrangement is commonly known as a "Sweep" account.  That yields are non-existent speaks to the fact that everyone and their mother is now employing this strategy.

Sweep accounts are currently expensive relative to yields and the FDIC rules effective January 1 will give customers who simply want liquidity the option to leave the money in the bank, earn 20 to 60 basis points of "interest" via service fee credits (as opposed to 1 to 2 basis points in the Sweep accounts) and have those dollars fully insured.

So what happens when everybody and their mother decides to leave their tonnage of liquidity in the banking system overnight instead of purchasing "Repo's", which is just a fancy way of purchasing bonds? 

We must admit that we have absolutely no idea but that will not keep us from guessing!  Our current guess is that 1) The cash movements caused by this FDIC rule change will mean round two of Armageddon in the bond / fixed income markets and that 2) the FED's quantitative easing program is timed to fight Armageddon against what could be a wholesale collapse of world-wide fixed income markets that could play out in early 2011.  In more colorful terms, our guess is that the FDIC is unwittingly preparing to squeeze the mushroom shaped dollar debt sponge!!!

Will the FDIC Wring out the Debt Sponge?

A Caveat to this story:  The Municipal Bond market has depended upon government stimulus funds to leverage huge amounts of recent offerings to cover unsustainable spending at all levels of government.  These stimulus funds will phase out between January and June of 2011.  On cue, the FED is now on the verge of buying up Municipal Bonds.  Just think of it as Blip 3 on the Mint's radar.

It is all coming together, fellow taxpayer.  Now you know why the Irish are being forced to accept a bailout even though they don't intend to borrow until June 2011.  The government there has no idea that Armageddon is upon them and that the fixed income markets as we have come to know them may not exist in June 2011.  At least not one willing to accept 7% on Irish debt. 

No wonder Ben Bernanke and his fellow of Central Bankers of the world are throwing caution to the wind as they shamelessly print more money.

What else can they do?

Stay Fresh!

David Mint

P.S.  If you enjoy or at least tolerate The Mint please share it with your family, friends, and colleagues!

Key Indicators for Friday, November 19, 2010

Copper Price per Lb: $3.79
Oil Price per Barrel:  $81.57
10 Yr US Treasury Bond:  2.60%
FED Target Rate :  0.20%

Gold Price Per Ounce:  $1,354

MINT Perceived Target Rate*:  5.25%
Unemployment Rate:  9.6%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  11,181
M1 Monetary Base:  $1,763,300,000,000
M2 Monetary Base:  $8,706,500,000,000

*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.

Look Out Below! Bond Markets Will Need Luck of the Irish to Survive

11/18/2010 Portland, Oregon – Pop in your mints…

The action today is in the Bond Markets so we must turn our attention away from our "Junk" to the Junk of the Irish.

Today from the Associated Press comes word that European officials are traveling to Ireland to "lift the lid" on Irish banks.  Apparently word is out that all is not well on the Emerald Isle.  A stench has been rising for some time and Bond Market participants have fled Irish paper in droves.  The stench has now gotten so bad that the EU feels compelled to take a whiff and to see these worthless bank assets first hand.  Again, we submit this as evidence of the wisdom of Government management in action on multiple levels.

The EU is lagging behind the United States on a crash course leading to currency and debt catastrophe. However, they both are heading in the same direction and will both meet with the same disastrous fate.  The EU, concretely Ireland, is still stuck on the mantra of curing bad debt problems by saying to the bond holders "Don't worry, we'll back the Irish bank paper (insert troubled asset) no matter what" and hoping that the bond holders don't call their bluff.  Unfortunately, as we have learned in a previous Mint, if you add a spoonful of sewage to a barrel of wine, you get sewage.

Don’t Touch My Junk

11/17/2010 Portland, Oregon – Pop in your mints…

In case anyone missed this on Monday, the now famous "Don't touch my junk" exchange seems to have struck a collective nerve across the land of the "Free".  For those of you who missed it, a software engineer was asked to submit to the Transportation Safety Authority's (TSA) new "enhanced security" screening while boarding a plane in San Diego.  The software engineer chose not to submit to the screening on the grounds that he would not be groped in the name of national security.  The software engineer unwittingly but perhaps providentially left his smart phone video recorder on which recorded a good portion of the incident.  You can see the entire clip, all 15 minutes which, if you embrace freedom, are worth hearing (if not watching the airport ceiling):

Now the person solely interested in safety might think that the software engineer seems to be unreasonably obstructing the "right" for everyone to fly "safely" and should be dealt with accordingly.  You may detect that most of the quotations used so far ring of sarcasm.  Your senses do not deceive you.  For a better understanding as to why this incident demands sarcasm and why it is important to see the cost of "security", we need a bit of history on the TSA and its latest screening spree.

The TSA was formed in response to the September 11, 2001 attacks on the World Trade Center in New York.  It operates under the cabinet level Department of Homeland Security.  All of this was authorized under what is known as the "Patriot Act" which betrays its name as it amounts to one of the most invasive pieces of legislation we have seen on these shores.  It removed any protections that the Citizens of the United States may have against the Government of the United States and has far reaching implications from travel restrictions to financial transaction and communication monitoring.  The TSA's job, apparently, is to make American's feel safe while travelling.  This new enhanced level of screening that our software engineer is currently concerned with was inspired by an alleged attempt by someone to board an airplane with a bomb in their underwear during the last Christmas travel season. 

Does this business of smuggling a bomb onto a plane in one's underwear seem farfetched?  Apparently not to the TSA, who in response dutifully stimulated the economy by ordering X-ray machines by the thousands and instituting "enhanced" screening which amounts to government endorsed voyeurism and groping, all in the name of passenger safety and National Security.  Do you feel safer, fellow taxpayer?  Apparently making millions of travelers walk barefoot and removing their belts before walking through a metal detector is not sufficiently humiliating.  The TSA now is going all the way.

How far will the Government go?  The Boston Tea Party was not inspired because the British were going to raise taxes, it happened because the British attempted to collect a tax at all.  In our day and age, with the Patriot Act, Big Bank Bailouts, Healthcare Reform, Financial Reform, and now "Enhanced Security Measures" threatening the very Freedoms we cherish, are we, as Americans, as principled as those brave souls who founded this nation?  There is no other nation in the world that embodies the ideals of Freedom on a large scale.  If Americans do not take a stand, who will?

So we leave today with a question:  How much Freedom must be sacrificed in the name of Security?  We would do well to understand the words of Benjamin Franklin on the subject:

"Those who desire to give up freedom for security will not have, nor do they deserve, either one."

Or as we might sum up today, "Don't touch my junk!"

Stay Fresh!

David Mint

Key Indicators for Wednesday, November 17, 2010

Copper Price per Lb: $3.70
Oil Price per Barrel:  $82.17
10 Yr US Treasury Bond:  2.60%
FED Target Rate :  0.21%
Gold Price per Ounce: $1,340

MINT Perceived Target Rate*:  5.25%
Unemployment Rate:  9.6%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  11,203
M1 Monetary Base:  $1,763,300,000,000
M2 Monetary Base:  $8,706,500,000,000

*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.

The Mushroom Shaped Dollar Debt Sponge

11/16/2010 Portland, Oregon – Pop in your mints…

So what is the point of all this speculation about the dollar no longer being widely accepted as a medium of exchange?  Why would this be important?

The point is that the worldwide real demand for dollars may have hit its high water mark, in the long historical sense, in 1971.  Since then, any increase in relative value has been mostly smoke and mirrors obscuring a long, winding road that the dollar has been following on its way to obsolescence.  As the wheels begin to fall off the "dollar mobile", the only thing that is holding it together is that its debt markets are the deepest that have ever existed.  If a large portion of the US denominated debt market were to be defaulted upon or forgiven (the portion owed by the government in Washington, D.C. comes to mind), inflation in domestic prices would shoot off like a rocket and the whole sorry episode would end in a spectacular, fantastic debacle played out in real life, a debacle the likes of which cannot yet be fathomed.

Anyone Want a Buck?

11/15/2010 Portland, Oregon – Pop in your mints…

The world left off Friday with gold taking a $38 drop and the world markets worried that China is worried about inflation.  At the Mint, however, we left off by coming to an even more astounding conclusion.  One that has far reaching implications not only for misguided Keynesian school economists but for every dollar denominated bond and bank account holder.  It also applies to those of us dinosaurs who still use dollars in its cash and coin form as much as possible.

The astounding conclusion is that the world, after nearly a century of increasing demand for dollars as a medium of exchange, is slowly turning towards other mediums of exchange to replace it.  For those of you who missed it Friday, we put it this way:

"This is what the low interest, low inflation rate phenomenon is really telling us.  On the margins, the dollar's popularity as a medium of exchange is diminishing."

The “Peril” Through the Eyes of a FED Head - Part II

11/12/2010 Portland, Oregon – Pop in your mints…

We left off Wednesday wondering just what a good Central Banker is to do when faced with the supposed "Peril" of deflation?  If you missed Wednesday's Mint, please take a moment to review it at the link below as it will greatly help your understanding of what follows:

The "Peril" Through the Eyes of a FED Head - Part I

For a brief refresher, Dr. James Bullard, the President and CEO of the St. Louis FED, published a research paper cleverly titled Seven Faces of "The Peril".  Instead of reading the paper, we summed it up here in this handy cliff notes version:

The “Peril” Through the Eyes of a FED Head - Part I

11/10/2010 Portland, Oregon – Pop in your mints…

We look out the window today and find that, apart from commodity and stock prices racing higher at a neck and budget breaking pace, the world appears much the same as we knew it before the FED announced QE2, its latest desperate attempt to devalue the US dollar.  The FED claims that, in doing this, it is helping the US economy.  We hope that the absurdity of this claim is obvious but at The Mint, we know that when we assume we risk making an ass out of "u" and "me" so a brief explanation of our position is in order.

We are conditioned as a society to associate increasing nominal value (the value of things in terms of a monetary unit such as the dollar) as "good" and to associate decreasing nominal value as "bad."  However, this conditioning is based on the assumption that the monetary unit is a stable measure of value.  FACT: the US Dollar has lost 98% of its purchasing power over the past 100 years.  Does that sound stable?  So we need to understand that the dollar is far from stable.  What is important, then, is to look at RELATIVE values through an ever-changing monetary lens.  To gain a true understanding of the relative value of a good or service, we recommend that its value in dollars be measured against gold, the historical global money's, value in dollars at any given time.

Is The World Waking up to Gold?

11/9/2010 Portland, Oregon – Pop in your mints…

The cold, rain, and accompanying haze began to move into Portland.  The weekend was a constant battle as the sun tried to shine on as the clouds regrouped and doubled their gloomy offensive.  In between the action we could see geese following their collective biological GPS south for the winter.  In the war for seasonal climate domination, autumn has begun the week firmly in control.

Does this surprise anyone?  Of course not!  The weather in the Northern Hemisphere has followed this pattern for as long as anyone can remember.  It is interesting to see what the weather will bring each day as the seasons change but if the current season is known, there is no question as to where the weather is headed.  In Portland, it is clear that we are going to get slowly and thoroughly soaked at various temperatures that can generally be called "cold or colder" over the next several months.  It is referred to in these parts as winter.

Unemployment “Steady” and Has the Lone Ranger Arrived? Ron Paul vs. the FED

11/8/2010 Portland, Oregon – Pop in your mints…

Perusing the news we see that China and Germany, economies that actually produce more than they consume, are openly mocking US economic and monetary policy ahead of the next G20 meeting.  It is a wonder the G20 even bother to meet.  At least it gives protesters of all stripes a world stage in which to air their grievances, which is nice.  To us here at The Mint, the G20 resembles an uncomfortable high school reunion where the participants do their best to update each other on their progress and make feeble attempts to "get together and do something" before the next reunion.  Little if any meaningful real world action actually occurs or comes as a result of what happens at these meetings.  Which is probably a good thing.

Looking further, we see that the stated unemployment rate, one of our key indicators, remained unchanged at 9.6%.  We will elaborate later on the importance of what the unemployment rate as stated by the Bureau of Labor Statistics  means to dollar holders and the bond markets.  What is important is that, this stated unemployment rate (which is the product of many "adjustments" by the government statisticians) gives us the signal as to what the FED will do with regard to monetary policy.  High unemployment = loosening of monetary policy (more inflation) on the horizon. Lower unemployment = tightening of monetary policy (less inflation) on the horizon.  This current unemployment number, concerns about its accuracy aside, simply gives the FED the cover it needs to continue to needlessly inflate the currency at the expense of savers and bondholders.

FED QE Aftermath, are there any Bonds left to buy? Canada Keeps Potash Local

11/5/2010 Portland, Oregon – Pop in your mints…

Today it appears that word is spreading throughout the stock, bond, and commodity markets that indeed the FED will support them (and sacrifice the dollar) at all costs.  Have any extra bonds laying around?  The FED will buy them.  In fact, according to one estimate, the FED may now be buying too many of them and "forcing" cash into the stock and commodity markets.  From the Wall Street Journal:

"At RBS, Mr. Briggs noted that the Fed's $600 billion in expected purchases, on top of an expected $250 billion to $300 billion reinvested from maturing existing bond holdings, will absorb a large percentage of expected net new bond issuance in 2011. RBS estimates that in 2011, the net new issuance of "high quality" bonds issued by the U.S. Treasury, government agencies and corporations, will total $1.352 trillion.

With the Fed potentially buying $900 billion of that, "it leaves very little for the rest of us," Mr. Briggs said. That scenario would result in downward pressure on yields across nearly the entire bond market, he added."

Mr. Briggs, by recognizing that the FED buying "leaves very little for the rest of us" is simply stating the obvious strategy of the FED.  You see, the recent flood of capital into Bonds is the equivalent of the lifeguard screaming "Everybody! Get out of the pool!" Yesterday, the FED announced that it will now begin to run around the pool and push all of the market participants back in, whether they want in or not!  Does this seem insane?  That is because it is insane!  

Ben puts $600 Billion on Black and What would You do with $1 Trillion? If You are Just Printing Money, Why Spend it on Bonds?

11/4/2010 Portland, Oregon – Pop in your mints…

Today Ben Bernanke and his band completed their encore, they effectively placed the fate of the US Dollar on a roulette wheel, betting $600 Billion that bond markets will trump the currency markets for the time being.  Ben and Co. believe that the bet is simple, red or black, and it has landed on red for over two years, so black seems like a reasonable choice.  What Ben doesn't realize is that regardless of where he places his bet, the casino of the US dollar system is falling down all around him.  As for the piddly sum of $600 billion, don't worry bond market participants, we'll get much more than $1 Trillion before this fiasco known as QE2 is finished.  But really, who is counting?

That is the point.  Why count something that doesn't really exist anyway?  Does the FED really have $600 billion sitting in a vault somewhere in the same way the US carries a strategic oil reserve in caverns in Texas and Louisiana?  Don't be silly, dear reader, we are giving them too much credit, as if they had planned for this sort of contingency.  A study of Zimbabwe's recent currency debacle informs us of the ultimate results of this sort of "unconventional monetary policy", the kind you don't find in textbooks.  At a certain point counting dollars will become as meaningless as counting raindrops in the air.  It is only meaningful if it hits the ground.  Right now, most of the FEDs stimulus is evaporating before it gets down to us.  But the air is getting thick and the pressure increasing.  Rain is on the way. 

Candidates Begging at the MAX, Bloated Pension Promises, and More of the Same from the FED…

11/3/2010 Portland, Oregon – Pop in your mints…

Today Ben Bernanke and his band are completing their sound checks and preparing to sing the tune that the markets are waiting to hear.  It is a classic tune (debauching the currency is as old as the concept of currency itself) that the FED is simply performing a modern version of to the tune of $1 Trillion dollars .  As we wait for Ben to sing and for the election results to roll in, the markets are calm so we will satisfy ourselves today with a personal anecdote, the significance of which we are still pondering.

As you may or may not know, Portland has a public transit system that is the envy of much of the US.  Due to a little old fashioned foresight and out of the box thinking and "redirection" of federal highway dollars (which took place long before we pitched our tent here), we enjoy transit amenities on the scale of much larger cities with technology that may rival any city in the world.  Whether or not the public can afford it is another story.  Trimet, the organization in charge of the system, allows employees to retire after 10 years with full health benefits for the employee and their family.  At last count, benefit costs were higher than the wages paid to existing employees.  Something has to give.