I am still working on some financial projects. No time to post right now. Will be back after Labor Day. Have a nice Labor Day.

Things are not good. The economy and politics in this country are in a sorry state. This week the Wall Streeters are for the most part on vacation until after Labor Day so we might see some surprising volatility in these market. I am not sure equities are where you should be right now. I am looking at different thinks other than stocks to buy.

Zen and the Art of Economy Repair
By Bill Bonner

……..In the US, half a million Americans filed for jobless benefits last week-the highest number in 9 months. At this point in a typical recovery, job growth should be strong. Instead, it is shockingly weak. As for house sales, the drop in July was the greatest one-month decrease since 1968. Again, the direction is all wrong. Housing led the US out of 7 of the last 8 recessions. Now, it is holding it back! One out of every 7 mortgages is delinquent or in foreclosure. The nation is on target to foreclose on more than a million houses this year-a new record.

So let us take up a serious question. If an economy cannot trot out of recession, what becomes of it? To Japan or not to Japan? There are so many economists voicing an opinion on the subject that if you spent 5 minutes listening to each one you would have to be an idiot. There are those who think Europe and America will follow in Japan’s footsteps. And those who think it will not. Taking no chances, our Daily Reckoning has firmly held both opinions at one time or another.

The US is not Japan, say many. Japan’s 20-year slump was made possible by three unique circumstances: deflation imported from China, falling commodity prices and a current account surplus. The US is confronted with the opposite situation: commodities prices are strong, its current account is in deficit, and China is raising prices. These differences will bring on a crisis Japan never had to face. Interest rates will rise. The dollar will fall. Unable to finance its deficits at low rates, the US will unable to stay on the road to Tokyo. Instead, it will soon be detoured to Buenos Aires. Or Harare. The resulting panic will have nothing in common with Japan’s orderly ruination.

Those who think the US and Europe are following on Japan’s heels have at least the flow of current news to support them. Japan fell into a slump. Rather than let its markets clear, its government supported zombie banks and businesses with money borrowed from the public. This effectively transferred the burden of debt from the private sector to the public sector, while holding the economy in a state of suspended animation for two decades. Meanwhile, Japan’s people were getting older…more cautious…and more resigned to slippage.

This seems to be what is happening in America too. The private sector is de-leveraging. The latest report shows credit card debt at an 8-year low. Mortgage debt is dropping sharply too-thanks to defaults and foreclosures. Banks and private companies are stockpiling cash in anticipation of a cold winter. Households are playing it cool too.

Ben Bernanke must have gotten the message sometime between the 4th of July and the Assumption of the Virgin. On the 11th of August, the Fed announced another round of quantitative easing designed to fight against the decline. Of course, Japan tried quantitative easing too. It failed, just as monetary and fiscal stimulus had failed……

When it comes to Dylan Ratigan I find he is not real good at politics (his new gig on MSNBC) but he is good at explaining the economy. Below is a nice review of the current economic situation. It is worth a watch.

Note: To start the video click on the “25″ in the date “Aug 25″ in the left hand corner of the video.

Visit msnbc.com for breaking news, world news, and news about the economy

As the market heads towards the magic 1020 number on the S&P500 and the Dow dropped briefly below 10,000 today one could say things are not looking good. Once we hit 1020 (if we hit it) I see the market going sideways again and then who knows what.

Below is an article by Mark Cuban who is a real interesting character. You pay attention to him because he made a billion dollars and he on occasion makes a lot of sense. You judge for yourself.

The Stock Market is still for Suckers and why you should put your money in the bank
by Mark Cuban — blogmaverick.com

I wrote a whole series of articles warning people about the stock market over the years. You can see them here. It’s gotten worse. So I thought i would write some more about why you should probably avoid putting any new money into the stock market.

If you haven’t noticed, individuals are avoiding the stock market in droves. There has been an enormous exodus from equity based mutual funds. Why ? Because people buy stocks for only one reason, they want them to go up in price. If you don’t believe the market is going to go up. If you don’t believe you can find a greater fool to buy your stock, or the stock your funds own, why would you buy either ? You wouldn’t and people aren’t.

The amazing thing is that doing nothing in the market is the smartest approach to the market. It is pretty much impossible for some man or woman or child who devotes a couple of hours per week to the market to outperform the professionals who spend 24×7 doing this for a living and when they are asleep, they have a workforce full of people doing more of the same. In this day and age, none of us are smarter than the market.

I didn’t always think this way. I didn’t ever think there was a truly efficient market until just recently. What changed ? The availability of capital changed. While we can argue about whether or not the market is efficient because everyone has access to the same information, I would always argue that they didn’t efficiently use that information and even if they did, capital was not always allocated correctly to every market segment.

Capital found its way to where people/funds thought they were smarter than the rest. Some people thought they understood the tech markets better than others. Some thought they understood retail better, etc. The belief that an individual/fund had an advantage drove where capital was allocated. People posted good performance or identified macro opportunities and put their own and others money to work. Others saw the success and followed. Like the saying goes “first there were the innovators, then the imitators, then the idiots”. Fortunately for market participants over much of the history of the stock market, if you were the innovator that was smarter and faster than the other guys, you could make money on the long and / or short side of the market before the imitators and then the idiots flooded the market.

The door was open to opportunity in the past simply because capital was relatively expensive. It was expensive to raise, it was expensive to borrow. High cost of capital creates scarcity of capital. The more expensive the scarcer. The scarcer the capital, the more untapped opportunities just waiting for innovators to exploit and the longer it took the imitators and idiots to chase the same opportunities and close them. Which is why you found funds and smart people posting great returns over a long period of time.

But a not so funny thing happened on the way to and through the Great Recession. Capital became progressively cheaper. It became the opposite of scarce. It became readily available. To anyone.

The innovators had put together unique mortgage programs. The imitators made it a little easier to partake. Then the idiots took over. Capital was so easy and suckers and idiots so prevalent, everyone believed that there was always going to be a greater fool to buy their house and /or give them refinancing money. Until the idiots couldn’t collect on the mortgages they lent or pay the mortgages they took out. That de-levered the system and we know what happened next to the banking, mortgage and housing industries and the entire economy.

In response to that great de-levering, the government stepped in and I truly believe they saved us. Sure, they watched as the idiots dragged us into the mire. Sure they allowed all those mortgages to be guaranteed and that was a key culprit in the Great Recession. Our government has never been very good at being proactive at anything. Reactive thats another matter. That gets the votes.

So the government reacted and poured money into the system. They allowed just about any bank with a pulse to borrow money. To this very minute it is incredibly cheap to borrow short term capital. Particularly if you are in the business of trading/hacking the stock market. If you are a big fund or investor, money is cheap. Unfortunately for the stock market, it is cheap for everyone. In other words, capital is not longer expensive and it is no longer scarce.

When capital is so cheap that everyone with a pulse thinks they can make money once they borrow it, the stock market is in trouble.

Remember the rule about first there are the innovators, then the imitators, then the idiots ? It is why the stock market is truly in trouble.

There is SO MUCH CAPITAL available at so little cost to so many that the timeline from innovator to idiot is measured in days, hours and probably even milliseconds. The guys who are actually smart and uncover new opportunities can’t even get in a position large enough to make it worth their while before the imitators and then idiots pile in right behind them.

Remember the Flash Crash and the discussion about how trades are made in milliseconds, what I called hacking the system ? I don’t know for certain, but Im willing to bet that those innovators that made money by trading in milliseconds, now have so many imitators and idiots that have piled in behind them , putting servers right next to theirs and hiring their algorithm coders away from them, that there is no longer any advantage, or not enough of one for any of the players to make any real money.

There is so much capital chasing so little return that big time players are getting out of the business.

So what does this mean for you ?

It means that I don’t know if the market will go up or down, or by how much. My guess is that it stays in a trading range for a while. There isn’t much money coming in, but enough of that easy to come by capital has so much ego attached to it, that the same people will get in and out of the market over and over again and trade amongst themselves.

Until something happens. What that will be, I have no idea.

But I do know that I have continued to add to my cash balance or sovereign debt from around the world (that I have owned for a while now and has been profitable and is very, very liquid.) The stocks I still own for the most part pay me a nice cash on cash return, or I have owned them for a long, long time and have more in gains than I want to pay taxes on. But in total, I have been a net seller of stocks for more than a year. The only investments I am making are small buys into private companies. I want as much “powder dry ” as possible for when something happens.

I’m not saying you should get out of the stock market. What I am saying is that it is not a bad thing to accumulate cash right now. Retention of capital is a good thing. Don’t go chasing stocks. Something is going to give in this market. Like I said, I dont know what it is, but I want to have as much capital available as possible for when it happens.

Baron Rothschild said “the time to buy is when there is blood in the streets”, Warren Buffet said it differently when he said ” you pay a very high price in the stock market for a cheery consensus”

This is the time to start saving for a “bloody day”. There will be a time when capital regains its scarcity. When it becomes more expensive. When it does , what do you want to have in as great an amount as possible ? Capital.

So save your money. Pay off your credit cards. Put your money in the bank where it is insured. Be patient. Get a good nights sleep knowing that your money is not going any where and just wait till your capital is in demand and you get paid for it. When everyone is complaining about the money they lost, you will be ready to step in and buy.

That is how fortunes are made. Having money when no one else does. And you can take that to the bank !

I have been very busy on a non-business related project I am working on over the past few days so I haven’t had much time to read or make a post.

This market is not doing well but still is hanging in there by going sideways. I have been told that the magic number is 1040 on the S&P500. If the S&P500 drops below that level things could get worse very quickly. The bears seem to be in charge of this market currently and there is no good news coming from the economy.

My website provider sent me a note saying I might have some disruptions in my service. If that happens, hang in there and we will get it fix asap.

Here is a summary by John Mauldin on the current market:

V-Shaped Recovery
John Mauldin Weekly Newsletter

……..Long-time readers know that I think we are in for an extended period of slow growth, high and sticky unemployment, and volatile markets punctuated by more frequent recessions. That is what you get when you have a deleveraging environment resulting from a credit crisis. It is what happens when the Debt Supercycle ends. We start the journey to the New Normal and it just takes time.

“Where Is My V-Shaped Recovery?”

Remember all the bulls and cheerleaders late last year and into this one talking about a V-shaped recovery? They were making their projections based on what had happened in past recessions. I (and others) argued that that data was meaningless, as it did not reflect the fact that a balance-sheet recession requires years of deleveraging, is inherently deflationary, and all the factors that produce the normal “V” are no longer in play. Bank lending is still dropping. Savings rates go up. Debt gets paid down. Governments run into limits as to how much they can stimulate the economy without creating large and destabilizing debt. Central banks push rates to zero, and then what? This is a far different environment than we have had for the last 70 years. Using past performance to predict future results when the future environment is significantly different than the period in which the data was collected is misleading at best and worthless at worst, leading to bad decisions. Much better to deal with reality.

And just to show that I am really the optimist in the room, let’s turn to my good friend David Rosenberg, writing this morning under the following headline:

“U.S. RECESSION NEVER ENDED; GDP TO CONTRACT IN Q3″

Our suspicions have been confirmed the recession never ended. Macroeconomic Advisers produces a monthly U.S. real GDP series and it shows that the peak was in April, as we expected, with both May and June down 0.4% in the worst back-to-back performance since the economy was crying Uncle! back in the depths of despair in September-October 2008. The quarterly data show that Q2 stands at a +1.1% annual rate (so look for a steep downward revision for last quarter) and the ‘build in’ for Q3 is -1.5% at an annual rate. Depending on the data flow through the July-September period, it looks like we could see a -0.5% to -1% annualized pace for the current quarter. Most economists have cut their forecasts but are still in a +2.5% to +3.5% range. What is truly amazing is that despite all the fiscal, monetary, and bailout stimulus, the level of real economy activity, as per the M.A. monthly data, is still 2.5% below the prior peak. To put this fact into context, the entire peak-to-trough contraction in the 2001 recession was 1.3%! That is incredible.

“Interestingly, and dovetailing nicely with our deflation theme, nominal GDP fell 0.3% in May and by 0.4% in June. This is a key reason why Treasury yields are melting.”

Politicians are going to be greeted with a GDP number for the third quarter, right before the elections. Will it be negative like Rosie thinks? I am not sure, but in any event it will not be good. Structural unemployment will still be over 10% and deficits will be high.

…….. Unemployment and continuing claims have started to rise again. This is not what happens in V-shaped recoveries, gentle reader. The ONLY reason the headline
unemployment number has dropped a little is that the Labor Department has dropped so many people from the labor force. Again, if you have not looked for a job for four weeks, they do not count you as unemployed. If you use the labor-force number from just last April, unemployment is 10.5%. Brutal. Who doesn’t know too many people without jobs?
But it is not just rising unemployment claims. Yesterday’s Phillie Fed report was just awful. Buried in the details was the fact that the hours-worked index is collapsing, consistent with previews to past recessions. Very worrisome.

Bottom line? It is going to be a tough environment for the next 6-8 years. That is just what happens when you have a deleveraging / balance sheet / deflationary / end of the Debt Supercycle recession. It is what it is, and no amount of wishing or finger pointing can change the facts……

These market continue to go sideways although the numbers moving up and down don’t make it look that way. The economy is not doing well, it is stagnated and world events are causing concern to those who have taken the time to watch. There are a lot of problems in this world which might cause these markets to collapse quickly so one needs to be careful. Just another brick on the wall of worry.

Below is an long interesting article on the bond bubble. I cut some of it out but put the link if you want to read the whole article.

THE MYTH OF THE GREAT BOND “BUBBLE”
by Pragmatic Capitalism

Read complete article here:

http://pragcap.com/the-myth-of-the-great-bond-bubble

……There is ever increasing chatter of a bubble in the U.S. bond market. This idea of a bubble has become pervasive due to the myth that the U.S. government bond market can and will collapse under mounting fiscal burdens and the idea that bonds are “expensive” when compared to other assets.

Over the years investors have become increasingly concerned about the risk of sovereign default in the United States. China officially “hates” us. Alan Greenspan is frightened that the bond vigilantes are merely sleeping. Jeff Gundlach is worried that the United States is already insolvent. But are these concerns justified?

This brings us to a key question. What exactly is the U.S. government bond market? In a country with monetary sovereignty in a floating exchange rate system (USA & Japan, for instance) the bond market is really nothing more than a mechanism through which the central bank controls the money supply. It doesn’t actually fund anything as it does in Europe or under a gold standard. This is best understood by studying the bond auction data in the USA. Despite constant shrieking of a potential lack of buyers in government bonds over the years we continue to see incredibly high demand for US debt. The auctions are always oversubscribed. They never fail. Why is this? Why do the buyers keep coming back for more? The simple answer is because the government puts the buyers there. The auctions are designed not to fail. How is this you ask?

The government bond market is merely a monetary tool that the central bank utilizes to control the cost (or supply) of money by controlling the level of reserves in the system. So, when the government auctions bonds they are merely targeting reserves in the system. This action is mandated by Congress as an accounting tool and so is seen as a source of funding, however, in reality the Central Bank is merely draining reserves that the Treasury already spent into existence – reserves that were deposited at various banks (read this process in greater detail here). Therefore, it’s incorrect to argue that there won’t be buyers of U.S. bonds – with the banks earning 0.25% on their reserves and the government offering anything above that (depending on duration) the trade is a no-brainer for the banks who hold these reserves. The government is basically offering them free money and the Central Bank keeps control of the money supply in exchange (at least in theory). What is not occurring is some sort of funding mechanism. The Fed could care less if the auctions are 2X, 3X or 4X oversubscribed. They don’t get extra money when this occurs. They don’t get a gold coin that can then be spent. So long as they meet the 1:1 bid to cover the auction is a huge success because they drained their targeted reserves and convinced Congress that we aren’t going bankrupt.

Over the years the classic hyperinflationist or defaultista argument has been that China will stop buying our debt or that Japan will stop buying our debt. But the problem with this argument is that China is not our banker. Japan is not our banker. What do we care if they buy our bonds? They desire to net save with the U.S. and we happily send them pieces of paper with old dead white men on them to satisfy this desire. In recent months Chinese net holdings of U.S. debt declined:

“China’s ownership of US government debt has dropped to the lowest level in at least a year, Treasury data showed Monday, in a sign Beijing is increasingly keen to diversify out of US bonds.

The cash-rich Chinese government reduced its US Treasury bond holdings to 843.7 billion dollars in June, the lowest level since at least the same month last year, the Treasury said in a report on international capital flows.

The June data was lower than the 867.7 billion dollars in Treasury bonds held by the Chinese in May and 900.2 billion dollars in April.”

But U.S. treasury yields continue to plunge. The demand for this paper is enormous even though the largest holder of these bonds appears to be getting scared off. The demand is well beyond what the Fed even requires (as previously explained). While the Chinese fret about U.S. insolvency we’ll gladly keep sending them pieces of paper in exchange for real goods and services. If they desire to save less (which actually benefits their citizenry) then the United States will save more domestically (not all bad if you ask me). But ultimately, what they decide to do with those pieces of paper is their business and is not going to sink the U.S. economy.

Many of the arguments in favor of a bond bubble can be debunked by reviewing the hyperinflationist argument over time. For instance, in January of 2009 The Telegraph had a provocative piece titled “The bond bubble is an accident waiting to happen”. The author, Ambrose Evans-Pritchard, said the bond vigilantes were asleep and that China and Japan would soon stop funding the US need for debt:

“The bond vigilantes slumber. As the greatest sovereign bond bubble of all time rolls into 2009, investors are clinging to an implausible assumption that China and Japan will provide enough capital to keep the happy game going for ever.

It is lazy to think that China, Japan, the petro-powers and the surplus states of emerging Asia will continue to amass foreign reserves, recycling their treasure into the US and European bond markets.”

The only thing that appears lazy in this whole argument (aside from the argument itself) is the bond vigilantes, who, 18 months after this piece was penned, just refuse to wake up! Unfortunately for Mr. Evans-Pritchard China has already begun reducing their holdings of treasuries and the bond yields have continued to tick lower. He went on to describe how Mr. Bernanke was about to be the cause of horrid inflation and how we weren’t at all similar to Japan:

“Investors have drawn a false parallel with Japan’s Lost Decade, when bond yields kept falling, forgetting that Tokyo waited seven years before resorting to the printing press. Mr Bernanke has no such inhibitions. He has hit the nuclear button in advance.”

Unfortunately, that nuclear option did not prove inflationary at all and we are looking more and more Japanese by the day. Although the Fed’s actions changed the composition of bank balance sheets and helped trigger a mean reverting move in some asset prices it has not caused even one iota of inflation. In fact, recent data shows that the private sector appears to be at serious risk of retrenching and could take prices down with it. In a de-leveraging cycle, the Fed has far less control over the money supply than many presume. Bernanke’s great monetarist gaffe was based on this idea that saving the banks would save the economy which would save the private sector. But that has been proven entirely false as Bernanke’s focus on saving the banks has actually translated into very little private sector good. Without a steep acceleration in borrowing I would argue that Mr. Bernanke has failed entirely. Hence, his frustrating battle with disinflation (and risk of deflation).

Some market participants have gone so far as to compare the U.S. bond market to the Nasdaq bubble. This is simply not a fair comparison. The Nasdaq declined 90% from peak to trough. If you buy a 10 year government bond and hold it to maturity you will receive your principle back in full in addition to the coupon payments. If inflation jumps from the currently low levels to 5% you will be sacrificing 2.5% per year in real terms. Certainly not a winning pick, but nowhere near what the apocalyptic results of the Nasdaq bubble were. To reinforce this point I would highly recommend reading this paper from Vanguard which nicely summarizes the risks of the current low rate environment:

“When evaluating the potential risks in the bond market, it is critical to remember exactly why bonds are an integral part of a well-thought-out asset allocation plan—to diversify the risk inherent in the equity markets. Simply put, while the fear of rising interest rates may be legitimate, a potential bear market in bonds is dramatically different from a bear market in stocks (or other risky assets). In fact, unlike stocks, where the common definition of a bear market is a 20% decline in prices, to most investors a bear market in bonds is simply a period of negative returns. And to date, the broad U.S. bond market has never experienced a –20% return. Indeed, it’s the magnitude of returns that is the key differentiator between bad periods for bonds versus stocks. For example, the worst 12-month return for U.S. bonds since 1926 was –9.2%, while the worst 12-month return for U.S. stocks was –67.6% (12 months ended
June 1932).

In another example, the worst calendar year for the broad bond market was 1994, when due to an unexpected upward shift in interest rates, the bond market returned –2.9% (in 1995, the bond market returned 18.5%). Contrast this to the experience of stock investors in 2008, when the Standard & Poor’s 500 Index lost more than –2.9% in 27 individual trading days.”

When it comes to this whole debate the most important factor is the mere reality of our economic plight. As we all know by now, we are currently confronted with the threat of deflation, 9.5% unemployment, 74.8% capacity utilization, falling home prices, durable goods orders that are more than 20% from their peak levels, rising unemployment claims, equity prices that are 30% from their peak and high historical private sector debt levels. When your options are 0% cash, unstable real estate and equity in what appears like a weak economy that 2.6% government bond doesn’t sound so bad. Perhaps not the best bet in the world, but irrational? Certainly not. As Vanguard says, when compared to the long-term growth potential of equities bonds currently look like a fairly good hedge.

So, you can see that it is not accurate to describe the U.S. government bond market as even remotely comparable to the “bubble” occurrences we have seen in other asset classes throughout history. Even at its worst “valuations” the U.S. government bond market has performed relatively well when compared to the well known “bubbles” of history.

In summary let us remember that a bubble (as it pertains to markets) is an irrational psychological market environment resulting in extreme disequilibrium and ultimately some form of systemic collapse. These characteristics are not currently attributable to the U.S government bond market. Given the economic environment (and potential outlook for equities) it is not irrational for investors to seek a very safe interest bearing asset in a time of high uncertainty and 0% interest rates. In addition, as shown in the examples above, it is highly improbable that the US government bond market will collapse as the market itself is designed solely as a monetary tool. Lastly, while bond investors might be susceptible to losses history shows that it is not accurate to imply that they are susceptible to a “collapse”. While a 10 year U.S. treasury at 2.6% might not be the world’s greatest bargain it’s entirely incorrect to argue that there is a “bubble” in government bonds. In fact, I would argue that the term is not even applicable.

This market is up big time today based on some made up reason by Wall Street. The truth is this market is going nowhere currently and therefore it is impossible to make money in it no matter which way you invest (up or down). So why bother unless you are a day trader or like to gamble. The numbers and events we are seeing are very strange and cannot be depended on to give you direction.

The Dow Jones 30 industrial stocks yield more than the 10 year treasury. That was a headline this morning…..
…… this is only the second time in history that the DOW yield has exceeded the yield on a 10 year treasury. The competition for invested dollars has always been between the safe U.S. treasury and the more risky stock market. Usually, that risk has always meant that the higher yield for the risky stock market the less risk you are taking when comparing the lack of risk in government bonds. Investors today are saying that buying growth is not important; they do not want risk. However, at what level is taking risk worth it? That is the issue. Since in over 100 years this is the second time this has happened it is hard to guess what it all means for the future. One thing seems certain: this inversion of yield will not stay this way. Either stocks will go up in price, treasury’s will go down in price (up in yield), or both. Stocks could go down as well which would push the yield on the DOW even higher in comparison to treasuries. That outcome means a fall into a Depression possible just not probable.