History

200 years in the future, students will learn from history and economic books that cite the failures of a centrally planned economy.  I expect there will be at least a chapter devoted to "The Great Keynesian Experiment in America 1971 - 2022", and maybe hopefully another chapter to address "Deficit Spending as a Means to Economic Growth and Recovery in America 1931-20??"

Lastly I hope these textbooks compare the benefits and shortcomings of long term price stability vs. short term price stability.  

Similar to last year, only this year we have a timetable.

The economic woes of the world haven't changed much in a year, they are just ever so slightly worse.  The benefit we have is that at this point is that we've done it all before.  We even have schedules and specific dates to guide us this time around.  We know that operation twist comes to an end in June.  We know that on April 16-17th North Korea will try to launch a test missile, and we know that the US will breach the debt ceiling before the November elections.  My timeline is as follows:

Now -> mid May:  Rally mode, possible QE3 anouncements/hints, possible N Korea scares which may have effect on select commodities.

Mid May -> August:    The emergence of QE3 announcement if it is going to happen.  I expect mediocre economic data.   We can rally on QE3 or dip some without it.

August -> December:  This is where we bring the pain.  Debt ceiling will be breached at latest in October, republicans will not be any help in getting a debt ceiling raise to pass because they have an election to win.  Country is likely to be more divided than ever.  Even with QE3, I think any rally dives for a moment during elections and debt ceiling breach.

Based on this timeline i'll hold on gold and oil for the time being.  Upon emergence of QE3, i'll continue holding my gold and oil positions.  Without it i'll begin the VIX all in.  When September rolls around i'll begin shorting financials again if we already aren't in avalanche mode because of the lack of QE.

Preparing for a VIX all in

Lately a number of sources have noted the incredibly low price of the VIX lately.  I have predicting a time line in which the easy money and growth in stock prices will cease sometime around may.  Operation twist ends in June, so if we don't start hitting the fan in May, June would be a good second guess.   Debt ceiling woes should start having an effect sometime around august or September, and elections tend to throw everything into a tussie.   My point here is that the culmination of my financial reading and analysis points to significantly higher volatility in the fall and i'm tripling-down-all-in-throwing-the-childrens-college-funds into the VIX sometime early May or late April, and then again in September if that proves to be a wash.

Greek Default Timeline and more explained

Voting may be a right, but it is certainly not a privilege.

What is a vote worth?  The answer changes for everyone.  Not because different people value a vote differently, but because from an omnisceent perspective a vote is intrinsically worth more to someone who has something to gain than from someone with something to lose.  It is the means by which the poor can be subsidized by the rich.  I say subsidized and not supported because any monetary benefit given out by the public for the benefit of a specific group/cause/corporation/industry is a subsidy.  I dislike the word support because that infers a long term solution, whereas the current "support" is more like a child "supporting" a feather by continuously blowing it up in the air.  Subsidies are specifically for the purpose of lowering prices though..... right?  In fact prices are lowered, the price it costs to live for anyone subsidized is greatly reduced.  The obvious flaws in the voting system reflect current and past economic policy.  If this does not yet seem logically clear, take the example below, writen as a microcosm:

Suppose a society of 11 people exist on a small island as well as a small governing body that attempts to organize their productive efforts.  In this society not everyone is equally skilled.  They gather coconuts, and the best coconut pickers on the island manage to get 7-8 coconuts a day while the worst can only manage 0-3.  The very worst coconut picker on the island mostly just relies on the charity of other cononut pickers to get by, and occasionally the second worst coconut picker does the same.  The top coconut pickers end up with the most leisure time of course because they consume less than they produce and can afford to take time off.  All 11 islanders are given the right to vote in an upcoming election.  There are two candidates, and one promises that he will create legislation requiring islanders picking 6 or more coconuts daily to give one each working day to someone who picked 2 or less in order to win the election.  Now lets suppose the generated coconut income per day of the islanders is as follows:

islander 1:  8 coconuts
islander 2:  7 coconuts
islander 3:  7 coconuts
islander 4:  6 coconuts
islander 5:  5 coconuts
islander 6:  5 coconuts
islander 7:  4 coconuts
islander 8:  3 coconuts
islander 9:  3 coconuts
islander 10:  1 coconut
islander 11:  0 coconuts

Assume that ideally one would need to consume 2-3 coconuts per day for a healthy lifestyle.  The above follows a rather standard distrbution of wealth whereas 2/11 islanders are in poverty, 6/11 are somewhere between lower and upper middle class, and 3/11 are wealthy.  How do you think these islanders will vote?  It seems obvious that islanders 10 and 11 will support the legislation to redistribute wealth.  Islanders 1-4 will likely oppose the legislation.  Islanders 8 and 9  will likely support the legislation; maybe they have a bad day one day and only get 2 coconuts, the new legislation would provide them with an extra coconut, it would be like a safety net.  Since 8 and 9 are also rather poor themselves than can sympathize with islanders 10 and 11.  Islanders 5 through 7 are the swing votes and aren't affected either way by this legislation, but they still get to vote on it.  More than likely they will all support the legislation, after all its not their money, and it feels good to help the poor.  Maybe one of the middle class islanders understands economies and opposes it.... it doesn't matter, a majority still support.  It is also possible that one of the rich islanders, maybe islander 1, will be feeling charitable and won't mind supporting the legislation.  However, this principle doesn't work in reverse as islander 11 will virtually never vote to not give himself an extra coconut.  Regardless, it should seem clear that with any income distribution similar to the above voting would favor subsidizing the poor islanders.  Apart from being unconstitutional to take something earned by one islander without choice and give it to another, there are a number of defects with this type of legislation: negative incentitves are created.

- Islander 4 picks 6 coconuts a day and has to give one up so he always ends up with 5.... he could work less, pick 5 coconuts a day, and have the same benefit!  Islander 4 has been incentivised to produce less by this legislation.

-Islanders 8 and 9 are in the same boat.  If they picked one coconut less a day, they would qualify for an extra coconut.  Either way they end up with 3 coconuts, but they don't haver to work as hard if they just pick 2, giving them some leisure time. These islanders are also incentivized to produce less.

-Is anyone incentivised to produce more??? Nope, that just seems silly.  Why would islanders 5 or 6 try to pick more coconuts?, they would just have to give one away.

-The worst part is, in real life the administration of such a plan would have a slight cost as well.  The government would need to take a small fraction of every coconut in order to pay for the organization of such a plan.

Now it should be clear that the island is incentivised to produce significantly less coconuts.  Its possible that there won't even be enough rich islanders to pay for the poor islanders at some point... but the poor islanders have been promissed coconuts.....maybe the government can borrow coconuts from another island temporarilly to pay the poor the coconuts they were promissed and pay it back later when the economy is better?  That is another story all together.

Regardless, the point here is that free voting is rarely a priveledge to those with something to lose.  A vote that is free is worth nothing unless you have something to gain from it.  Voting is a joke.  As far as I am concerned, boycotting a vote on the premiss that it incentivises unproductive behavior is just as patriotic if not more than voting itself.

Erik Townsend on the markets:

Erik Townsend: Expect a US Price Shock as Black Swans Come Home to Roost

American investor (and longtime CM.com member) Erik Townsend has spent the past several years living internationally, with an eye to which countries may be good alternatives if economic crisis and/or Peak Oil start to materially impact life in the US. 

His main observation as an expat? Through its misguided policies, the US has been exporting inflation to the rest of the world, raising prices all over the globe (as an example, he cites a $57 chicken pot pie from the menu at a 'working class' restaurant in Australia). 

This inflation is affecting the rest of the world harshly, but is not yet being felt in the US due to our ability to export it as the issuer of the world's reserve currency. Our immunity will not last forever though, and when it ends, a massive upwards spike in prices is going to hit US markets.

On the Global Economy

As far as I can tell, this whole economy is being propped up by stimulus and money printing, really since 2009. And I think that what is going on is we have forgotten that we are literally changing the—I do not know if you want to call it changing the terminology or changing the paradigm—but what is going on here is, we used to use words like “solution” fairly accurately. Now as we are just creating these Band-Aid fixes to temporarily put symptoms of problems at bay.

We are calling those solutions, and we are actually behaving -- and when I say “we”, I mean collectively market participants -- are behaving now as if the ECB printing money in order to buy some more Greek bonds and put a bid under that market was a solution to the European sovereign debt crisis. And it is obviously nonsense. The ECB printing money just dilutes the value of the Euro and causes more reason in the long term for people to flee away from making investments in Euro-denominated sovereign debt. So it does not solve anything.

But we have gotten to the point where we are so overwhelmed that the market is thinking in terms of these Band-Aid patches as being actual solutions to problems. And I think as long as that is the case, we are going to continue to apply these Band-Aid patches, which are things like printing more money, until it all comes to a head. When it comes to a head and how it comes to a head, I do not think anybody is smart enough to predict accurately.

At some point, though, we are going to get to a point where we cannot handle any more printed money and I think that the black swans that have been leaving the market alone for several years are going to come in force.

 On The Market's Willfull Blindness

I do not think that we have ever seen a larger basket of major macro structural risks that everybody is aware of. It is not like nobody sees these things. But we have just somehow put them all on the back burner. Do not worry about China. Do not worry about Europe blowing up. Do not worry about Iran. Do not worry about the carry trade unwind in Japan that you have just written about recently. Do not worry about Peak Oil. Do not worry about the domino effect of China and Japan going down, taking out other economies that depend on them.

It is all fine. The LEIs are looking up. And we just seem to be in this cyclical trading mindset

that it is going to continue to last until something breaks. And I think that when something breaks, it is going to break big.

On The China Wildcard

I think China has quite a bit of pull here. In that as QE3 happens—and I am convinced it is going to happen sometime this year, I do not know when—it is going to export so much inflation to China that it is going to be almost intolerable for them.

And I think that we are forgetting that if China says, “Okay, guys, we have had enough of this. If you do any more QE-ing we are going to dump the US Treasury bonds that we are holding and we are going to use the money to save our own economy.” If we see that kind of reaction from China, it really could put a monkey wrench into the plans of the central banks to inflate this all away.

I think that whether it is that mechanism or another one, at some point we are going to get to a hard wall here where you cannot just print money forever without the unintended consequences coming back and biting you.