...from Dr. John

"To a large extent, the current softening of economic conditions is really nothing more than the recrudescence of the deterioration we saw last summer. Basically, we're coming up on the can that the Fed kicked down the road when it initiated QE2. While the Fed was successful in releasing a modest amount of pent-up demand, and was certainly successful in provoking speculative activity, there was never a realistic prospect of creating a beneficial "wealth effect" for the economy as a whole. The historical evidence is emphatic that people consume off of perceived "permanent income" - not off of volatile dollars. Wealth is driven by the creation of long-term cash flows through productive investment, not by boosting the valuation of existing cash flows by encouraging speculation. There was no reason for people to take much of a permanent signal from fluctuations in a stock market that has lost more than half of its value twice in a decade (and is likely to lose a good chunk of its value again if history is of any indication).

So while the Fed has been successful in fostering speculation, further impoverishing the world's poor through commodity price increases, and subsidizing banks by driving funding costs to zero (at the expense of the risk averse and the elderly), QE2 has clearly failed from an economic standpoint. This failure is not because we haven't given it enough time, or because monetary policy works with a lag. Rather, the policy has failed because it focused on easing constraints (bank reserves, short-term interest rates) that weren't binding in the first place. Very simply, neither the Fed's policy, nor the fiscal policy initiatives to date, address the central challenge that the U.S. economy faces, which is the debt burden on households.

The salient problem in the U.S. economy isn't the precise level of already low mortgage rates. It isn't "uncertainty" about taxes or health care. The problem is that people aren't spending as they did in recent decades, because that spending was largely debt-financed, and the pressures now run in the opposite direction. We still haven't restructured mortgage debt on millions of homes that are underwater. Property values are hitting new lows. Hundreds of thousands of properties are delinquent and yet the mortgages are being carried by the banking system at face value. Banks, knowing this, are clearly reluctant to extend their balance sheets further. Government deficits of nearly 10% of GDP are presently required to cover the gap in private incomes and spending. Indeed, most of what we observe as personal income growth is attributable to transfer payments from government.

To be clear, I believe that about 90% of the economy is functioning reasonably well (in the typical range of what is experienced over an economic cycle), but 10% of it is in extreme difficulty well outside what is seen in the normal cycle, and is only floating thanks to deficit spending that is unsustainable in the long-term and increasingly under pressure in the short-term. The problem is that we measure severe recessions as declines in GDP on the order of 2% or so. Without addressing the central problem of household indebtedness and underwater mortgages, the economic growth we get may not be robust enough to avoid more frequent recessions and near-recessions."

http://www.hussman.net/wmc/wmc110606.htm

Jetman

Yves Rossy, dubbed “Jetman” after becoming the first man ever to fly with a jet-propelled wing, completed a historic eight-minute flight over the Grand Canyon on Saturday. According to a press release issued by Breitling, Rossy’s sponsor, the Swiss pilot completed the flight after taking off from a helicopter at 8,000 feet with his jet-propelled wing strapped to his back.

He then proceeded to fly approximately 200 feet above the rim of the Grand Canyon, steering with his body and reaching speeds of up to 190 mph during the process, before he deployed his parachute and glided down to the canyon surface.

...from the local Faux News Affiliate - The Memorial Park Criterium Series

Bicycle Races Resume After Unfortunate Accident: MyFoxHOUSTON.com

...chapeau Jane

Friday Night Jazz, returns for today, anyway

Coltrane, w/Eric Dolphy...

Enve 6.7

New super areo wheel tested in the Mercedes Formula 1 wind tunnel...

"I'd come to the UK on business in March 2009 and I was watching the Australian Formula One GP in the hotel. Back then we were sponsoring Fly V which also had Virgin branding. Then on the television I saw the Brawn GP car wheeled out and it had a Virgin sticker on the nose. I made some calls and got a contact at Brawn GP and requested a meeting with them. They put me onto Simon Smart who had a contract to use their wind tunnel. From the first time we met I knew he was the guy we needed."

As well as having ten years of experience in F1 and two of the fastest and most successful time trial bikes on his CV, Smart is a keen and rapid time triallist himself. But most crucially, he was already thinking along the same lines as Enve. The development of the Giant and Scott time trial bikes had involved a lot of wheel testing and he'd soon started having ideas on how to make faster wheels than were currently offered. He just needed a manufacturing partner...

It was a perfect fit. If Enve had any doubts, it was that they might bite off more than they could chew. "I can't tell you how much thought went into this project before we committed," says Lucas. "We had to be sure we could actually make what Simon came up with."

Grams of drag: a measure of the size of the aerodynamic force acting against the object. The lower the better. At 30mph (48km/h), a reduction of 50g of drag force is roughly equivalent to a time saving of 0.5sec/km, or 20sec in 40km.

Yaw angle: the angle between the direction of travel and the direction of the wind.

It's one thing for a wheel to be aerodynamically effective in a varying crosswind but it's quite another for it to be rideable. Ease of handling and confidence stem from predictable behaviour which in turn owes everything to a linear response from the wheel as the crosswind changes. As is so often the case in any interaction between man and machine, from the brakes in your car to your PC's mouse, linearity allows the user to calibrate their actions and working in harmony with the machine – in this case, their bike.

Smart's wind tunnel rig allowed him to measure the steering torque applied to the front wheel by a crosswind. Baseline tests with existing wheels that were known to be tricky to ride in gusty conditions showed a non-linear response to crosswinds. That is, as the wind angle increases you might have to steer into it more but then if it increases again past a certain point then you would need to steer against it a lot less.

By designing this in from an early point, Enve and Smart were able to achieve a near-perfect ratio of steering input to angle. That means that you can run your deeper, faster wheels when everyone else is reaching for their skinny back-ups.

http://www.cyclingnews.com/features/enve-wheels-can-aero-get-any-quicker

...and, the best part...a post with Labels of F1 AND Cycling - How cool is that?

...from Financial Sense - Biggest Inflection Point of the Year

BY CHRIS PUPLAVA05/27/2011

• Print
• Share
  
• Font Size

Typically there are a few major inflection points in the year where assets either switch gears and reverse their prior trends or undergo an acceleration of their current trend. One of the key themes that have often marked these inflection points over the last few years is the general trend of the USD. At present the USD is at yet another major inflection point and what it does from here will have direct implications for not only asset allocation (bonds, stocks, commodities, currencies) but also sector allocation (cyclicals, non-cyclicals).

Want to Know What to Invest In? Watch the USD

As mentioned in the opening, the general trend in the USD has far reaching investment implications, particularly for US investors. For example, when the USD is weak the following general relationships are seen:

“RISK ON” Trade

• Stocks outperform bonds
• Investment grade and high yield bonds outperform US Treasuries
• Foreign stocks outperform US equities
• Commodities are strong
• Commodity currencies outperform USD
• Cyclical sectors (Technology, Cons. Disc., Materials, Energy) outperform non-cyclical sectors (Cons. Staples, Utilities, Health Care)

When the dollar is strong you typically see the reverse of the above relationships. This general investment theme is shown below in which US stocks (S&P 500), commodities (CRB Index), and emerging market equities relative to the S&P 500 tend to have an inverse correlation with the dollar. The USD Index is shown below in green and inverted for directional similarity. Looking at the figure we can see that when the USD is rising (falling in chart) commodities and the S&P 500 are weak and emerging market equities underperform the S&P 500 (2008, early 2010), and the converse is also true (2009, late 2010-early 2011).

Source: Bloomberg

One of my big picture investment themes is the 1970s analog of the USD Index relative to the present. So far there has been a remarkable similarity of how the USD moved in the 1970s to the present, and so I believe it becomes quite valuable to bear that in mind in terms of portfolio management. To see what I am referring to, take a look at the figure below which shows the USD Index in the 1970s on the top panel and the USD Index presently on the bottom panel. You will notice in the 1970s that the USD Index had a big decline from early to mid 1973 before it staged a dramatic bounce heading into 1974. The second decline occurred from 1974 to 1975 followed by yet another bounce heading into 1976. The moves in the USD Index in the early seventies created a pennant formation which is formed by lower highs and higher lows. After peaking in 1976, the USD Index steadily declined until late 1977 in which it then accelerated its decline and broke the lower pennant support. In 1978 the USD Index rallied to test the underside of the broken trend line and then fell more than 15% in 109 trading days.

Source: Bloomberg

Looking at the bottom panel the USD Index looks to be eerily mimicking the 1970s general movements in which we saw two big down moves followed by sharp rallies and then a third decline that witnessed a break of the pennant lower trend line. Not only has the USD Index broken the lower pennant trend line as it did in 1977, it has now tested the underside of the lower trend line and what comes next, if past is prologue, is a 15% decline in the USD Index to roughly 65.

There is absolutely no guarantee that the 1970s analog will play out in the current case as the USD may have a false breakdown of the pennant and then rally back above into the pennant formation. However, the further the USD declines from present levels the more and more likely the bearish case for the USD is in play and the “RISK ON” trade has a green light. My personal leaning is that we do in fact continue to track the 1970s example.

Since the early part of May the USD Index has been experiencing a short-term rally in which it looked like it was going to make a move to test its 200 day moving average similar to its rally in November-December of 2010. Once the USD Index broke its 50 day moving average (green line below) the bearish trend resumed. Presently the USD Index is testing its 50 day and 20 day moving averages and a decisive close below both would likely indicate the dollar is continuing its decline. Also, given the break in the multi-year pennant formation, the USD’s decline may accelerate to the downside.

Source: Bloomberg

What supports my belief in the bearish case for the dollar stems from its broad-based weakness to global currencies. Over the last month the USD has experienced a decent bounce but this strength is deceptive and not as strong as would appear on the surface. I track 30 world currencies and all four precious metals returns relative to the USD over various time frames to gain an understanding as to how weak/strong the USD is on a global basis, with my return table shown below.

The USD Index began to rally roughly one month ago and the third column from the left shows the 1-month returns relative to the dollar. You can see that only 6 out of 34 currencies and metals declined relative to the USD while 82% of them rallied, which indicates this countertrend bounce has been incredibly weak. A strong reversal in the dollar such as was seen in the summer of 2008 or late 2009 often occurs when it displays widespread strength. As shown in the table below, whether one looks at a one day relative return or a one year relative return, the USD Index is weak on a global basis and is not showing improving strength that would indicate a major reversal of its bearish trend.

Source: Bloomberg

If the dollar does experience a decline similar to 1978 (declineing over 15% in less than four months), one of THE primary beneficiaries would likely be commodities in general, and precious metals in particular. With gold already approaching $1600/oz, some have a hard time imagining how much further it can advance. One way to analyze gold is on a relative basis to help create some price targets, and rather than purely analyze how high gold can rise, we also need to analyze how far the USD can fall as gold and the USD are two sides of a the same coin. Thus, looking at the value of US governmental holdings of gold bullion in relation to the US monetary base helps in determining some price targets for gold and to gauge how expensive it may be.

Shown below on the left hand side is the percentage of the US monetary base backed by the value of US governmental gold bullion (ounces of gold * current price). On the right hand side is the required price of gold necessary to back the US monetary base to a set percentage with 25%, 50%, and 100% backing shown. I’d like to make a few quick points. First off, please note that the beginning of the secular bull market in gold in the 1970s that took it from $35/oz in January 1970 to $835/oz ten years later (+2285%) began with gold representing a mere 17.8% of the US monetary base. By the middle of the decade after the first big run in gold US government bullion holdings represented 58% of the monetary base, and by the peak in early 1980 the value of governmental gold bullion represented 131% of the US monetary base. By the time the secular bull market in gold was over, the value of US gold bullion represented more than the entire monetary base!

While it may come as a huge surprise that after rallying from $254/oz in 2001 to a recent high of $1577 (+520%), the present value of governmental holdings of gold bullion backing the US monetary base is currently BELOW the starting point of the prior secular bull run in gold! I believe this point is too big not to reiterate, the present value of gold bullion relative to the US monetary base is BELOW where it stood at the beginning of the last secular bull market.

Source: Bloomberg

A large part of this is due to rapid expansion in the monetary base caused by quantitative easing (QE) round one and two by the Bernanke Fed which has more than doubled the monetary base in short order. To bring the gold backing of the monetary base to 25% would require a gold price of $2382/oz, and for 50% gold backing would require a price of $4763/oz, which would still be less than the peak seen at the mid point for the last secular bull market in gold in which by mid 1970s government gold holdings represented 58% of the monetary base. For 100% gold backing of the monetary base we would need to see gold rally to nearly $10,000/oz.

As you can see, it is highly erroneous for anyone to call gold a bubble as we do not have an over abundance of gold bullion as we did of technology companies in 2000 or a glut of homes in 2005-2006. What we do have is a glut of US dollars. Shown below is the growth in the monetary base and global gold production. Since 1990 the monetary base has grown by 570% thanks to the Federal Reserve, while global gold production has grown by a mere 21%. So I ask you, where is the supply glut characteristic of a bubble, in US dollars or gold bullion?

Source: Bloomberg

Summary

Over the course of the last few years major pivot points in global financial market relationships have been centered around moves in the USD. I believe we are at yet another major inflection point and what the USD does from here will likely have widespread implications. If the USD Index tracks the path of the 1970s and witnesses a sharp decline in the months and years ahead, it is likely that the “RISK ON” trade will come back with a vengeance in which the S&P 500 vastly outperforms government bonds, higher yielding fixedincome securities like investment grade and high yield corporate bonds will outperform US Treasuries, emerging markets will outperform the S&P 500, commodities will rally as will commodity currencies relative to the USD, and cyclical sectors will outperform non-cyclical sectors. For a sign that the “RISK ON” trade is actually “on,” I would look for a decisive close of the USD Index below its 50 day moving average. However, if the USD instead stages a strong rally back above its prior broken trends then the converse of the “RISK ON” trade will likely be the order of the day. That said, my personal leaning is towards a USD decline given the widespread weakness relative to global currencies and precious metals. If the USD does experience an accelerated decline in the months ahead, then precious metals are likely to be the ultimate beneficiary.

...from The Telegraph - What happens when Greece defaults

By Andrew Lilico Economics Last updated: May 20th, 2011

335 Comments Comment on this article

It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that). Given that the ECB has played the “final card” it employed to force a bailout upon the Irish – threatening to bankrupt the country’s banking sector – presumably we will now see either another Greek bailout or default within days.

What happens when Greece defaults. Here are a few things:

- Every bank in Greece will instantly go insolvent.

- The Greek government will nationalise every bank in Greece.

- The Greek government will forbid withdrawals from Greek banks.

- To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.

- Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)

- The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts.

- The Irish will, within a few days, walk away from the debts of its banking system.

- The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.

- A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements.

- The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.

- The French and German governments will meet to decide whether (a) to recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its founding charter.  On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)

- They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.

- There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps.

- This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps.

- Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years. By the time they are finally heard, no-one will care.

- Attention will turn to the British banks. Then we shall see…