Friday, October 21, 2011

Americans’ Income Drops Most in Twenty Years

Yet again the real data confirms what most of us already know: the U.S. economy is in serious trouble.

One look at this chart and you’ll understand what we mean.

Via Zero Hedge:

One place where nominal and real income data can absolutely not be fudged is the Social Security Average Wage Index based on withholding data reported by employers, particularly the median wage, whose nominal change can then be extrapolated in real terms using CPI to create a chained series. And here is where things get messy: as John Lohman demonstrates in the chart below, real income based on median wages, dropped (in real terms) by 1.2% – the biggest year over year slide in over 20 years of data…

What we are seeing is a perfect storm of horrendous economic data on almost all fronts. Manufacturing costs are up, essential basic goods have skyrocketed in price over the last three years, and more people are left unemployed every single month than the month before. The New York Times reports that gloom has gripped the U.S. consumer:

The United States has a confidence problem: a nation long defined by irrational exuberance has turned gloomy about tomorrow. Consumers are holding back, businesses are suffering and the economy is barely growing.

There are good reasons for gloom — incomes have declined, many people cannot find jobs, few trust the government to make things better — but as Federal Reserve chairman, Ben Bernanke, noted earlier this year, those problems are not sufficient to explain the depth of the funk.

That has led a growing number of economists to argue that the collapse of housing prices, a defining feature of this downturn, is also a critical and underappreciated impediment to recovery. Americans have lost a vast amount of wealth, and they have lost faith in housing as an investment.

They lack money, and they lack the confidence that they will have more money tomorrow.
Many say they believe that the bust has permanently changed their financial trajectory.

The paradigm is shifting, and there is no turning back. The jobs bill won’t save us. More stimulus won’t save us. The worthless, counterproductive actions of our elected representatives have failed miserably – likely even made things worse.

The economic situation of this nation is dire. We’re well outside of short-term cyclical downturn territory here. There will be no meaningful growth 18 months from now, as this is not a recession. We’re talking deep depression levels of economic inactivity that may potentially span decades.

This may not sound feasible to some, but just look at history for guidance to put the reality of the situation into perspective. When paradigms shift, the reverberations affect some generations for their entire lifetimes. Many people will not be able to make the adjustment, and they may very well end up living the remainder of their lives in poverty and squalor. Simply look to recent historical accounts of the multi decade periods in which we saw the German Wiemar hyperinflation, the Great Depression in the U.S., and the countless examples of generational poverty throughout the world in just the last 100 years. It has happened before. It will happen again.

Thus, when we discuss the ‘preparedness’ and ‘self reliant’ lifestyles, we’re not just talking about stockpiling supplies. Yes, this will be critical in getting you through the crunch – a term James Rawles, author of Patriots and Survivors, used to describe a period of economic collapse and political upheaval. But what will you do when we come out the other side – during what we might call the period of ‘reconstruction.’

It is time now to make the psychological, intellectual, spiritual, occupational and physical adjustments that will prepare you to live in a paradigm where the world as we know it today does not exist.

The alternative was best summed up recently by Kerry Lutz of the Financial Survival Network:

There are people who are still connected to the old one and can’t conceive of life without that old paradigm. I think you saw that in the Great Depression. A lot of people never recovered from it because once that hit it was the end of their lives.

You can embrace the changes and accept them as the new paradigm – or, you can bury your head in the sand and pretend you live in a magical utopia. The consequences of maintaining the latter as your world view will severely impact your quality of life for years to come – so choose wisely.

The Coming Derivatives Crisis That Could Destroy The Entire Global Financial System

Most people have no idea that Wall Street has become a gigantic financial casino. The big Wall Street banks are making tens of billions of dollars a year in the derivatives market, and nobody in the financial community wants the party to end. The word "derivatives" sounds complicated and technical, but understanding them is really not that hard. A derivative is essentially a fancy way of saying that a bet has been made. Originally, these bets were designed to hedge risk, but today the derivatives market has mushroomed into a mountain of speculation unlike anything the world has ever seen before. Estimates of the notional value of the worldwide derivatives market go from $600 trillion all the way up to $1.5 quadrillion. Keep in mind that the GDP of the entire world is only somewhere in the neighborhood of $65 trillion. The danger to the global financial system posed by derivatives is so great that Warren Buffet once called them "financial weapons of mass destruction". For now, the financial powers that be are trying to keep the casino rolling, but it is inevitable that at some point this entire mess is going to come crashing down. When it does, we are going to be facing a derivatives crisis that really could destroy the entire global financial system.

Most people don't talk much about derivatives because they simply do not understand them.

Perhaps a couple of definitions would be helpful.

The following is how a recent Bloomberg article defined derivatives....

Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.

The key word there is "speculation". Today the folks down on Wall Street are speculating on just about anything that you can imagine.

The following is how Investopedia defines derivatives....

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

A derivative has no underlying value of its own. A derivative is essentially a side bet. Usually these side bets are highly leveraged.

At this point, making side bets has totally gotten out of control in the financial world. Side bets are being made on just about anything you can possibly imagine, and the major Wall Street banks are making a ton of money from it. This system is almost entirely unregulated and it is totally dominated by the big international banks.

Over the past couple of decades, the derivatives market has multiplied in size. Everything is going to be fine as long as the system stays in balance. But once it gets out of balance we could witness a string of financial crashes that no government on earth will be able to fix. (more)

Crude Oil Analysis & How To Trade Oil Report

How to trade oil is not an easy thing to do in today’s headline driven market. Even the best oil analysis which may have been correct will still be wrong at times. This is due to the fact that oil has many factors which play into its price. Things likes like extreme weather conditions, geopolitical events, currency fluctuations, economic conditions and supply and demand.

During any time of the day oil traders and their oil analysis stand a good chance of having one of these factors directly affect the price of crude oil messing up their charts.

But, I am a firm believer that these factors (news events) generally fall in line with the overall larger trend of oil. So understanding how to spot trends in oil is a vital part of the equation.

Another important aspect of trading crude oil along with stocks and commodities is for you to understanding how to trade price and volume at an intraday time frame. If you don’t understand candle sticks, chart patterns and volume will get your head handed to you more times than not.

Let’s take a look at some charts and my short video which cover everything you need to know in great detail…

How to Trade Oil Daily Chart Analysis:

Below you can see clearly how the overall trend is down for oil. You can also see the repeated bearish patterns and key resistance levels. In my oil analysis I focus on finding and trading the trend. You will not find me trying to pick a major top or bottom with my strategy; rather I focus on low risk high probability continuation patterns within a trend.

Once the trend stops and reverses there will likely be one or two losing trades as the investment shakes things up and sentiment slowly comes around and shifts to support the new trend in oil.

How To Trade Oil

Intraday Crude Oil Analysis:

This is a chart of Oct 19th using a 5 minute interval. The annotations on the chart explain clearly what I saw and was hoping to see for an oil etf trade setup this week.

How To Trade Oil Analysis

Watch My 8 Minute Crash Course on How to Trade Oil:

How To Trade Oil Conclusion:

In short, I have been waiting for this setup to unfold for a few days now. This report goes to show that if you have the patients to site back, watch and wait you will trade with much less risk. By doing this you reduce risk on your overall position because you can time your entry 1-3 days before oil moves in your favour getting you the best possible price. Also the less time you have to keep your money in a trade the better because of the factors (news events) I told you about earlier. Cash is king!

Student Loan Bubble To Exceed $1 Trillion: "It's Going To Create A Generation Of Wage Slavery" And Another Taxpayer Bailout

First, this is the total amount of student debt in real time:

While one of the biggest complaints of #OccupyWallStreet protesters, and much of the balance of middle-class America, continues to be the burden of student loans, the paradox is that, as the USA Today reports once again on one of its favorite subjects, student loans are set to surpass $1 trillion in total notional for the first time in history on what appears to be relentless demand and interest for this cheap form of educational financing, making this debt burden the single largest form of consumer debt, well bigger than outstanding credit card debt, and smaller only compared to mortgage debt. "The amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year. Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York. Students are borrowing twice what they did a decade ago after adjusting for inflation, the College Board reports. Total outstanding debt has doubled in the past five years — a sharp contrast to consumers reducing what's owed on home loans and credit cards." What explains this insatiable demand for this kind of debt? Well, it's cheap, it's easily accessible (the collateral is education), and it is fungible - a student can take out a loan, yet use part or all of the balance for tangential purchases (that iPhone 4S sure would make me cool). But this, like every other debt, comes at a price.

Per USA Today:

Taxpayers and other lenders have little risk of losing money on the loans, unlike mortgages made during the real estate bubble. Congress has given the lenders, the government included, broad collection powers, far greater than those of mortgage or credit card lenders. The debt can't be shed in bankruptcy.

The credit risk falls on young people who will start adult life deeper in debt, a burden that could place a drag on the economy in the future.

"Students who borrow too much end up delaying life-cycle events such as buying a car, buying a home, getting married (and) having children," says Mark Kantrowitz, publisher of

Naturally, just like in the credit bubble days, when NINJA loans were fast and furious, the lines in front of banks stretched around the block. Banks may or may not have known that the loans would be repaid, but nobody pressured borrowers to live in that big McMansion that "demanded" $1 down and a 99.9% LTV. Sure enough, when the day of reckoning comes, it is never the fault of the person who probably should have shown some restraint, but no: after all everyone else is doing it.

Well, it is the same thing now. And with generations of people indoctrinated that only those with a college degree can be successful, it is only obvious that student debt is now the next big bubble.

"It's going to create a generation of wage slavery," says Nick Pardini, a Villanova University graduate student in finance who has warned on a blog for investors that student loans are the next credit bubble — with borrowers, rather than lenders, as the losers.

Full-time undergraduate students borrowed an average $4,963 in 2010, up 63% from a decade earlier after adjusting for inflation, the College Board reports. What's happening:

Granted, unlike with the mortgage bubble collapse, this time we know, as Zero Hedge reported earlier in the week, that everyone is on the fraud. We quote from "The Fraud At The Heart Of Student Lending Exposed - The One Sentence Everyone Should Read"

A key reason why a preponderance of the population is fascinated with the student loan market is that as USA Today reported in a landmark piece last year, it is now bigger than ever the credit card market. And as the monthly consumer debt update from the Fed reminds us, the primary source of funding is none other than the US government. To many, this market has become the biggest credit bubble in America. Why do we make a big deal out of this? Because as Bloomberg reported last night, we now have prima facie evidence that the student loan market is not only an epic bubble, but it is also the next subprime! To wit: "Vince Sampson, president, Education Finance Council, said during a panel at the IMN ABS East Conference in Miami Monday that lenders are no longer pushing loans to people who can’t afford them." Re-read the last sentence as many times as necessary for it to sink in. Yes: just like before lenders were "pushing loans to people who can't afford them" which became the reason for the subprime bubble which has since spread to prime, but was missing the actual confirmation from authorities of just this action, this time around we have actual confirmation that student loans are being actually peddled to people who can not afford them. And with the government a primary source of lending, we will be lucky if tears is all this ends in.

So... debtors know it's a bubble, lenders know it's a bubble, everyone knows it's a bubble, yet it is growing faster now than ever before.

If nothing this is a fantastic exercise in observing a slow at first, then fast-motion train wreck from the side. It is without a shadow of a doubt, that not only will the student debt bubble pop, but writedowns on amounts outstanding will be massive, potentially resulting in another hit of 50% to total notionals, or about $500 billion. And since the borrowers will be fully tapped out, and the lenders will plead ignorance, and control the regulators and administration any way, is there any doubt who will once again be forced to pay for this upcoming bail out? This is something that does not require a college degree to figure out...

Eric Sprott: “Forces are at Work that can Move the Prices Down.”

Dan Norcini: Central Banks Collapsing the Financial System

from King World News:

With markets globally experiencing extraordinary volatility, today King World News interviewed legendary Jim Sinclair’s chartist Dan Norcini. When asked about the chaotic trading in the markets, Norcini responded, “Right now the trading markets have become electronic battlefields. Much of this volatility is being created by a lack of stability in the Western hemisphere. If the current monetary system were a train, the engineer’s in the front would be the heads of the various central banks and they are certainly leading us to destruction.”

Dan Norcini continues: Read More @

A Long-Term Look at Inflation

The October 2011 Consumer Price Index for Urban Consumers (CPI-U) released today puts the September year-over-year inflation rate at 3.87%, which is fractionally below the 3.96% average since the end of World War II.

For a comparison of headline inflation with core inflation, which is based on the CPI excluding food and energy, see this monthly feature.

For better understanding of how CPI is measured and how it impacts your household, see my Inside Look at CPI components.

For an even closer look at how the components are behaving, see this X-Ray View of the data for the past five months.

The Bureau of Labor Statistics (BLS) has compiled CPI data since 1913, and numbers are conveniently available from the FRED repository (here). My long-term inflation charts reach back to 1872 by adding Warren and Pearson's price index for the earlier years. The spliced series is available at Yale Professor Robert Shiller's website. This look further back into the past dramatically illustrates the extreme oscillation between inflation and deflation during the first 70 years of our timeline. Click here for additional perspectives on inflation and the shrinking value of the dollar.

Alternate Inflation Data

The ShadowStats Alternate annualized rate of inflation is 11.45%.

The chart below (click here for a larger version) includes an alternate look at inflation *without* the calculation modifications the 1980s and 1990s (Data from

On a personal note, the more I study inflation the more convinced I am that the current BLS method of calculating inflation is reasonably sound. As a first-wave Boomer who raised a family during the double-digit inflation years of the 1970s and early 1980s, I see nothing today that is remotely like the inflation we endured at that time. Moreover, government policy, the Federal Funds Rate, interest rates in general and decades of major business decisions have been fundamentally driven by the official BLS inflation data, not the alternate CPI. For this reason I view the alternate inflation data as an interesting but ultimately useless statistical series.

That said, I think that economist John Williams, the founder of Shadow Government Statistics, offers provocative analysis on a range of government statistics. While I do not share his hyperinflationary expectations, at least not based on current economic conditions, I find his skeptical view of government data to be filled with thoughtful insights.

Southern Company (SO) Offers Dividend, Stability, Performance The large-cap electric utility makes a great long-term buy

Southern Company (NYSE:SO) — This large-cap electric utility owns Alabama Power, Georgia Power, Gulf Power and Mississippi Power. According to Credit Suisse, it remains a “best-in-class” utility offering a combination of strong annual earnings growth at 5% to 7%, along with a 4.7% yield. They target the stock at $45.

On Sept. 14, the Trade of the Day said, “Technically SO broke from a four-month top following a selling climax early in August. The stock’s near-term objective is in the mid-$40s, but it is recommended as a long-term buy.”

The stock has been a steady performer and its recent break above $43 is a strong positive. Continue to hold SO for its dividend income, stability and performance.

Trade of the Day – Southern Company (NYSE:SO)
Click to Enlarge

The Time to Short Is Now Market struggling to maintain a push above its 50-day moving average

Despite a positive start yesterday, stocks sank in the afternoon when the Federal Reserve’s Beige Book was issued. It and the lower-than-expected earnings from Apple (NASDAQ:AAPL), along with the televised turmoil atConstitution SquareinAthens, turned stocks lower.

But the focus was mainly the Beige Book’s conclusion that the selling of short-term and buying of long-term bonds, called “Operation Twist,” failed to stimulate the economy. And the Beige Book noted a weaker or “less certain” outlook for the remainder of the year. The Wall Street Journal quoted one trader as saying, “The beige book tells you that the economy’s stalled out.”

QQQ Chart
Click to EnlargeTrade of the Day Chart Key

The PowerShares QQQ (NASDAQ:QQQ), the ETF, which represents the Nasdaq 100 index, has rallied above its 200-day moving average. But note that volume in the peculiar advancing right triangle is falling even as the ETF moves higher. Like Tuesday’s illustration of a rectangle, this type of triangle is a consolidation formation that usually breaks in the direction of the major trend. Perhaps it is no coincidence that just when a high-volume push is needed to pop it through resistance, volume is declining and the stochastic has issued a sell signal.

NYSE Chart
Click to Enlarge

And while technology stocks have rallied, the sector has had little impact on the broad market. Note how the broad market, as illustrated by the NYSE Composite, has been struggling to maintain a push above its 50-day moving average and that yesterday its stochastic issued a sell signal.

On Oct. 3, the Daily Market Outlook said, “The market is oversold and due for a bounce after the S&P 500 and the NYSE Composite have penetrated into last summer’s zone of support. Therefore, it would be wise to cover profitable short positions on any deep thrust into that zone and wait for another short-selling opportunity.”

That short-selling opportunity has arrived, heralded by faltering earnings from a key technology giant and a faltering economy.

Large Commercials take bullish gold and silver positions

Over past fifteen years or so, I have watched the Large Commercials (LCs), as they are known to futures markets traders, change their positions in gold and silver with uncanny accuracy. The LCs have not always been on the right side of the markets, but they have been right often enough to profit handsomely from their positions. Critics of LC positioning call it manipulating, and there are good arguments that they are right.

One of the best analysts of the LCs’ positions is Gene Arensberg, who publishes Got Gold Report. From the latest Got Gold Report:

In the five reporting weeks just since September 6, as the price of gold fell as much as nearly $350 at one point, before snapping back up to settle a net $213.19 or 11.4% lower (as measured on Tuesdays, from $1,874.87 to $1,661.68) the combined commercial traders have covered or offset an eye-opening 59,236 contracts or 26% of their collective net short positioning. Indeed last week’s COT report (Oct 4), showing 164,751 contracts of LCNS was the lowest net short stand by the commercial traders since the post 2008-crash positioning of April, 2009.

We find it enormously interesting and instructive that in the 10-weeks since August 2, as the price of gold launched from the $1,650s up to the $1,900s, then careened lower in panic and liquidation to as low as the $1,530s and has now returned almost exactly to where it was in August – actually slightly higher than then – as gold apparently pulled a blow-off top, the largest, best funded and presumably the best informed traders the CFTC classes as commercial have very, very strongly reduced their collective net short positioning for gold futures. (From 287,634 contracts net short August 2 to 168,478 lots on Tuesday, Oct 11. A reduction of a whopping 119,156 contracts or 41%!)

In case it isn’t just as obvious to readers as it is to us, let us state it differently. Since August 2 the price of gold, with all its gyrations up and down, is nearly net flat, but the collective bets by commercial traders that gold will fall in price are now much smaller than then. If we can assign a confidence level to the commercial traders by their positioning in gold futures on the COMEX, we would have to say that as of this past Tuesday they are a lot less confident that the price of gold will fall looking ahead.

As I read gold price chart and analyze the action, I see a period of consolidation. My analysis, of course, is not unique. Other better analysts see the same consolidation. Still, I am encouraged to see Gene Arensberg’s analysis of the LCs’ positioning in gold.

Arensberg’s work can be found at He also reviews the LCs’ position in silver. Subscription options are explained on the site.

For silver investors, this will be of interest: Special GGR Excerpt – Silver COT Most Bullish in Eight Years.

Existing Home Sales, Prices Fall

The NAR (National Association of Realtors) reported that sales of existing homes fell 3.0 percent last month, from a seasonally adjusted annual rate of 5.06 million in August to 4.91 million in September, 11.3 percent above the level of a year ago.

More importantly, median home prices fell 3.5 percent to $165,400 from a year ago and that trend is likely to continue in the months ahead as traditional buyers continue to exit the market after the conclusion of the summer sales season and investors make up an increasing share of purchases, in many cases paying cash for distressed properties.

Distressed sales accounted for 30 percent of all sales in September – 18 percent foreclosures and 12 percent short sales – down from 31 percent in August, but this market share should rise over the winter months putting more downward pressure on prices.

The supply of unsold homes fell 2.0 percent to 3.48 million units representing an 8.5 month supply at the current sales pace, up from an 8.4 month supply in August.

In an era of “freakishly low” borrowing costs – rates for 30-year fixed mortgages recently dipped below four percent – contract cancellations continue to be a problem as the lack of qualified buyers and low appraisals slow sales, some 18 percent of all purchase contracts having been canceled last month.