Winning the (Afghan) Future

How you going win this one? The WaPo reports:

To grasp the severity of Lt. Gen. Michael D. Barbero’s $40-fertilizer-bomb problem, it helps to consider some much bigger numbers.

Barbero heads a U.S. military command, with an annual budget of about $2.8 billion, that was created to stem U.S. casualties from insurgent bombs. In just the past few months, he has shelled out $24 million for a new hand-held ground-penetrating radar, $33 million for mini-surveillance robots and $19 million for bomb-resistant underwear.

The insurgent’s weapon of choice in Afghanistan is at the other end of the price spectrum: a plastic jug filled with ammonium nitrate fertilizer. So far this year, these cheap, hard-to-detect bombs have wounded about 3,200 U.S. soldiers and Marines, up 22 percent from 2010, according to the Pentagon. . .

Note the focus on underwear, as genital injuries are common now.

With Osama bin Laden dead and few al-Qaeda reported left in Afghanistan, for whom and what are the U. S. fighting in Afghanistan?

More Problems in Pak-Ghanistan

It's another uh-oh moment in the Pak-ghanistan region, as Reuters reports.

YAKKAGHUND, Pakistan (Reuters) - NATO helicopters and fighter jets attacked two military outposts in northwest Pakistan on Saturday, killing as many as 28 troops and plunging U.S.-Pakistan relations deeper into crisis. . .

A senior Obama administration official said U.S. officials had contacted their Pakistani counterparts from Islamabad, Kabul and Washington to express "our desire to work together to determine what took place, and our commitment to the U.S.-Pakistan partnership which advances our shared interests, including fighting terrorism in the region."

The NATO-led force in Afghanistan confirmed that NATO aircraft had probably killed Pakistani soldiers in an area close to the Afghan-Pakistani border.

"Close air support was called in, in the development of the tactical situation, and it is what highly likely caused the Pakistan casualties," said General Carsten Jacobson, spokesman for the International Security Assistance Force (ISAF).

There's one Republican candidate for President who talks about the harm that all the war-fighting the U.S. does overseas can do to the U.S. national interests. This sort of horrifying incident, which either was or was not intentional, has the potential to bring a lot more visits from Chinese and even Russian diplomats to Islamabad.

Austrian Economist Robert Wenzel Predicts T-Bill rates to Jump at Least 100 times in One Year; Is This Likely?

The well-known economist-blogger Robert Wenzel is out today with a post that predicts that T-bill rates will hit at least 7% within one year. Currently, on a day when gold is up 2% in price, the 6-month T-bill rate is 0.07%.

This is the cut and paste from the relevant blog post:

Investors won't want to own short-term Treasury securities paying less than 7
percent to 10 percent (The 6 month yield is currently only one-tenth of a
percent) . At some point after that things will move very rapidly and the United
States government will be paying interest rates comparable to those paid by
banana republics.

This rate has dropped today even though gold and oil are both up
about 2% today.

And it's not just ultra-short rates that have dropped
today in the face of what appears to be buying pressure in multiple commodities.
The 5-year bond is down to 1.69% from 1.77%.

Think of what a 0.07% annual rate means for a 6-month bill. It means that if you lend the government $1000 for 6 months, you are owed the grand total of 3 cents plus a ha'penny (3.5 cents).

A 1.7% or so 5-year note rate means that the lender gives away the thousand, not
to see it again for 5 years, and in return accepts $1.70 a year from the gov't as a sign of its good
faith that it appreciates the thou.

You need to understand that it is
not retail money that is rushing into the money markets to snap up these
securities the way it rushed into condos 6 years ago or tech stocks 12 years
ago. This is smart, sophisticated institutional and banking money that does not
much like stocks or real estate at these prices. It wants better deals on these
and other assets. This is not money that expects to realize a loss on its 5-year
notes within one year that far exceeds the total interest owed. This is
money that not only is very well-connected but has a significant say about what
the Federal deficit is going to be. When this money talks, Presidents, Treasury
Secretaries and Congressmen listen. This is also money that is part of the
"game". My guess is that this money does not want the chaos that the Wenzel scenario would
envision. I suspect that this money would prefer a Japan scenario for the US
than a Greek one.

Who of us can be sure in advance, of course? It is
always wise to recognize that "it's always something". But I'm taking the
"under" on interest rates vs. the above view.

I propose a friendly wager on the Wenzel prediction. I say he's wrong. This will be a negative wager. Loser has to eat crow.

Copyright Long Lake LLC 2011

Is Silver a Short-Term Buy Again?

I want to focus on longer-term matters here most of the time, but it's also important to stay on top of trading calls I have made on the record. Thus I want to provide an update on silver, as I posted "Silver Is Probably Overpriced" on June 2. At that time, the ETF known as SLV was at $36. I thought that was a brave call, given that silver had recently plummeted and looked oversold to many.

Afghanistan Messier than Ever for Obama

First, please note that several posts have gone up by me on The Daily Capitalist. You may click HERE, HERE and HERE for them or go to the first 'HERE' and scroll down.

Next, several news items are out showing how uphill the Obama surge is in Afghanistan. First, from Reuters:

Afghanistan's political crisis worsened Saturday with lawmakers voting to sack the five most senior judicial officials and international consternation growing after a presidential tribunal threw out a quarter of parliament.

The special court, set up by a decree of Afghan President Hamid Karzai after parliamentary elections last year were marred by fraud, ruled Thursday that 62 lawmakers would have to be replaced because of alleged poll fraud.

Karzai did not immediately comment, perhaps because he is in Iran attending a security conference. Hmmm . . .

And speaking of Iran, they're quite the wonderful country with which and in which to feel secure. Here is today's news out of Iran from the Guardian:

Prison guards in Iran are giving condoms to criminals and encouraging them to systematically rape young opposition activists locked up with them, according to accounts from inside the country's jail system.

A series of dramatic letters written by prisoners and families of imprisoned activists allege that authorities are intentionally facilitating mass rape and using it as a form of punishment.

And getting back to Afghanistan, of course there are many reasons for lack of military success (perhaps the main reason is that military force can't defeat a popular insurgency), but here's one that would have been utterly marvelous news 70 years ago:

German Soldiers Can’t Shoot

Leaked reports question the competence of the German army, which has thousands of troops serving in Afghanistan.

June 26, 2011 10:30 PM EDT

“German soldiers mostly don’t know how to use their weapons.” They “have no or little experience driving armored vehicles.” For German field commanders, “the necessity and ways [to protect their units from roadside bombs] are to a large extent either unknown or incorrect.”

These are quotes from a series of secret internal reports on the German army, the Bundeswehr, whose 5,000 soldiers in the northern Kunduz sector of Afghanistan were supposed to help the U.S. rout the Taliban and stabilize the country over the past 10 years.

Out now.

Two New Posts on The Daily Capitalist, and Comments on President Obama's Leadership

Click HERE and HERE for the last two posts. Message of the second (more recent) one: Gold miners represent good relative value in what remains a generally overvalued financial marketplace. Message of the first one: financial stocks are pointing downward, and that has tended to be a poor portent for the economy.

I also want to comment politically. It is not clear what is motivating Barack Obama. He is maintaining a large military presence in Afghanistan. Do the polls tell him that a partial withdrawal, to a troop level that exceeds the level it was at when he took office, will win him votes?

Economically, not long ago the Senate rejected the Ryan plan with about 40 votes in favor. But it rejected the President's budget with no votes in favor.

It's not clear to me that this president is a leader. With FDR, it was clear that he (at least in posture and headline actions) favored the common man, who was a poor man in those days. With Mr. Obama, he favors the poor- but he also favors the rich, and he has turned out to be far more corporation-friendly than almost anyone expected. So he favors everyone. But he and the country are only what they are. And there are no tall aliens with the ability to serve man by making the deserts fertile. So, choices must be made. This business of trying to please all, which in my field of interest, finance, I correlate to pleasing both the stock and bond markets, simply is not working. It worked for Lula of Brazil, but that followed a prolonged period of hyperinflation. There was public and private support for conservative, growth-oriented policies. And who knows what Lula swept under the rug to get to 70+% approval ratings?

Unfortunately I am getting an LBJ-Carter feeling of a failed president. LBJ and BHO are both guns-and-butter-oriented. Both led the economy into big-time price inflation as the central bank obediently helped to monetize the resulting deficits. But no one would mistake LBJ for other than a leader. Mr. Carter, who may have been well-meaning, ended up looking unfocused and indecisive, and chose (was "forced" to) move to the right giving near-hyperinflation toward the end of his tenure. The world is not ending, and as I have noted recently, a number of headlines are overly histrionic. So what is "priced in" in the markets is impossible to know, especially given the vast amount of money the Fed has printed that has been seeping into the real economy. We do not need a QE3 for lots and lots of price inflation to occur.

Got gold? (And shares of gold miners?)

Dealing with Financial Repression

Given the article posted today by Econophile on the WSJ and inflation, I thought it timely to submit some quantitative considerations for anyone with savings who has to deal with interest rates on savings that are below the rate of price increases for consumer goods and services.

The WSJ writer's view is that the authorities "should" inflate away debts. I fully agree with The Daily Capitalist's different viewpoint about what "should" be done. It is further my view that what Mr. Arends of the WSJ advocates has in fact been "the plan" ever since the economy began collapsing in 2008. I believe that the Consumer Price Index understates price inflation and that if one removes housing from the CPI (because houses are financial assets rather than costs for most adults), the real cost of living has been rising at least at 5% per annum for the past year for the "average" American. I further believe that this policy of imposing negative real interest rates on savers, which is being called "financial repression", will continue for some time.

Thus gold ownership in various forms remains appropriate in my view even for small savers unless they may need access to those savings soon (e.g. retirees or people who are not able to save from their income). To review the reasonableness of current gold prices, which are around $1540/ounce, I have gone back to 1976 prices and interest rates, when gold was in the $100-140 range.

New Articles on TDC

Articles on gold and Treasurys, and on general topics, are up on The Daily Capitalist.

Romney Looking a Likely Winner as Economy Bad and Worsening

First, I have a new post up on The Daily Capitalist; click on that link or cut and paste the link below.

http://dailycapitalist.com/2011/06/16/worsening-wealth-disparities-reflect-downside-of-excessive-money-creation/

Since I don't discuss politics at that site, I wanted to prognosticate a bit. Yesterday, Lakshman Achuthan, the face of the Economic Cycle Research Institute, told Fox Business News that their US "long leading" indicators have not turned up yet, having turned down in January. Since these are supposed to lead downturns in the economy by a year or so, he said that he foresees the best case-- a lucky case-- that a cyclical slowdown/stagnation in the economy will last until the end of this year. My thought is that it is therefore reasonable to presume that economic activity will be stagnant until at least the end of Q1 next year.

Following from this, the Republicans will see the Presidency ripe for the taking on economic grounds. In that case, they will rally behind their alleged economy guy, Mitt Romney. He will reiterate that so long as he gets a cooperative House and Senate, his first official action will be to repeal Obamacare. (His support of Romneycare will be forgiven in the names of victory and getting the economy moving again.) My further guess is that he will choose a polished social conservative as VP, due to his health care issue vulnerability and for other reasons such as his Mormonism and positions he may have taken as Governor of Massachusetts.

Between the worsened financial status of average Americans as the country apparently heads into a cyclically worsened state of economic stagnation, my guess is that all other things being equal, there will be a President Romney in January 2013.

It goes without saying that there is many a slip twixt the cup and this lip (yet I said it nonetheless).

Copyright (C) Long Lake LLC 2011

Thoughts on the Failure of Yesterday's Turnaround Tuesday Rally

As I write this at 2:10 PM Eastern time, yesterday’s “turnaround Tuesday” rally has been reversed. We are finally seeing the beginnings of capitulation in stock traders, as the volatility index with the symbol VIX finally break above 20. Last year, it surged above 45, and I use 25 and above as a rule of thumb of when to trade stocks from the long side if I am liking the bullish case.

We are seeing the deflationary market events occur that I recently suggested were most likely. One of several recent posts on this topic was titled Goldman Wrong on Rates, Zero Hedge Wrong on Oil As Deflationary Side of Biflation Begins Its Ascendancy. Next-month oil prices on the futures market have dropped to a multi-month low around $95/bbl. Gold, Treasurys and the US dollar are safe havens for the moment, and I suspect will be so for a while yet.

Short-term interest rates up to the 6-month range remain lower in the US than in Japan. If you, along with the great majority of investors, think that interest rates here have nowhere to go but up, you might be interested in perusing a multi-year chart of Japanese interest rates in the 5-30 year range. This is linked to from freely available data from the consultancy www.KShitij.com, which specializes in Forex.

To summarize, the Japanese have been locked since the 1990s into a near-zero interest rate policy. It is clear that investors did not want to believe that there could be such a persistence of this policy. Investors in the 10 year bond, and in the 30 year bond that was introduced during the time frame of the chart, apparently “knew” that rates had to rise. But they did not.

What is being called a “credit collapse” is a reasonable title for the dissipation of real capital in the booms, first of the late ’90s and then in the aughties, but it is a bit too gentle. The amazing leverage of companies’ capital bases led to insolvency when that limited real capital vanished. Until the stock market gets real with its valuation of operating companies, I remain unconvinced that a Japanese-type fate does not await, meaning a multi-decade stagnation/decline of prices of these pre-owned equities. There simply is a fundamental difference between stocks and bonds. Low rates on the latter is historically consistent in the US as well as Japan with low valuations on the former. To the extent that stocks are an inflation hedge, got gold? To the (more important) extent that stocks reflect the current value of the assets of the companies plus the (unknowable) present value of future profits, it just might be that today’s low interest rates are forecasting below-trend and below-expectations growth of said profits.

Today’s outside reversal (so far) of yesterday’s rally in stocks and oil is, as stated, finally beginning to get some bulls to throw in the towel. With no (public) interest in suggesting what tomorrow or the next day will bring, I think the most likely course is for more disappointing economic news in the months ahead, and that gold and only gold is the optimal hedge against a new round of money creation by the Fed.

COpyright (C) Long Lake LLC 2011

The Answer is None

The Christian Science Monitor is out with a brief review of the Obama "surge" in Afghanistan, titled "As troop drawdown nears, is NATO surge working in Afghanistan?"

Here is the article's conclusion, which refers to an interview with Chairman of the Joint Chiefs of Staff Mike Mullen:

For now, the Pentagon will be working closely with the White House in the months to come to determine how best to bring an end to the surge that marked the moment Obama made the war in Afghanistan his own.

For now, America's top military adviser acknowledges that there are no clear answers to precisely how many US troops should remain on the ground.

"We don't know what the answer is," he says. "I can honestly say that no one knows what the answer is yet."

Yours truly has never been to Asia, but given the lack of success the surge has produced and the apparent fact that there are almost no al Qaeda left in Afghanistan, the answer appears obvious.

None. Support the troops. Bring them home.

Copyright (C) Long Lake LLC 2011

New Post on the Stock Market at The Daily Capitalist

A new post has gone up on The Daily Capitalist on the stock market, click on the link or cut and past the link below. Due to formatting problems, work of this nature is not transferrable to the Blogger format.

http://dailycapitalist.com/2011/06/12/why-bill-russell-would-be-a-bear-on-the-stock-market-now/

The Administration Is a Lost Wolf

Pre-P. S.: Note please that as stated last year, I have been blogging at The Daily Capitalist. As that is a WordPress site and this site uses Blogger, there are interoperability problems with dual posting. I will continue posting here on various topics and in the future will place links here to those posts.

Now to today's effort. Barack Obama looks to me like a warlike Jimmy Carter, floundering at home and aborad.

Gone are the days when his critics called him 'Bambi'. Now he sends his Defense Secretary to posture, his strategy in Afghanistan having failed so far. Here is Robert Gates' latest:

KABUL, Afghanistan – In a last farewell to US and international forces in Afghanistan, Defense Secretary Robert Gates says they are on track to deliver a decisive blow against the Taliban.

Sorry, it was over a year ago that we heard that the victory in the non-city of Marjah was a prelude to a major, successful takeover of Kandahar city. What Gates and his boss should have done is what corporations learned to do years ago: underpromise and overdeliver. First rout them, then everyone will see the victory and you can be modest. Assuming the reporting is correct, Gates was engaging in puffery. Unattractive.

Not that I favor this effort at all. My sense is that 'Bambi' is in league with the neocons. I prefer the Reagan years. The only foreign military aggression I remember US troops performing was the minor thing in Grenada. Peace through strength. The last decade of all war, all the time with the latest, Libya, being an obvious war of choice.

Anyway . . . as with the ongoing military effort in Afghanistan, so with the economy. It's not yet falling off a cliff, and let's hope it does not, but as with Afghanistan, the administration has overpromised and underdelivered. And as the economic course was set in 2009 and 2010 with no Republican support, it was the Dems who were the lone wolf party and their president whose electoral fate is likely going to be decided next year based on the choices they unilaterally made one and two years ago.

It's time to let freedom (economic) ring. That's the solution. As we saw in 2009, the administration had no creative ideas for the economy, and so they ran up a multi-trillion dollar debt for little if any lasting benefit. At least FDR had the CCC and built some structures that are still in use today.

When the latest round of "Keynesianism" fails, which people will start to notice by this fall at the latest, there will be that many more adherents to the historical American position that that government is best that governs least.

BTW I put 'Keynesianism' in quotes because we are in a post gold-standard world with deficits so profound that it is impossible to know what John Maynard himself would be advocating were he around today. We have moved to an economic Extremistan that is sui generis in American history.

Copyright (C) Long Lake LLC 2011

Market Comments for the Week Ahead

New post on The Daily Capitalist . . .