The Governor of the Bank of Canada, Mark Carney, has become Governor of the Bank of England. No change in actual title, but hired at considerably higher compensation than that of the previous Governor. Mr. Carney brings to the position a pleasant visage and speaking voice. Obviously his new employers are expecting much more than that.

Although a stretch, it reminds of when England’s government appointed Isaac Newton to head up the Mint. Some have written that there was hope that the great scientist would be able to provide more than sound management. Perhaps, as an alchemist, he could conjure up something for nothing. This, of course, was well before ambitious politicians and bureaucrats discovered Keynes.

During the financial storm Carney earned accolades in Canada and glowing comments from an international financial media. Like so many others in central banking circles he has a PhD in currency depreciation and interest rate manipulation. Because Canada’s troubles were less severe than many countries there was much favourable comment about the country’s banking system and central bank.

The best thing that can be said about Canada’s banking system is that it has not been designed by the US Congress. The long tradition of sound banking started in the early 1800s when partners forming a bank were liable for twice their personal equity in the bank. The best banks became relatively big and diverse in operating in all regions of the geographically huge country. So far the folly of deposit insurance imposed by the government in 1967 has caused little harm to the banking system.

If one had to identify key reasons how Canada weathered the storm it would be that her politicians were not as forceful in insisting that mortgages be made available to those who could not meet the obligations. Another reason also involved residential real estate. The bid from Asian buyers continued in Canada. Perhaps in the US it was overwhelmed.

After the 1980 blow-off in commodities and inflation, upscale residential in Toronto and Vancouver fell to one/third of their highs. Financial markets are again faltering and Canadian real estate is vulnerable.

As the head of the Bank of Canada Mark Carney maintained considerable poise and as the saying goes “was looking good”.

For sure some of Carney’s compensation is to cover the much higher costs of London relative to those in Ottawa. But a couple of years ago when the Fed’s “Dream Team” had faltered, Carney seemed to have the central banker’s equivalent of a magic wand. Admirers of the techniques of central banking place considerable stock in timing the market. In 2007 it was widely boasted that the Fed, and to a lesser degree, the Bank of Canada could make the perfectly-timed cut in some administered rate and the financial party would continue.

Now any old financial historian would know that this claim was impossible. But somehow Carney kept “looking good” and is appointed as head of the Bank of England. In her early days, the “Old Lady of Threadneedle Street” promised to “infallibly” lower interest rates, but provided unsound banking, herself. After a couple of insolvencies she discovered sound banking.

Since the intellectuals gained influence in the 1930s unsound banking has prevailed.

As the “new broom”, Governor Carney is in rare position. Should he continue with the ancient practice of trying to make a post-bubble credit contraction go away by throwing more credit at it? Or should he work towards sound banking built upon a sound currency?

We wish him well.

BOB HOYE, INSTITUTIONAL ADVISORS – WEBSITE: www.institutionaladvisors.com

There are any number of names that can be used to describe the Administration’s policies. However, in this polite assembly it is best to stay with what is printable and ask the question about which description fits best?

It is hard to avoid terms that have become derogatory epithets. Liberal is one, progressive-Democrat is another. And then there is communist, socialist, fascist and corporatist to list only a few. But all describe current U.S. policy.

Academics intensely debate the differences between Lenin and Trotsky. But it is more practical to review the similarities. Actually coercive political movements and their promotional labels are all the same in the quest for power. What’s more, the quest repeats in an all-too-real nightmare of Groundhog Day. Although burdened with nonsense about Obama ending the rise of oceans, in the West we remain thankful that the old and recurring political experiment in big government has avoided state murder.

So far it has just been the assassination of constitutional norms. And with remarkable irony, those that protest the assault and defend the traditions of freedom are called Nazis. This shows more passion than commonsense and suggests that all of the experiments of bullying political movements need a universal description.

The General Theory of Authoritarianism elegantly defines the experiment as “That which is not compulsory, is prohibited.” Of course, the corollary is “That which is not prohibited is compulsory.”

This can be applied to Marx, Lenin, Mao and Keynes. The latter’s The General Theory of Employment has assisted all manner of authoritarians in the West to finance the greatest experiment in intrusive government since the 1600s. Keynes’ own preface to the 1936 German version of his theories boasted that his recipes would work best in “conditions of the totalitarian state.” They have assisted such ambition.

Sadly, Keynes’ notion that an economy can be managed to avoid the nasty times that attend the business cycle was just a personal revelation, and not new. Keynes was lucid until the 1929 crash when he took a hit and discovered the liquidity preference. Edward Misselden had a similar revelation during the Crash of 1618. The revelation was also personally discovered by John Law in the turbulent early 1700s and by Walter Bagehot just at the start of the Great Depression that followed the 1873 Bubble. The essential recipe has been that throwing credit at credit contraction will make it go away.

The purpose of this address is to review the laws of the General Theory of Authoritarianism as derived from two previous examples. The distinction is that what follows is based upon how financial history actually works, rather than upon how it “ought” to work. The two previous examples of the senior economy going authoritarian brewed up in the Third Century and in the Sixteenth Century.

But, before expanding this, there are a couple of instructive ironies.

In the early 1600s the civic administration in Malines in Belgium made the cultivation and consumption of potatoes illegal.

Why? Because potatoes caused leprosy. Was this an example of Post-Medieval superstition or just plain stupidity?

There was more to it than either. It was bureaucratic absurdity as a great experiment in big government went out of control. Potatoes were new and it has always been easier for control freaks to deny the new than to change long-standing traditions.

On the last serious famine in Africa, America was quick to provide basic foods. Almost immediately, political activists protested such aid, as it could include grains genetically modified by evil corporations.

Why? Because genetically modified foods would impair the health of the starving. Is this an example of Post-Modern superstition or just plain stupidity?

Actually, it is all of the above and then some. Bureaucratic intrusion has always used superstition and slogans. As Rome was corrupted from a republic to a brutal police state ambitious leaders celebrated the “Genius of the Emperor”. On our experiment in big government, the politically ambitious have promoted the “Genius of the Federal Reserve”.

Mao used his Little Red Book to inspire the “Great Leap Forward”.

Today’s authoritarians have been equivalently ambitious in crafting a Big Red Book of “political correctness” which provides an endless list of issues on the way to perfect a progressive society.

Will they continue to dominate?

Not likely, as today’s frenetic policymaking is another example of ending action. The establishment claims the Republicans are finished, but a veteran trader would say that they have become very oversold as the Democrats have been the focus of a buying mania.

Some of the Main Stream Media are recovering their ability to criticize. Besides that, cheerleading a losing team is so yesterday.

Last week, even the Washington Post wrote that Obama is failing in his attempt to prove that “activist government could also be smart government”.

How important is this?

Beyond losing some of its support from ardent Main Stream Media, something much bigger has been going on. Essentially, the last Great Reformation was propelled by a printing industry that was independent of the authoritarians. This time around, the internet, talk radio and talk TV are definitely independent of the control freaks. Government institutions will be reformed.

The motivation for bureaucratic greed has been great wealth and prosperity. Other people’s.

Rome had accumulated enormous wealth through conquest and tribute. Even enhanced by massive depreciation, the ability to fund unlimited government eventually became impossible. Plagued by decades of predation, what was left of the productive sector departed to Northern Italy. Seeking sustenance, the bureaucracy moved to Istanbul which is still an important commercial center. Rome was not located at a natural trading point and from a population of some 1 million it collapsed in a few hundred years to only 80,000. Trying to support some 400,000 on welfare in a city of one million was uneconomic.

The next accumulation of enough wealth to provoke another such experiment started in the early 1500s. It was inspired by the unprecedented windfall of gold and silver from the New World. Spain was the dominant power and its administration went out of control. The massive flow of real money was not enough to satisfy the demands of unlimited government, which borrowed endless amounts and “printed” endless amounts of money. Spain defaulted at least three times on its way to becoming a lesser power.

Ambitious bureaucracy needed even a bigger organization than those of one or two countries and eventually corrupted the Catholic Church. The Protestant Reformation involved religion but the main theme was productive individuals and families reforming in-your-face government. Political power devolved from central authority to regions as well as to the individual.

The next accumulation of wealth was not based upon conquest or windfall treasure, but upon productive work in an essentially free-market economy. Despite the testimony of millions of economic text books, the enormous rise in prosperity had nothing to do with the “Genius of the Federal Reserve”. It had everything to do with private initiative introducing science and technology to producers and consumers.

Sadly, unprecedented increases in the overall standard of living have earned the hostility of authoritarians. Envy and greed have again driven confiscatory taxation and as that has always been inadequate to the demands of unlimited government. Naturally, to satisfy its ambition the state turns to currency depreciation.

The inquiring mind may wonder how long demented central bankers can go before they turn towards responsibility?

Yes we can all wonder, but it won’t be voluntary. Political and market changes will force all agencies of big government into accountability. Chagrin can provide forceful instruction and this is getting close.

Culmination of the two earlier examples of inflation and bullying politics could provide the “ending action” model. After a hundred and fifty years of relatively stable prices to 1500, purchasing power eroded from 682 to 100 in the early 1600s. Prices went up by a factor of seven.

Since the Fed opened its doors in January 1914, purchasing power has plunged from 100 to 4.3. Prices have soared by a factor of twenty plus and, yet on May 2nd, Paul Krugman, the socialist running-dog, said that there is “Not enough inflation”.

Some may be thinking that we are in a political trap as described by Orwell or Rand. This suggests it will not end.

Tocqueville had a good handle on today’s governing classes and their supporters distressing the producing classes.

“Society was cut in two: those who had nothing united in envy; those who had anything united in common terror.”

This also suggests bullying without end.

This would have been the grave concerns of the productive classes on two previous examples, but after a hundred years of barely enduring the financial assault the public suddenly became more critical. Then government did something incredibly and acutely stupid.

Diocletian was a well-organized dictator and was reckless with his depreciation and became very concerned about rampant price inflation. He did not have economists to lay the blame on the public with “inflation expectations”. Stupid Policy # 1 was severe depreciation. Stupid # 2 was price and wage controls imposed in 301 AD. Stupid # 3 was backing up price and wage controls with the sword.

There were numbers of approved religions and cults. They did not criticize big government. Only one was indifferent and it was banned and persecuted.

The Edict on Prices was effective in rapidly collapsing the economy so as a diversion it was followed by the Edict against Christians, otherwise known as the “Great Persecution”.

Perhaps concerned about the injustice and sensing the collapse of bureaucratic edicts, Constantine moved in 306 to legalize Christianity and to return confiscated property.

The frenzy of radical policymaking came to a shuddering halt.

For much of this time the term barbarian meant stranger or Christian and mainly meant class distinction. Somewhat similar to the way that today’s establishment looks down on non-liberals. Many ordinary Romans began to admire those from the Northern Provinces as “innovative” and thrifty. Also admired were Northern fashions of long trousers and blonde hair. These were upsetting to the establishment and were banned. The dictates of fashion prevailed.

The contrasts then would be similar to the governing classes in Washington DC and to those of the typical Texan today. If you can appreciate this you can understand the collapse of the Roman bureaucracy.

The next great experiment in authoritarian political correctness began its end in the early 1600s and evolved more clearly in England than in Europe.

A distinctly grand, but stupid policy erupted in England in the early 1600s. A decade of boom times, rising prices and prosperity was followed by a recession and rising unemployment. The folly includes three key players: King James, Alderman Cockayne and the Archbishop, who recorded the meetings.

The perceived problem and opportunity was that British exports of cloth were finished in the Netherlands, which was the commercial centre. The alderman persuaded the king that England deserved the “value-added” and persuaded him to duplicate facilities already existing in Europe.

Unfortunately the weak economy and unemployment continued and in 1618 the king became concerned. Particularly as successful merchants were calling the scheme as “a Sepulcher – attractive without, Dead bones within”.

Then in November of that fateful year, which was seasonally appropriate for financial calamity, credit markets crashed. The archbishop recorded that the king told the alderman “in could bloude before ye Council Table that if he had abused him by wrong information his 4 quarters would pay for it.” As this meant “hanged, drawn and quartered”, the archbishop continued with “Ye poore Alderman stood infinitely amazed”.

A pamphleteer by the name of Chamberlain observed that it was strange that the “wisdom of the state could be induced [to rely upon] the vaine promises of ydle braines”.

Well, be that as it may, but outside of this assembly there are too many idle brains employed by today’s exceptionally intrusive government. Saul Alynsky, wherever he is, will be looking up and nodding his approval.

Now there is a saying from the old and dreadful Vancouver Stock Exchange that applies to today’s weird world.

“So long as the stock is going up, the public will believe the most preposterous of stories.”

And then when it goes down belief vaporizes and is replaced by chagrin and eventually condemnation of the promoters.

The next credit crisis will demonstrate that all of the “stimulus” was a futile waste of taxpayer money. Let’s call it Stupid Policy # 1, and it will be recognized as such.

How much has financial history been changed by the massive “stimulation”?

The discovery of problems at Bear Stearns in June 2007 stimulated, well, a massive stimulation that did not prevent the worst financial disaster since 1929. The Crash was a classic and the consequent severe recession and weak business recovery are characteristic of a lengthy post-bubble contraction.

Remember that in 2007 the establishment boasted that “nothing could go wrong”. The Fed had the dream team of economists but the establishment did not anticipate the worst Crash since 1929.

At four years this recovery is showing signs of maturity and as it rolls over, the public will realize that interventionist remedies have not worked.

The recognition of Stupid # 2 involves the promotion of man-caused global warming. This has been underway for some 15 years as the amount of atmospheric CO2 continues to increase but global temperatures have not. The supreme blunder has been that the promoters have argued that global warming has been due to only one influence and nothing else.

Ironically, the “nothing else” is what really drives climate that has been the sun. Since the mid-1990s some solar physicists have been calling for diminishing output from the sun. The recent solar minimum has been the deepest since 1913 and the current up cycle has been the weakest in over a hundred years. North America has clocked the second coolest spring on data back to the late 1800s. Northern Europe and England recorded the coolest winter and spring in decades.

The establishment did not anticipate the turn to a quieter sun.

However, some government agencies have been forced to admit that warming isn’t what it was hyped to be.

By way of summary, the worst of times for the individual have been the best of times for statists. But I’m very optimistic that this sordid social contract is about to fall apart.

In the Western World, independent opinion has been ridiculed to the greatest degree since the early 1600s. Regrettably, nineteenth-century liberalism has become a state religion and once again bureaucrats have become dedicated to “That which is not compulsory is prohibited”.

In the Western World, for the first time since the early 1600s independent scientific inquiry has been condemned by the arbitrary dictates of a state religion. Man-caused global warming is the modern equivalent of the Vatican insisting that the solar system rotates around the Earth. While glaringly erroneous in real time, the ambition was to control thought not the climate. The Church’s interest in the economy made no attempts to control it. But was mainly focused upon “fairness”, “usury” and venally finding ways to confiscate private savings.

Today’s ambition by control freaks shows audacity away beyond precedent. Communists limited themselves to merely making the perfect man. Now political leaders demand not just a managed economy but also a managed climate.

Mother Nature has been doing something else about the climate and the trading floor cynic observes that politics and financial markets have both been corrupted. Mister Margin knows that brokerage accounts are leveraged at levels not seen since 2007 and that the bubble in lower-grade bonds is unprecedented.

At the climax of any speculative fury, the power shifts from the Fed to the margin clerks – every time. Each has a vastly different job description. The Fed’s task has been to get the accounts leveraged. Mister Margin’s job is to get the accounts in line.

On the political side, America has an outstanding record of self-governance and is not ungovernable, now. It is the frenetic Administration that has become ungovernable.

I trust that everyone in this assembly is prepared to enjoy a fabulous change in politics and in the markets. In so many words, the veteran trader is calling for a lengthy bear market for authoritarian ritual, and a new bull market for commonsense.

Evidence is piling up, and it points to big changes in markets around the globe. I suggest you read this very carefully. You need to know about the latest developments.

Three weeks ago I told you about the May 10 Tweet from legendary bond trader Bill Gross. He said “the secular 30-yr bull market in bonds likely ended 4/29/13.” Our team here at Weiss Research made the same prediction months earlier, but it was still significant that Gross said this publicly. His huge PIMCO funds are a major player in Treasury, corporate and other bond markets, so people pay attention whenever Gross speaks.

On Wednesday of this week, Gross spoke again. In a CNBC interview — with no need to stay within Twitter’s 140-character limit — Gross went further. He predicts a new relationship between stocks and bonds.

Let’s stop here for a second. Stockbrokers and investment advisers typically recommend a “balanced” strategy. Keep part of your money in stocks and the rest in bonds. Over time the stocks should outperform, but you still need bonds. Why? Bonds tend to do well when stocks are in a bear market. They’re useful as a cushion, reducing your overall portfolio volatility.

Think of it this way: Stocks and bonds are a playground see-saw. When one side goes down, the other goes up. Stocks and bonds have a similar pattern. (In investment lingo it’s called “negative correlation.”) When your stocks are doing well, the bonds probably don’t look very exciting. But when the stock market crashes, the bonds are likely to outperform. So the experts recommend holding both, and reducing the stock allocation as you enter your retirement years.

Historically, this approach worked well for many years. Everyone from trillion-dollar pension funds to middle-class IRA holders depend on it. If this is your plan, I’m not suggesting you abandon it, and I don’t think Bill Gross would, either.

But yesterday he hinted the “balance” is changing.

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Gross now thinks the correlation between stocks and bonds is changing from negative to positive. In other words, they will be much more likely to move up and down together. Here is how he described it to CNBC viewers:

“If bond prices go down, stock prices should go down as well. That’s simply because the global levered trade is dependent upon a stable Japanese yen and a stable (Japanese government bond) yield and a stable Treasury yield.

“Once you produce instability, then that leverage starts to unwind, the housing market gets affected, and stocks come down.”

Whew! This quote has a lot to unpack, but zero in on the second sentence. He says global trade depends on three factors:

• Stable Japanese yen
• Stable JGB yield
• Stable (U.S.) Treasury yield

Now look at the markets the last few weeks. The yen is anything but stable. JGBs are under serious pressure, with much-higher yields looking very likely. And now U.S. Treasury yields are breaking out to levels we haven’t seen in over a year.

Add those three together, and according to Gross we should expect instability, de-leveraging and problems in both housing and stocks. Wow!

“But wait,” you may say. “Ben Bernanke and the Fed have their hands on the wheel. They’ll keep us on track, won’t they?”

No, they won’t. Gross says Bernanke can’t control the economy and never has. Here is another quote.

“I think Bernanke has a lost a little control in terms of the real economy. As a matter of a fact he never had it. And to the extent that low interest rates reduce savings and therefore reduce consumption, to the extent that they reduce the return on investment for corporations, to the extent that they destroy business models and then technically jam up the repo market, you’ve sort of lost control of economic growth going forward.”

Cutting through the jargon, Gross says Bernanke didn’t have much control in the first place, and is losing whatever influence he may have had on the economy.

Once a central bank cuts interest rates to zero, it has no more bullets. The Bank of Japan found out the hard way when 20+ years of forced liquidity resulted in almost zero growth.

What does this mean for investors like you and me? Two conclusions:

First, if your investment strategy depends on bonds remaining stable as the stock market falls, you may want to consider alternatives.

Second, we have to watch the markets closer than ever. The global changes Gross talks about may unfold slowly for months, or the world could change in a matter of weeks.

I know this is a lot to think about, but it’s very important. Here are some other stories the Uncommon Wisdomteam is following.

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In Other Market News:

• U.S. stocks rallied today on some good economic news. A revised estimate for U.S. economic growth in the first quarter came in at 2.4%, a bit weaker than expected. Traders think this may influence the Fed to keep the faucet open.
• The Securities and Exchange Commission hit the Nasdaq stock market with a $10 million fine for last year’s botched Facebook (FB) public offering. The exchange’s systems failed when the highly-anticipated FB shares hit the market. (Speaking of Facebook, have you liked our Uncommon Wisdom fan page yet?)
• Agribusiness giant Monsanto (MON) has egg on its face after a wheat species that was genetically modified to resist normal pesticides was found on an Oregon farm. The seeds were never supposed to leave the lab. Now the entire U.S. wheat harvest is under suspicion.
• Many of our main export customers won’t buy genetically modified crops. Already the European Union said it would test wheat imports from the U.S. and Japan canceled a tender offer for white wheat. Monsanto shares finished the day slightly lower on the news.

I’m watching all these stories closely — and keeping watch for any more Bill Gross comments. Look for more news and analysis for you tomorrow.

Have a great evening!

Good Luck and Happy Investing.

Brad Hoppman
Publisher
Uncommon Wisdom Daily

The front pages of yesterday’s newspapers were full of good news. A strong rebound in real estate prices, they said, meant a full recovery was in the bag. From Reuters:

Home prices accelerated by the most in nearly seven years in March as the spring buying season gave the sector traction, while surging consumer confidence pointed to some resilience for the economic recovery.

The data on Tuesday also suggested the two segments could act as buffers as the broader economy faces the pinch of belt-tightening in Washington.

The S&P/Case Shiller composite index of 20 metropolitan areas climbed 10.9% year over year, beating expectations for 10.2%. This was the biggest increase since April 2006, just before prices peaked in the summer of that year.

This, along with a record stock market, was spreading cheer from coast to coast. Again, from Reuters:

Consumer confidence strengthened in May to the highest level in more than five years, suggesting Americans’ attitudes were resilient in the face of belt-tightening in Washington, a private sector report showed on Tuesday.

The Conference Board, an industry group, said its index of consumer attitudes jumped to 76.2 from an upwardly revised 69 in April, topping economists’ expectations for 71. It was the best level since February 2008.

So you see, dear reader, everything is hunky-dory, copacetic and cool.

Good News Is Bad News

But wait! What’s this? In the face of all this good news, the US stock market fell and “disaster insurance” gold rose. The Dow dropped 106 points. And the price of gold went up $12 per ounce.

Why? Because good news is bad news. Bad news is good news. Up is down and backward is forward . Nothing is what it seems… or what it ought to be.

If the economy were really doing better, the Fed would have to follow through on its promise to “normalize” monetary policy. That is, it would stop lending at zero interest rates and stop its $85 billion-per-month QE program.

But our hunch is that those hocus-pocus programs – not a genuine recovery – are what keep stock prices going up. Take them away and you also take away the boom in stocks… and real estate too. (Housing prices now depend on the lowest mortgage rates in 50 years.)

What this means is that there is no genuine recovery. It’s all the smoke of ZIRP and the mirrors of QE. When the magic show ends… so does the illusion of recovery.

40 Facts You Won’t Believe

Yesterday, we promised to tell what was really going on in the US economy. As you will see, there is no sign of a real recovery. Instead, what we see is a deepening depression disguised by a Fed-driven asset bubble. Here’s The Economic Collapse blog with “40 Statistics About the Fall of the U S Economy That Are Almost Too Crazy to Believe”

1. Back in 1980, the US national debt was less than $1 trillion. Today, it is rapidly approaching $17 trillion.

2. During Obama’s first term, the federal government accumulated more debt than it did under the first 42 US presidents combined.

3. The US national debt is now more than 23 times larger than it was when Jimmy Carter became president.

4. If you started paying off just the new debt that the US has accumulated during the Obama administration at the rate of one dollar per second, it would take more than 184,000 years to pay it off.

5. The federal government is stealing more than $100 million from our children and our grandchildren every single hour of every single day.

6. Back in 1970, the total amount of debt in the United States (government debt + business debt + consumer debt, etc.) was less than $2 trillion. Today, it is over $56 trillion.

7. According to the World Bank, US GDP accounted for 31.8% of all global economic activity in 2001. That number dropped to 21.6% in 2011.

8. The United States has fallen in the global economic competitiveness rankings compiled by the World Economic Forum for four years in a row.

9. According to The Economist, the United States was the best place in the world to be born into back in 1988. Today, the United States is tied for only 16th place.

10. Incredibly, more than 56,000 manufacturing facilities in the United States have been permanently shut down since 2001.

11. There are fewer Americans working in manufacturing that there was in 1950, even though the population of the country has more than doubled since then.

12. According to The New York Times, there are now approximately 70,000 abandoned buildings in Detroit.

13. When NAFTA was pushed through Congress in 1993, the United States had a tradesurplus with Mexico of $1.6 billion. By 2010, we had a trade deficit with Mexico of $61.6 billion.

14. Back in 1985, our trade deficit with China was approximately $6 million (million with a little “m”) for the entire year. In 2012, our trade deficit with China was $315 billion.That was the largest trade deficit that one nation has had with another nation in the history of the world.

15. Overall, the United States has run a trade deficit of more than $8 trillion with the rest of the world since 1975.

16. According to the Economic Policy Institute, the United States is losing half a million jobs to China every single year.

17. Back in 1950, more than 80% of all men in the United States had jobs. Today, less than 65% of all men in the United States have jobs.

18. At this point, an astounding 53% of all American workers make less than $30,000 per year.

19. Small business is rapidly dying in America. At this point about only 7% of all non-farm workers in the United States are self-employed. That is an all-time record low.

20. Back in 1983, the bottom 95% of all income earners in the United States had 62 cents of debt for every dollar that they earned. By 2007, that figure had soared to $1.48.

21. In the United States today, the wealthiest 1% of all Americans have a greater net worth than the bottom 90% combined.

22. According to Forbes, the 400 wealthiest Americans have more wealth than the bottom 150 million Americans combined.

23. The six heirs of Wal-Mart founder Sam Walton have as much wealth as the bottom one-third of all Americans combined.

24. According to the US Census Bureau, more than 146 million Americans are either “poor” or “low income.”

25. According to the US Census Bureau, 49% of all Americans live in a home that receives direct monetary benefits from the federal government. Back in 1983, less than a third of all Americans lived in a home that received direct monetary benefits from the federal government.

26. Overall, the federal government runs nearly 80 different “means-tested welfare programs,” and at this point, more than 100 million Americans are enrolled in at least one of them.

27. Back in 1965, only one out of every 50 Americans was on Medicaid. Today, one out of every six Americans is on Medicaid, and things are about to get a whole lot worse. It is being projected that Obamacare will add 16 million more Americans to the Medicaid rolls.

28. As I wrote recently, it is being projected that the number of Americans on Medicare will grow from 50.7 million in 2012 to 73.2 million in 2025.

29. At this point, Medicare is facing unfunded liabilities of more than $38 trillion over the next 75 years. That comes to approximately $328,404 for every single household in the United States.

30. Right now, there are approximately 56 million Americans collecting Social Security benefits. By 2035, that number is projected to soar to an astounding 91 million.

31. Overall, the Social Security system is facing a $134 trillion over the next 75 years.

32. Today, the number of Americans on Social Security Disability now exceeds the entire population of Greece, and the number of Americans on food stamps now exceeds the entire population of Spain.

33. According to a report recently issued by the Pew Research Center, on average, Americans over the age of 65 have 47 times as much wealth as Americans under the age of 35.

34. US families that have a head of household who is under the age of 30 have a poverty rate of 37%.

35. As I mentioned recently, the homeownership rate in America is now at its lowest level in nearly 18 years.

36. There are now 20.2 million Americans who spend more than half of their incomes on housing. That represents a 46% increase from 2001.

37. 45% of all children are living in poverty in Miami more than 50% of all children are living in poverty in Cleveland, and about 60% of all children are living in poverty in Detroit.

38. Today, more than 1 million public school students in the United States are homeless. This is the first time that has ever happened in our history.

39. When Barack Obama first entered the White House, about 32 million Americans were on food stamps. Now, more than 47 million Americans are on food stamps.

40. According to one calculation, the number of Americans on food stamps now exceeds the combined populations of Alaska, Arkansas, Connecticut, Delaware, District of Columbia, Hawaii, Idaho, Iowa, Kansas, Maine, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Oklahoma, Oregon, Rhode Island, South Dakota, Utah, Vermont, West Virginia and Wyoming.

Regards,

Bill

Japanese markets suffered an elevator shaft-like failure late last week, dropping 7.32% in the single largest decline since the horrific March 2011 earthquake and tsunami. Global markets followed suit but recovered.

This is the third-largest economy on the planet in the fastest-growing region in the world.

Ostensibly, a drop in Chinese PMI that fueled global slowdown fears was what the talking heads agreed was the reason.

They were wrong.

In reality, there were three other real factors.

And every investor needs to know what actually happened:

1) Benchmark 10-Year Japanese Government Bonds topped 1% for the first time in a year

As was the case with gold a few weeks back, this bond event pushed “value at risk” metrics or VaR beyond normal limits.

Typically Japanese traders could have simply purchased offsetting hedges like options or other derivatives, but their greed glands have been in consumption mode for so long that there was no additional cash to do so. They were, for lack of a better term, fully invested and fully margined.

Remember a while back when I told you that traders would sell equities if they had to bring VaR models in line? This is exactly what happened.

Having already sold substantial portions of their gold a little over a month ago, Japanese traders began selling equities as hard and fast as they could to compensate for six sigma volatility in Japanese government bonds. Again.

And, for the second time in weeks, traders effectively walked away from the bid — nobody wanted to buy. So prices that had begun to slide accelerated to end the day down a staggering 1,143.28 points, or 7.32%, as America slept.

2) Japanese traders are the first to put together the implications of Bernanke’s comments

Bernanke made comments via written testimony to Congress May 22 from the Fed’s April 30 – May 1 meeting suggesting that the end of stimulus may not be far away.

What’s interesting to me about this is that very few people here in the United States lasered in on the meat of his recent observations – namely that when the Bank of Japan is finished with its stimulus, the BOJ’s balance sheet will be three times larger than the Fed’s balance sheet compared to GDP.

But Japanese traders sure did. I know, because I received several calls from panicked Japanese bond trading colleagues in the middle of the night wanting to know if they had interpreted Bernanke’s comments correctly from English to Japanese.

In practical terms, what the Bank of Japan is planning to do is like expanding the Fed’s ledgers to $12 trillion – expensive, fraught with risk and almost completely un-repayable except by default.

So they began taking profits in addition to burning off the risk premium needed to bring VaR in line. That all but guaranteed that momentum was firmly to the downside all day in Tokyo.

Figure : Zero Hedge/ Bloomberg / Annotations Fitz-Gerald Research

3) The Bank of Japan lost control over normally placid Japanese markets for the day.

The way I see it, this drop was Japan’s “Lehman Brothers” moment.

It’s the first time traders have really felt panic in a while and a sign that all is not well in any central bank-manipulated market, but especially in the big three markets of the United States, the EU, and Japan.

All it will take to induce a watershed moment is traders taking matters into their own hands. Absent additional liquidity, whatever central bank they target will lose control and the markets will adjust on their own, as completely as they need to.

What that actually looks like and when that happens, we don’t know. Nobody does. But the bet is this is more of a “when” question than an “if” question. The same derivatives traders that locked the PIIGS (Portugal,

Italy, Ireland, Greece and Spain) out of the barnyard in Europe have now set their sights on Japan. And Prime Minister Abe’s unlimited stimulus is simply more slop in the trough as far they’re concerned.

Japanese financial companies at the center of this tempest fell off the proverbial cliff. Consumer lenders were particularly hard hit as were major industrials. Shinsei Bank (8303), Mitsubishi Motor Corp (7211) and Tokyu Land Corp (8815) were among the biggest losers. 

While they are still tallying the wreckage as I write this, some sources are suggesting that last Thursday’s fire sale may have just buzz cut 1.5%-2% of Tier 1 capital from the Japanese banking system. That’s bad.

Tier 1 capital, in case you are not familiar with the term, is what the bankers call “core equity capital,” meaning it’s the money that a bank has on hand to support all the risks it takes, including lending and trading.

The point: The banks Japan needs for its recovery just got weaker.

Now for the trillion-Yen question…what does this mean for your money?

1. As long as traders perceive central bankers have room to maneuver and are willing to use the printing presses, the markets will have an upward bias. Don’t fight the Fed is now don’t fight the Feds – plural.
2. Selling because others have panicked is never good. Sell because the underlying premise upon which you own a stock has changed or you’ve hit your trailing stop (which you hopefully have in place ahead of time as we continually encourage you to do)
3. Stay in the game…just make sure it’s the right game. If you’re nimble you can probably trade Japan’s equity markets. But the far better alternative is to bet against the Yen using either currency or an ETF alternative like the ProShares UltraShort Yen Fund (NYSE: YCS). If there’s one thing that’s going to torpedo Japan eventually, it’s higher rates ahead and the currency will reflect that when it happens, regardless of why it happens.

At the end of the day, somebody is going to make a bundle on the volatility ahead…it might as well be you.

Related Articles and News:

• Money Morning:
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• Money Morning:
  Is Japan About to Fire the First Shots in a 1930s Style Currency War?
• Money Morning:
  Can Kuroda’s New Round of “Easy Money” Finally Revive Japan?
• Money Morning:
  Why Gold Really Crashed and What You Can Do About It