“Fears of a new recession that loomed over the economy this summer have all but receded.”

– AP, November 5

“I do not want the same kind of focus on safety and soundness that we have in OCC [Office of Comptroller of the Currency] and OTS [Office of Thrift Supervision]“

“I want to roll the dice a little bit more in this situation towards subsidized housing.”

These highly-reckless statements were made by Congressman Barney Frank as chairman of the Financial Services Committee. He and his fellow Democrats encouraged the Fannie and Freddy disaster, that has yet to be resolved.

The good news is that Frank announced his retirement last week.  The bad news is his financial legacy.

Last week’s wonderfully oversold stock market was accompanied by urgent policy statements:

“Germany told to act to save Europe”

– Financial Times, November 25

“Euro zone: Possibility of asking the IMF for more help”

– Yahoo! Finance, November 26

Then came the big remedy:

“Fed, Five Central Banks Cut Dollar Swap Rate”

– Bloomberg, November 30

We have often mentioned that announcements of these big “fixes” should be timed for when the market is ready to rally, rather than the other way around. It helps the true believers.

*   *   *   *   *

Perspective

Volatility!

Stocks, bonds, commodities, “Black Friday” shoppers, occupier-anarchists and even central bankers have been volatile. The latter have been inspired to again lower rates and add more stimulus. Old ideas, but as said in Tudor times, “One beam in a dark place hath exceeding refreshment”.

The attached chart of the VIX shows the set ups to “buy” signals.

We had been looking for choppy action that would net out positive into January. The S&P low was 1075 in early October and the high was 1292 four weeks later. At 1247, the churning-around level is around 1270.

This week’s jump has been outstanding and we think the accomplishment will be to keep going for some six weeks. The percent gain is not yet known.

COMMODITIES

Crude oil’s action has been very good – enough to push the CRB up over the past 8 weeks.

Within this, agricultural prices (GKX) continued their decline. The high was  570 earlier in the year and the low was 406 on Friday.  That’s a 29% decline.  The RSI got down to 30 and a decent rally is possible.

Over in the base metals, the GYX set its high at 502 in April and plunged 30% to the 350 level in early October. The third test was accomplished last week and the pattern suggests up.

In January our Momentum Peak Indicator expected speculation to surge into April, setting a cyclical high.

CREDIT MARKETS

As the saying goes, credit is money of the mind, and there is a difference of perception out there. Central bankers have been reckless in easing, but markets have been tightening.

The action in the money market continues to indicate tightening conditions.

Three-month Libor continues the rising trend that began in June at 0.245%. At 0.530% the yield had doubled. Yes, we are dealing with very small numbers, but the trend is important.

This was the case in 2008 when Libor turned up in June of that fateful year.

Perhaps increasing regard for risk is still at work.

This also shows up in the Ted-spread with its widening trend since July.

Of course, these two are integrated and the numbers are low. But, if they break out beyond current levels it would be a warning on the next return of risk.

More than likely, this would be confirmed by the gold/silver ratio rising above the trading range of the past two months.

At the long-end, markets have been tightening – rather severely as corporate spreads have moved to new “wides”.  With this, sovereign debt yields rose to new highs.

This is also defying central bank ambitions to lower rates where it counts, but velocity has a mind of its own in a post-bubble contraction. Spreads also have a mind of their own in defying official hopes of narrowing.

Although painful to orthodox investors and frustrating to policymakers, this is how financial history works. Interventionists still insist that lower rates will eliminate problems and restore prosperity. This phase of it essentially began in 2007 when developing concerns revived the notion that the Fed would cut administered rates and all would be well.

It still hasn’t made it into the textbooks, but the most dramatic plunges in administered rates occur only during the first bear market in a post bubble contraction. Following the 1873 bubble, the Bank of England’s rate plunged by 650 basis points. Following 1929, the Fed rate plunged by 500 bps as has been the case following the 2007 bubble.

History is working the way it should, which is the mind of the market.  Interventionists economists and their disciples continue to suffer the consequences of a closed mind.

THE LONG BOND

The rush to 140 in August was strong enough to register an Upside Exhaustion on the Chartworks proprietary model. The action was the flight to long-dated “quality” on Euro concerns. The jump to 147 in mid-September was on the new promotion of the old “Operation Twist” from the 1960s.

Technically, following the “Exhaustion” there was the double top at 147 and 146 in late September. The test stalled out at the 145 level two weeks ago.

This reminds of the ability of the S&P to bounce off support in September – only the other way around.

The long bond can decline in price into the new year. This could be interrupted by year-end portfolio adjustments.

Link to  December 2nd  ‘Bob and Phil Show’ on Howestreet.com:

http://talkdigitalnetwork.com/2011/12/markets-get-festive/

 BOB HOYE,   INSTITUTIONAL ADVISORS

E-MAIL  bobhoye@institutionaladvisors.com“>bobhoye@institutionaladvisors.com

WEBSITE:   www.institutionaladvisors.com

Mario Draghi just killed IMF lending proposal – “lending money to IMF to buy Euro bonds is not compatible with the treaty” – 9:03 12/08/11

Ed Note: With the potential for civilian unrest in Europe, it seems a good time to look at the nature of Government

Government in Trouble?

You’ll remember from yesterday that we have some question as to the actual divinity of the Egyptian dynastic rulers. Certainly, either the Egyptians had some doubts themselves, or they were among the most impious people who ever lived. Pharaoh was supposed to be a god. He was supposed to be in charge of everything, even the annual flooding of the Nile, the weather…life, death, you name it. But that didn’t stop him from getting the old heave-ho from time to time. Rival groups didn’t wait for God to decide who would sit on the throne. Men fought it out.

We don’t have any way of knowing about the pharaohs’ divine bona fides. We just note that as a theory of government, it does the job. Government claims the right to tell you what to do. Using the blunt instrument of ‘government’ some people are able to categorize, regulate, tax, inspect, dragoon, conscript, enslave, bully, incarcerate, murder and push around other people. Why do the other people stand for it? That’s the general subject of these little reflections.

There must be at least 10,000 commandments we Americans are expected to obey. The IRS code probably has that many alone. We cannot build a house or cash a check without fulfilling hundreds of (often invisible) requirements. We pass through an airport and we submit to indignities, usually without question. We know the TSA agent is a moron. But “dress’d in a little brief authority,” as Shakespeare put it, “most ignorant of what he’s most assur d, glassy essence, like an angry ape, plays such fantastic tricks before high heaven, as make the angels weep.”

Whence cometh that authority is our question.

If it comes from God, who are we to question it? We accept God’s authority, at least when He’s looking. And if Pharaoh were divine, we would have certainly buckled to his power too. How could we do anything else?

And yet, many people did not. For the two thousand years of the 30 dynasties, men killed each other to determine who would hold the pharaonic power. The last of them was clearly an interloper. The Ptolemies weren’t even Egyptian. They were Greeks, who conquered Egypt with Alexander. Then, finally, Julius Caesar and his nephew Octavian put an end to the divine tradition in Egypt forever. God either abandoned His man on the Nile, or he is playing tricks with us.

Caesar took the role of emperor of the whole Roman world. He did not seem to be too concerned about the theory of it. People bowed to him and paid tribute. That was how an empire worked. And he never had too much time to think about it anyway. He was cut down on the Ides of March at the age of 55 in 44 BC.

But the appeal of divinity did not die with the Ptolemies. Four score years after Cleopatra’s death the emperor Caligula declared that he was a god. This didn’t seem to take him very far. Romans came to the conclusion that he was not divine at all, but insane. He was murdered soon after by his own guards.

Rome struggled on for another 4 centuries. If there was a theory to dignify one man’s bending to another we aren’t aware of it. It was considered normal and natural. Those who got control of the government of Rome were able to exercise the rights of governors. They were victors on the field of battle…and in the halls and assemblies of Roman government.

What did they do with this power? “Ad victorem spolias.” Simple enough. You defeat someone. You take his stuff. His land. His wife. His children. At least there was no humbug about it. And the rules were simple. Government operated its naked form. As Mao described it two millennia later, political power came “from the barrel of a gun,” not from the Rights of Man or the Social Contract.

In the exploits of Genghis Khan and Tamerlane, too, we find a very pure form of government at work…and a very clear theory about it. Genghis announced his theory of government as follows:

“Man’s greatest good fortune is to chase and defeat his enemy, seize his total possessions, leave his married women weeping and wailing, ride his gelding, use his women as a nightshirt and support, gazing upon and kissing their rosy breasts, sucking their lips which are as sweet as the berries of their breasts.”

Tamerlane was no less direct. He saw government as a legitimate enterprise. He raised troops with the intention of conquering other peoples and replacing their governments with his own. His warriors were paid in booty — jewels, coins, horses, women, and furs. He was paid in loot, tribute and taxes.

This is not to say that there was anything wrong with running a government in such a way. We are not giving advice or making suggestions. We are just trying to understand the essence of what government is.

In the case of Egypt, people listened and obeyed — at least, as much as they did — because Pharaoh was, in theory, a god. In the case of Rome — with the exception of Caligula’s claims — and the Mongol empires, the theory was similarly simple, though different. Tamerlane made no claim to divinity. He merely made it clear what he would do to you if you resisted him. Towns that submitted were generally governed passably, according to the standards of the day…and taxed, but not razed to the ground. Those that contested his authority were destroyed, often with all the inhabitants killed.

In Rome and out on the steppes, those who controlled the ‘government’ were in the favored position. They could reach out and impose their will on those who were not favored. Which is exactly what they did. As long as they were able, the insiders took from the outsiders. In both cases, the outsiders were literally outside the ruling group and its homeland.

This is perhaps a good point to introduce our new theory about what government really is. It is a phenomenon, not a system. It is best understood as a fight between the outsiders and the insiders. The insiders always control the government…and use it to conquer and control the outsiders. Why do they want to do so? The usual reasons. Wealth. Power. Status.

Everybody — or everyone who isn’t either feebleminded or a saint — wants wealth, power and status. And the easiest, fastest way to get it usually is to take it away from someone. That is government’s role. Only government can take something away from someone else lawfully. Why? Because governments make the laws.

More to come…on the Divine Right of Kings…the Social Contract…and the Greatest Good for the Greatest Number….

Regards,

Bill Bonner
for The Daily Reckoning

It’s not hard to get Peter Schiff, president and chief global strategist of Euro Pacific Capital, to go after the Fed. After all, he remains one of the most vociferous dollar bears and harshest critics of the U.S. central bank.

When IndexUniverse.com Managing Editor Olivier Ludwig caught up with Schiff, Schiff went after the Fed by way of arguing that German Chancellor Angela Merkel is talking like eurozone policymakers won’t be printing money the way the Fed has. So what’s to stop the Fed from launching more “quantitative easing?” Another big crisis, or if China decides it’s time to stop buying Treasurys.

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