Every day, it seems, there’s another story about the web of surveillance that’s being woven around us by governments and telecom firms and hackers. Between the webcams and DVRs that can be activated remotely to watch us at our desks or in front of our TVs, the warrantless wiretaps that vacuum up millions of phone calls and emails and the data dumps from Facebook and Google into government storage facilities for later mining, the 4th Amendment’s freedom from “unreasonable search and seizure” looks like a relic from the days of black-and-white movies.

But this technological arms race has two sides. For every insecure browser or email service, there are several that are, at least so far, beyond the reach of government and corporate spies. A good place to start figuring out how to use them is FixTracking.com, which highlights services like DoNotTrackMe, a blocker of “third-party trackers”, and DuckDuckGo, an anonymous search engine.

PRISM Break is a more extensive site that lists free anti-surveillance tools by category, i.e, browser, search engine, email service, etc.

Also of possible interest is RetroShare, an “Open Source cross-platform, Friend-2-Friend and secure decentralized communication platform. It lets you to securely chat and share files with your friends and family, using a web-of-trust to authenticate peers and OpenSSL to encrypt all communication. RetroShare provides file sharing, chat, messages, forums and channels…”

And this TED talk by Gary Kovacs, titled Tracking the Trackers, highlights a very cool piece of technology.

I can’t vouch for any of this yet but will be trying some of the services listed here over the next few months. More about them then.

Things have been a little erratic lately here in US, but not really headline-worthy. The economy continues to grow, sort of, houses continue to sell and stock and bond prices fluctuate but can’t seem to follow through in either direction. We are not, in short, engulfed in any kind of crisis.

But out in the world, especially in once-hot emerging markets like Brazil and China, the story is very different. As Prudent Bear’s Doug Noland explains in his most recent Credit Bubble Bulletin:

Meanwhile, the “developing” market Bubble continues to unwind. As leverage comes out of the commodities, currency “carry trades” and developing stocks and bonds. And as capital flight becomes a more serious issue, the marketplace must ponder the consequences not only of what a faltering Bubble means for scores of markets and economies, there is as well the issue of developing central banks having to sell from their trove of Treasuries and bunds and such to finance a surge in outflows (“hot” and otherwise). There’s even this new dynamic where Treasury yields rise on days of global currency and equity market tumult. It’s been awhile…

I suspect that the global jump in yields (and CDS and risk premiums) has more to do with de-leveraging than it does with tapering worries. This dynamic has caught many by surprise. The speculators anticipated cleverly exiting their leveraged MBS and other trades based on their expectations for Fed policy. Now, there’s a tremendous amount of unanticipated market uncertainty.

Japanese policymakers have really mucked things up. The Nikkei sank 6.5% Thursday and was down 1.5% for the week. Perhaps it’s a little early to pronounce the BOJ’s “shock and awe” monetary experiment a failure. The yen rallied 3.5% this week against the dollar. Against the Philippine peso it was up 4.5%, versus the South Korean won 4.1%, the Indian ruppee 4.3%, the Malaysian ringgit 4.0%, the Indonesian rupiah 3.2%, the Argentine peso 3.9% and the Brazilian real 4.2%. Indonesia raised rates to support its weak currency. The yen “carry trade” (sell yen and use proceeds to buy higher-yielding instruments globally) is doling out painful losses – forcing the unwind of leveraged trades across many markets. I wouldn’t be surprised if the yen short is the largest short position in modern history. The yen bears are now running for cover – causing all kinds of havoc in the currencies and securities markets.

“Emerging” Asian markets are in the middle of an unfolding financial storm. Friday’s 2.1% gain cut the Philippine equities loss for the week to 9.2%. Even with Friday’s 4.4% recovery, the Thailand stock exchange ended the week down 3.4%. South Korea’s Kospi dropped another 1.8%.

Latin America is as well caught in troubling dynamics. Brazil’s currency (real) traded to a four-year low against the dollar this week – despite currency interventions and the removal of taxes on financial flows and currency derivatives. Brazilian equities were hit for 4.4% this week, increasing y-t-d losses to 19.1%. Mexican stocks dropped 2.4%, boosting y-t-d losses to 10.2%.

The Shanghai composite dropped 2.2% in a holiday-shortened week. China pegs its currency to the U.S. dollar, so we can’t look to the performance of the renminbi for much of an indication of flows or mounting financial market stress.

I have posited that China is in the midst of an historic Credit Bubble. I have over the years tried to explain how interrelated their Bubble is to ours. Our mismanagement of the world’s reserve currency led to 20 years of huge Current Account Deficits. A significant portion of the Trillions of associated IOU’s have made it onto the balance sheet of the People’s Bank of China, especially over recent years. And no Credit system and economy has gone to greater excess during the post-2008 global reflation. It was the “fledgling” Credit Bubble spurred to “terminal phase” excess.

If the “developing” economy Bubble has passed an important inflection point, then China is vulnerable. If “hot money” is leaving EM [emerging markets] then China should be susceptible. And, let there be no doubt, when China finally succumbs global economic prospects really dim – and prospects for some fellow EM economies turn downright dismal. Recall how the tightening of subprime finance gravitated to “Alt-A” and then worked its way to the “conventional” core. And when housing in general began to falter the bottom fell out of subprime.

This week provided a bevy of notable China-related headlines: From the Financial Times: “China Debt Auction Failure Raises Liquidity Fears;” “Fresh Data Highlight China’s Sluggish Growth.” From Bloomberg: “China Debt Sale Fails for First Time in 23 Months on Cash Crunch;” “China Local Debt Audit ‘Credit Negative,’ Moody’s Says;” “China’s Leaders Face Test of Growth Resolve After May Slowdown;” “China Export Growth Plummets Amid Fake-Shipment Crackdown.” From Reuters: “Fitch Warns on Risks from Shadow Banking in China;” “China Estimates Fake Trade Invoicing at $75 billion in Jan-April;” “China State Auditor Warns Over Local Government Debt Levels.”

The price of Chinese sovereign Credit default swap (CDS) “insurance” jumped from 92 to 113 in three sessions, before dropping back down to 98 on Friday. Chinese interbank lending rates have recently spiked higher – and there were even reports of several borrowers forced to pay up for increasingly scarce liquidity. There were debt auctions that did not go smoothly. The currency forwards market is showing some atypical downward pressure on the renminbi.

Many believe this newfound tightness in Chinese money markets can be easily resolved by liquidity injections from the People’s Bank of China. And perhaps Chinese monetary and economic managers still have things under control. If so, the same clearly cannot be said for many of their fellow “developing” policymakers. Capital flight is always extremely difficult to manage. I worry that the world has never faced the possibility for such destabilizing flows and speculative de-leveraging. To be sure, global markets have never been as dependent upon the power of central bankers. And in my mental tallies of risk and complacency, I never envisaged they could so elevate in tandem.

So can the US stay placid when the rest of the world turns chaotic? Highly doubtful. There’s a market phenomenon in which one investment play blows up and forces those on the wrong side of the trade to dump their liquid assets to raise cash — which causes the high-quality assets to fall as much or more than the junk. As Noland notes, the world’s premier liquid asset is the Treasury bond.

If the developing world’s need to raise cash is a factor in the recent spike in US interest rates, this implies a feedback loop in which rising US rates further destabilize emerging markets, forcing the sale of more Treasuries, and so on. Can the Fed stop this? Not unless it wants to buy up not just all the newly-issued Treasuries as it does now, but the trillions of dollars of bonds that might be dumped once things really get going.

It’s important to understand that we’re here because for years the developed world in general and the US in particular have been exporting their problems to the developing world via monetary policy. We fund our overspending by creating a bunch of new dollars,  many of which flow beyond our borders looking for higher yields. They land in, say, Brazil, pushing up both local asset prices and the exchange rate of the real. So individual Brazilians see their cost of living rise while Brazilian exporters are priced out of global markets. This is the currency war that Brazil’s government has been complaining about.

Then the hot money flows back out, causing a different set of problems for a country that has spent the past decade trying to adjust to excessive capital inflows. The result: some seriously fragile banks and over-leveraged companies and investors, any of which could trigger a nationwide crisis.

The same general process is at work in other major emerging markets, with each in its own way now posing a threat to the global financial system — at the pinnacle of which sit the S&P 500 and the Treasury market, looking an awful lot like Southern California real estate circa 2007.

This is why quantitative easing can never end:

Asian Stocks Slip on World Bank as Kiwi Drops; Yen Gains

Asian equities dropped, with the region’s benchmark index headed toward a correction, and the yen rose to the strongest in two months against the dollar after the World Bank cut its global growth forecast amid concern central banks may pare monetary stimulus. New Zealand’s currency weakened.

The MSCI Asia Pacific Index tumbled 2.6 percent at 11:16 a.m. in Tokyo, erasing this year’s gains. Japan’s Topix Index sank 4.1 percent and the Shanghai Composite Index declined 3.1 percent after a three-day break. Standard & Poor’s 500 Index futures slid 0.4 percent after the gauge retreated for a third day in New York. The yen gained at least 1.1 percent against its 16 major peers, reaching 94.45 per dollar, the strongest since April. The so-called kiwi weakened 0.8 percent. Wheat and rubber dropped, while metals rose. Bond risk in Asia climbed.

The global economy will expand 2.2 percent in 2013, the World Bank said yesterday, paring a January forecast of 2.4 percent. The Federal Open Market Committee meets next week after the Bank of Japan this week left its lending program unchanged. Global stocks have plunged 5.2 percent from their May 21 peak this year on speculation the Fed may ease stimulus.

“People are still trying to assess the prospects, likelihood, and timing of tapering from the Federal Reserve,” Chris Green, an Auckland-based strategist at First NZ Capital Ltd., a brokerage and wealth management firm, said. “Markets want stability in the economy but they also want unlimited stimulus. The two can’t continue to exist together.”

Trillions Erased

More than $2.5 trillion has been erased from the value of global equities since Federal Reserve Chairman Ben S. Bernanke said May 22 the Fed could scale back stimulus efforts should employment show “sustainable improvement.” The Bank of Japan left its lending program unchanged this week, adding to concern central-bank support will be pared back. The Nikkei’s volatility index rose for the first time this week today.

Australia’s S&P/ASX 200 index slid 1 percent, declining for a second day. Hong Kong’s Hang Seng Index tumbled 3.8 percent after being closed for a public holiday yesterday.

To summarize: after three years of the most aggressive deficit spending and monetary ease in human history, the global economy is…slowing down. Meanwhile, central bankers, finally realizing that their random lever-pulling has created asset bubbles without any actual new wealth, and that the likely (very ugly) aftermath might make them unpopular in retirement, are trying to untangle the mess they’ve created.

But even hinting that they might, at some point in the distant future, consider planning to discuss a timetable for eventually gradually phasing in a slightly lower heroin dosage has sent the global financial junkie into a fit of anticipatory withdrawal. Like any good enabler, the bankers will of course respond that they were misquoted and that easy money is now a permanent feature of the modern world. So relax, everything’s going to be okay. Go back to your derivatives trading, and have a little more leverage on us.

Now, there’s no way to know if this is that time, but a time is coming when things are so complex and the moving parts are moving so quickly and erratically that no policy response will make a difference. When that time finally comes it will look a lot like tonight’s Asian markets.

Friday was one of those days when so many markets move so dramatically that it’s hard to know what to focus on. But in this case the headline numbers – US stocks way up, gold way down, foreign markets all over the place — matter less than the interest rate on 10-year Treasuries, which spiked:

The reason this number matters is that a return to “normal” times of high employment and fast growth also means a return to normal interest rates, which would be about twice current levels. This creates one or two little problems for a society with trillions of dollars of debt to roll over each year. Already, with the 10-year moving just from 1.7% to 2.2%, the junk bond market is suffering:

The Day The Big Fat Junk-Bond Bubble Blew Up

My friends in the corporate restructuring industry aren’t breaking out the bubbly just yet. But with one eye, they’re gazing wistfully into the distant horizon where they’re seeing the first signs of a glimmer of hope. And with the other eye, they’re gazing at the screens of their smartphones and computers where they’re seeing brutal junk bond rout.

Junk bonds had a phenomenal run. With each truckload of free money that the Fed and other central banks delivered to the markets, junk-bond valuations soared and yields plunged. The St. Louis Fed’s BofA Merrill Lynch junk-bond yield index, which was deep into the double digits during the financial crisis, hit a low on May 9 of 5.24%, down from 6.19% at the start of the year. Yields on some of the least bad junk in the index were well below 5%.

Before these crazy times that the financial crisis brought, you could buy an essentially risk-free 1-year FDIC-insured CD with an interest rate of 5%. But recently, desperate investors, mauled by the Fed’s zero-interest-rate policy and losing ground to inflation, were furiously grabbing yield wherever they could, taking on risks no questions asked, any risks no matter how large, to get to that 5% yield. A feeding frenzy for junk. Companies took advantage of this Fed-induced desperation and bamboozled investors into gobbling up $187 billion in junk bonds so far in 2013, a record!

One of the losers of the Fed’s policies was the corporate restructuring industry. With endless amounts of nearly free money available, even teetering companies with too much debt and money-losing operations could borrow more to cover up any holes. So my friends and their restructuring outfits branched out into performance-improvement consulting and financial advisory, and some have left the business altogether.

Bubbles balloon to an absurd magnitude. But one day the feeding frenzy dies down, and gradually, or sometimes suddenly, the risks, the silliness, the illogic, the whole nonsensical nature of the bubble move into the foreground for all to see, and more and more people open their eyes and see it. Some of them will try to get out somehow, quietly at first, by looking for the greater fool. And there are plenty of them, for a while. But new investors want to be compensated for the risks they’re now seeing, and they’ll demand higher yields in return for taking on those risks. That day might have been May 9 – when the air started hissing out of the junk bond bubble. What came afterward was a rout. And a spike in yields:

And mortgage refinancing is drying up:

Refinancing Activity Continues to Shrink as Rates Jump to Recent Highs

There was another substantial drop in mortgage applications during the week ended May 31 as rates increased, in some cases to 13 month highs. The Mortgage Bankers Association (MBA) said results of its Weekly Mortgage Applications Survey showed an 11.5 percent decrease in its Market Composite Index, a measure of mortgage volume, on a seasonally adjusted basis from the week ended May 24. The Composite was down 20 percent on a non seasonally adjusted basis.

Rates for the conforming 30-year fixed-rate mortgage (FRM) had the biggest single-week increase since July 2011, jumping from 3.90 percent to 4.07 percent, the highest rate since April 2012. Points decreased to 0.35 from 0.39.

The average rate for 30-year jumbo FRMs (loan balances greater than $417,500) increased by 13 basis points to 4.20 percent, the highest rate since May 2012. Points increased to 0.28 from 0.27.

FHA-backed 30-year FRMs also increased to the highest level since May 2012, 3.76 percent, from 3.62 percent the previous week. Points increased to 0.32 from 0.27.  The rate for 15-year FRMs reached the highest level since June 2012, increasing to 3.23 percent with 0.38 point from 3.10 percent with 0.30 point.

The Bottom line: Even a small rise in long-term interest rates translates into a lot less credit available for marginal borrowers. Homeowners trying to get a lower rate on their mortgage to free up cash for college loans or to put gas in the car will see that window close. Weak, highly-leveraged companies will have to get by with internally-generated cash – which many of them don’t have.

The government, meanwhile, will have to roll over its debt at ever-higher rates or ever-shorter duration, leading to a rising deficit in the first case and increased exposure to future interest rate changes in the second. Either way, the system gets more instead of less fragile.

The fact that a highly-leveraged economy can’t cope with rising rates is the modern world’s Catch-22: Rates have to rise if the economy keeps growing, but the economy can’t grow if rates rise.

For a while there it looked like Japan had the answer. A strong new leader comes in and cuts through all the indecision, orders the central bank to flood the system with cash to depreciate the currency now rather than later – and boom, the stock market soars, exports rise and the economy starts growing again.

The entire left-of-center world eyed this process hungrily, sensing both vindication of their views and the coming economic nirvana when their governments finally accepted the truth about debt (it doesn’t matter) and easy money (a free lunch that always creates wealth). If Japan’s success proved sustainable, within a matter of months the European Central Bank would have no choice but to join the money creation orgy. And with the euro and yen both falling like rocks, the US Fed would soon have to follow.

But Japan’s success, to put it mildly, didn’t turn out to be sustainable. Just as Austrian economists and common sense predicted, interest rates on Japanese bonds soared, as the global markets subtracted the 2% target inflation rate from the 1.5% or so yield on long bonds, and decided that a negative real interest rate probably wasn’t the best deal. They sold, bond prices plunged, yields rose, and Japan hit the wall that Kyle Bass and others have been predicting it would hit for, it seems, ever. Japan’s stock market, now unsure exactly what is going on, has sold off in huge, bloody chunks. (The following chart does not show today’s 518 point drop.)

Here in the US something similar is happening. Share prices are at record levels and real estate is booming, which is a recipe for instability, so the Fed has been making noises about easing back on the asset purchases. And the stock market, no surprise, has started doing what it always does when the Fed tries to siphon off the river of liquidity. It is tanking, down another 200 points on the Dow as this is written on June 5.

What does this mean? Well, the obituary of the supercycle credit bubble that began in the 1940s has been written so many times that it would be crazy to say anything that definite. But it is safe to say that the corner central banks have been painting themselves into has gotten a lot more cramped in the past few weeks. The global economy, led by Europe but with the US close behind, is slowing despite debt monetization that would have been labeled insanely inflationary by pretty much the entire economics profession two decades ago. But shifting the printing press into an even higher gear is very risky, based on the Japanese experience.

So our options appear to have narrowed to just two: Roll the dice on complete monetization in which the central bank buys up all the debt being issued — government, corporate, asset backed – and accept that an asset inflation might ensue (a global debt-for-equity swap, in other words). Or retrench, let interest rates rise to normal levels, and hope that that doesn’t send the leveraged speculating community (which includes the governments issuing and rolling over trillions of dollars of short term debt) into cardiac arrest.

The Consumer Metrics Institute is out with commentary on the latest GDP revision. Here’s an excerpt: 

As we noted last month, on the surface a 2.38% annualized growth rate at nearly full four years into a recovery is good news — and a growth rate that many other global economies would currently be pleased to be reporting. And looking at the details provides us with some reasons for optimism:
– Consumer spending was sustained in spite of tax increases,

– Fixed investments continued to grow (although at a slower pace than in the prior quarter),

– Exports were still growing (slightly) after the prior quarter’s of contraction.

But one overriding issue in the data continues to suggest a reason for caution:

– Real per capita disposable incomes took a major hit, and it would appear that consumers had to dip into savings to sustain spending levels in the face of the January increase in FICA taxes. The astonishing annualized contraction of real per capita disposable income bears repeating: -9.03% — a full percent and a half worse than the -7.52% contraction rate recorded in the first quarter of 2009 (the worst quarterly contraction recorded during the official duration of the “Great Recession”).

The contraction in real per capita disposable income caused the savings rate to plunge to 2.3%. This is the lowest savings rate since the 3rd quarter of 2007. Which begs the question: is it 2007 once again and consumers are leveraging up once more in joyous optimism (as the equity markets seem to assume)? Or, are households dipping into savings (and defacto leveraging up) out of necessity to offset the “new” FICA rate increase of 2% (by reducing their savings rate by -2.4% relative to 4Q-2012)?

Our view is that the household savings rate is a short term shock absorber for household budgets that can require a quarter or more to adjust to the realities of new taxes or falling incomes. Ultimately, however, households adjust to the new realities by tightening their spending. In this case we would be shocked if spending does not soften during the balance on 2013.

Some thoughts
The key word in the above analysis is “leverage.” With per capita income falling, the only way the economy can grow is if we save less and borrow more. This is clearly happening. But with the savings rate down and taxes and interest rates up, as CMI says, “we would be shocked if spending does not soften during the balance on 2013.”

Talk about mixed messages. Stocks are at record levels and housing is booming, which implies a 2007-style bubble. But incomes are falling at a near-double-digit rate which implies a fairly serious slowdown. So which will it be: blow-off asset bubble or a double-dip recession?

Who knows? But note how extreme both scenarios have become. Stocks in general and home prices in many markets are literally back to 2007 bubble levels. The savings rate is as low as it was in 2007 and total debt is rising again, as mortgages and business loans more than offset a smaller federal deficit. So sustained growth from here would mean an even bigger asset bubble than the one that nearly destroyed the global financial system, while a return to recession would mean plunging stock and home prices.

This might be a good time to forget about direction and just bet on volatility.

It’s becoming easier every day to accept the miraculous as normal: GPS systems that somehow know exactly where you are and give you precise directions in the language of your choice (mine does this in a classy female British accent, though my kids once almost killed us by switching it to Chinese in an unfamiliar city); 4-ounce smart phones that function as full-featured, voice controlled PCs and high-res cameras; game consoles that translate your movements into golf swings or gun shots, and so on. A couple of decades ago (a couple of years ago in some cases) this was the stuff of science fiction. Now it’s your 10-year-old’s Christmas list. We really are accelerating towards some sort of singularity.

But like all forms of power, the above has its dark side. By illuminating the world for us, it also illuminates us for Big Brother. Consider this from Cracked.com:

The 5 Creepiest Ways Major Companies Are Watching You

The key to selling a product is knowing your customer. Traditionally this has been a hit-and-miss game for advertisers, who are faced with the near-impossible task of convincing people to buy something they didn’t even know existed 10 minutes prior.

However, the information age has been steadily providing technology that is allowing corporations to get to know their customers better than their own families. How creepy you find this tends to depend on how old you are, and in fact we’re betting that the next generation won’t find anything weird about …

TVs That Feed You Ads Based on What You’re Doing on the Sofa

Remember when you could watch your TV without feeling like it was staring right back at you like one of those haunted house paintings with the eyes cut out? Well, it looks like those days are numbered, because a handful of companies are introducing new products that monitor you while you watch — and we don’t mean “monitor” as in “keeping track of what you’ve been watching” — that would hardly be new. We mean these devices literally watch you while you are watching television.

Soon everything in your apartment will be disappointed by you.

Verizon has submitted a patent for a new cable box that uses infrared cameras and microphones to keep track of what you’re doing while sitting through syndicated blocks of The Big Bang Theory. According to the patent, the box is programmed to watch for specific activities, such as talking, laughing, singing, and playing an instrument, because it was apparently designed to be placed inside Billy Joel’s house. It will then show you commercials based on whatever it is you happen to be doing. For example, if you’re cuddling up next to your significant other on the couch, Verizon’s cable box will take notice and play some commercials for flowers, romantic getaways, Righteous Brothers CDs, and condoms.

We are in no way making this up. The TV is now your wingman.

This isn’t even a new idea — Microsoft filed a patent back in 2010 for a proprietary technology that will scan your emails, text messages, and browsing history, while monitoring your facial expressions and speech via webcam or Kinect (if you have an Xbox) to try and determine your emotional state, delivering ads that they think will appeal to your current mood. For some bizarre reason, the patent specifically outlines a course of advertising suggestions in case the viewer is screaming, which seems to indicate either that Microsoft is trying to tap into the always elusive “murder victim” demographic or that they’re anticipating running ads during the Big Bang Theory block we mentioned earlier.

Just in case you felt like your TV wasn’t being invasive enough, Intel is producing a similar device that will provide both targeted advertisements and programming based on the information it collects via cameras that are pointed directly at your Hulu-viewing face. That’s right — the Intel box isn’t just going to decide what commercials you’re going to watch, but also what shows you’re going to see, all based on whatever stupid bullshit you happen to be engaged in within its field of vision. “We’ve noticed you started masturbating to this lesbian scene in Black Swan! Would you like us to loop that scene, or continue on with the plot?”

Mannequins That Watch You While You Shop

Yes, you can take comfort in the knowledge that our children will not have to grow up in this primitive era where mannequins are simply inanimate clothing models and not undercover surveillance androids. Already some stores have begun using the EyeSee Mannequin, a person-shaped plastic clothes hanger outfitted with cameras, microphones, and state-of-the-art facial recognition software meant to record and quantify shopper behavior in an effort to improve sales. It’s like getting stalked by one of the replicants from Blade Runner while it completes a questionnaire about the faces you are making in the chambray department.

The mannequins use facial recognition software that can instantly identify a person’s age, gender, and race, as well as record how long people spend browsing specific products and even what language they’re speaking, so the store knows what types of employees to hire. This software is similar to programs used by law enforcement agencies, particularly in the way that it is unabashedly used to collect racial statistics.

Multiple EyeSee mannequins can be networked together to trace a person’s movements throughout a store, literally “following” you around like an aggressive hive-mind furniture salesman, until you feel sufficiently haunted and decide to leave. The information the mannequins record (what items you looked at, what you bought, what you look like, and what you said) is then stored and uploaded to a database, where it will be analyzed to determine the effectiveness of the store’s current layout and selection, and then presumably sold to other companies in exchange for a blood oath of fealty to the assistant shift manager. The mannequins are also used to track and apprehend shoplifters, presumably by deploying finger lasers and/or shoulder cannons like traditional humanoid sentry robots.

“If it steals, I can kill it.”

Each spy doll costs about $5,000, so it’s unlikely that you’re going to start seeing them in a Peebles anytime soon. However, facial recognition technology is already being implemented in chain stores like Whole Foods, so it might not be long before you’re greeted by some version of the EyeSee synthetic vigilance statues in virtually every place you shop.

Products That Relay Your Location to Advertisers

Nestle’s “We Will Find You” campaign was every bit as ominous as the name implies. Step one was to put GPS tracking devices into random candy wrappers. Then, once the device was found and activated, a team of A-Team chocolate bar ninjas would track down the signal in a helicopter to assault the person who’d discovered it with a briefcase full of 10,000 pounds, sort of like if Willy Wonka had sent a Russian kidnapping squad to ambush every child who found a golden ticket.

In an effort to seem like they might have had some notion of what a terrible idea this was, Nestle asked customers to refrain from activating the GPS device if they anticipated being unavailable to be attacked by an airborne terror squad and/or routinely carried a fillet knife they would be likely to reach for in the event of a surprise.

This isn’t wholly unexplored territory — Apple all but forces you into unifying all of your personal information under a single username and password and allowing your various iNonsense to continuously update their servers with your location, but that’s Apple, and their products are expensive, high-end gear. Candy bars cost a goddamn dollar. “We Will Find You” was just a one-off promotional campaign, but it really does show you the future: GPS technology is now so cheap to produce that a company like Nestle can stick a tracking chip into a freaking candy wrapper whenever it gets a wild hair up its ass to do so.

So we may be looking at a time when anything and everything you buy is tracked, from a bottle of Vita Coco Water to a pair of jeans and a comic book — remember, where you were when you purchased a product and where you went with it afterward is extremely valuable information. Companies could use it to determine where to put up posters and billboards, and tracked items could be synched to trigger specific advertisements in nearby televisions and electronic displays to sell you items related to what you have in your pockets. Though we imagine this might negatively impact the sales of both condoms and personal lubricant in equal measure.

The article lists two other privacy invasions: “Marketing Firms That Track Your Health Problems” and “Websites That Deliver Ads Depending on How Expensive Your Computer Is”. And no doubt these just scratch the surface, since everything we do creates valuable data for one marketer or another, while surveillance tech keeps getting cheaper.

Obviously this is creepy, but it will become more than creepy when these disparate databases are tied together and mined by Homeland Security. Then Big Brother will literally know where we are and what we’re doing 24/7.

Is there a solution that preserves both convenience and privacy in a world of intelligent devices? Future articles in this series will consider some.

One of the many scary things about writing an investment book is the six months that elapse between the typing of the last word and the book’s appearance in stores. That’s enough time for your predictions to be proven wrong or – nearly as bad – for your predictions to come true and make the book’s advice obsolete.

The temporal jury is still out on Nick Barisheff’s $10,000 Gold. Either it will be this generation’s Dow 36,000, a signpost marking a secular top, or a prescient and gutsy call for faith in gold’s fundamentals at a time when many are giving up on precious metals.

The latter is more probable, for reasons that Barisheff, CEO of Canadian gold dealer Bullion Management Group, spells out early on. To hit just a few of the high points: the developed world is grossly over-indebted and is holding a 1930s-style depression at bay with insanely-low interest rates and unprecedented amounts of newly-created currency. In response, the developing world, led by China, India and Russia, is buying up every bit of gold they can get their hands on, with an eye to the inevitable changing of the currency guard when the dollar, euro and yen are depreciated to nothing and the yuan and ruble rise to take their place. This dynamic, says Barisheff, will send gold soaring – though of course it will actually be gold sitting still and the dollar plunging.

As a gold dealer, Barisheff is at his best when clarifying the differences between paper gold like ETFs and unallocated storage and the real thing like coins and allocated accounts. This paper-versus-physical distinction has become front-page news recently, and is a crucial piece of information for new gold investors. The time will come when millions of people who think they own gold find out that they really don’t. This book’s readers will avoid that fate.

In Barisheff’s analysis, the US is in the final stage before hyperinflation, with debt beginning to overwhelm the system while crucial needs like infrastructure are starved to pay for entitlements, overseas military adventures and interest. Here’s how he describes what comes next:

Stage 5 is hyperinflation, the worst economic phase of the fiat cycle, when currency becomes essentially worthless. Hyperinflation has occurred fifty-six times since 1795. During the Weimar hyperinflation, which we will discuss in more detail below, only gold was accepted as reparation payment. Of course, it is probable that a significant structural change will occur, likely involving the formal recognition of gold as money, in order to avoid hyperinflation on a global scale.

Where would gold have to be set to account for all the paper currency now circulating? That’s right, $10,000.

A final note about this book’s production values: The publisher, John Wiley & Sons Canada, has done a great job with the cover art, the graphs and the indexes, while Barisheff’s presentation is clear and logical. This is a polished production from beginning to end, which makes it an easy read. Everyone associated with it should be proud of what they’ve produced.

Bloomberg is reporting on the rising number of hedge funds shorting gold:

Gold Bear Bets Reach Record as Soros Cuts Holdings
Hedge-fund managers are making the biggest ever bet against gold as billionaire George Soros sold holdings last quarter and Goldman Sachs Group Inc. predicted more declines after the longest slump in four years.

The funds and other large speculators held 74,432 so-called short contracts on May 14, U.S. Commodity Futures Trading Commission data show. That’s the highest since the data begins in June 2006 and compares with 67,374 a week earlier. The net-long position dropped 20 percent to 39,216 futures and options, the lowest since July 2007.

Gold prices that surged sixfold in the past 12 years fell 19 percent in 2013, including a seven-session slump through May 17 that was the longest since March 2009. Soros joined funds managed by Northern Trust Corp. and BlackRock Inc. in cutting holdings of exchange-traded products in the first quarter. ETP assets are now at the lowest since July 2011 after some investors lost faith in gold as a store of value amid improving economic growth, low inflation and a rally in equities.

“Gold has faced disappointment after disappointment,” said John Stephenson, a senior vice president and fund manager who helps oversee about C$2.7 billion ($2.65 billion) at First Asset Investment Management Inc. in Toronto. “It’s had a 12-year run, but the whole fear-mongering that the world is going to end is just not working. So, I think that any last vestige of an investment thesis for gold has been stripped.”

Soros Fund Management LLC lowered its investment in the SPDR Gold Trust, the biggest bullion ETP, by 12 percent to 530,900 shares as of March 31, compared with three months earlier, a Securities and Exchange Commission filing showed May 15. The reduction followed a 55 percent cut in the fourth quarter last year. Paulson & Co., the top investor in the SPDR fund, maintained a stake of 21.8 million shares, now valued at $2.86 billion. Global ETP holdings slid 16 percent to 2,207.1 metric tons this year, valued at $96.5 billion.

Goldman Outlook
Gold’s slump “has been faster than we expected,” Goldman analysts led by Jeffrey Currie wrote in a May 14 report. A further drop in ETP holdings would “continue to precipitate this decline,” said the analysts, who forecast prices at $1,390 in 12 months. The metal will get “crushed” and trade at $1,100 in a year and below $1,000 in five years as inflation fails to accelerate, Ric Deverell, the head of commodities research at Credit Suisse Group AG, said in London on May 16.

Physical buying will help to support prices, said Paul Dietrich, the chief executive officer of Middleburg, Virginia-based Fairfax Global Markets, which oversees about $120 million.

India Premiums
Gold premiums in India, the world’s biggest buyer, more than doubled to $40 an ounce May 15 from $17 to $18 a day earlier, according to Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation. China’s bullion demand jumped to a record 294.3 tons in the first quarter, the World Gold Council said in a report May 16.

Prices surged 54 percent since the end of 2008 as central banks printed money on an unprecedented scale to boost growth. The Federal Reserve is buying $85 billion of assets a month to stimulate the world’s biggest economy, while Japan is making monthly bond purchases of more than 7 trillion yen ($67.8 billion).

“The case for gold is still there,” Dietrich said. “All the central banks are joining in a massive printing of money. Physical demand may be helping provide a floor on prices, and while there’s not a lot of downside risk right now to gold, there is a lot of upside potential.”

Some thoughts
This article is a great illustration of how a news organization can shape the tone of a story by deciding what to put where – and what to exclude. Bloomberg chooses to make the dominant theme the bear market in precious metals, framing the record level of bearish hedge fund bets as, well, bearish. So after mentioning the hedge fund shorts, the reporter inserts negative quotes from analysts. Only at the end of the article does he mention the record level of physical demand and soaring premiums in Asia.

But the data here could just as easily – in fact more easily – be the basis of a bullish story. Hedge funds are massively short? What happened last time they were really short? Gold and silver soared. Is this a pattern? Yes, in fact every time hedge funds get really short, gold and silver soar. Why? Because commercial traders (the fabricators who buy gold and silver for their business and the banks they trade through) like to prey on hedge funds. They push down prices, which induces trend-following hedge funds to go short. Then the commercials switch sides and start buying, pushing the market up and cleaning out the hedge funds. It’s amazing that the funds being suckered this way have any capital left.

Bloomberg could have done a little digging, found the pattern and structured the story as follows: A paragraph or two on the hedge funds’ record shorts, followed by an explanation of what this has meant in the past. Then segue to the massive Asian physical demand and some quotes from analysts who understand this dynamic.

Click on the next chart for a video from gold dealer Bullion Vault showing just how short the hedge funds are now (“managed money short futures” refers to hedge funds). Note that the last time they were really short (though nowhere near as short as today) was in the depths of the 2008 gold price correction – which was followed by an epic bull market in precious metals.

Based on both recent history and mainstream economic theory the past few years should not have been possible. When you cut interest rates to near-zero, run deficits of 10% of GDP and buy up every government bond in sight with newly created currency, you get a boom, end of story. That’s just the way capitalism works.

But this time was different. After four years of QE and ZIRP and all the other easy-money acronyms, we entered the month of May with Europe in a deepening recession and the US recovery petering out.

The culprit? The one piece of the puzzle that governments can’t control: the velocity of money. This is simply a measure of how quickly holders of currency, i.e., banks, consumers, businesses, hand their currency off to someone else. The faster and more frequent the hand-offs, the more stuff gets bought and the more robustly an economy grows. But after their 2009 near-death experience, the world’s banks have been in no mood to lend. Instead, they’ve been sticking all the new currency their governments have been giving them under the proverbial mattress. This reluctance to lend means record low money velocity and little or no economic growth.

But in just the past month something fundamental has changed. US home sales and prices have accelerated, with prices returning to 2006 levels in some markets and bidding wars, flippers and interest-only mortgages once again becoming common. Stock prices pierced old records and then spiked rather than corrected. Suddenly we’re back in an asset-driven boom.

But it’s a boom with a twist because it coincides with unprecedented amounts of “excess reserves” in the banking system. This is the raw material for new loans, and banks across the country are worrying that they’re missing the boat by remaining in cash. Marginal mortgage applicants now look a lot more attractive because their collateral is appreciating. Private businesses, judged by the share prices of their publicly-traded peers, are becoming more valuable and hence more creditworthy. Families with rising stock portfolios and appreciating houses suddenly look like better bets for car loans.

So what happens if a tidal wave of bank reserves are suddenly converted to business and consumer loans at a time when asset markets are already overheated? Maybe the fabled crack-up boom of Austrian economics. A couple of weeks ago Daily Reckoning addressed this issue in an article that quoted Ludwig von Mises’ famous definition of a crack-up boom:

This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.

But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.

So how close are we to the point where “finally, the masses wake up?” Hard to say. Stocks and houses are back at previous-bubble levels and there’s even talk of a shortage of government bonds. And based on the excited emails pouring in from people who, after a decade of bad returns have seen their aggressive growth funds rise by 25% in a quarter and are feeling like geniuses, animal spirits are back and happy. All while bank lending has barely started to ramp up.  It’s safe to assume that banks getting into the game would heat the markets up even more.

How would today’s financial system handle the resulting volatility? Prudent Bear’s Doug Noland addresses this in his most recent Credit Bubble Bulletin:

I don’t mean to imply that today’s environment is comparable to 1999. The U.S. economy was sounder in 1999 – and the global economy was a whole lot more stable. Global imbalances in 1999 were insignificant compared to the present. The U.S. economic and Credit systems had yet to be degraded by a doubling of mortgage debt and a massive misallocation of resources. The federal government hadn’t doubled its debt load in four years. Europe had not yet terribly impaired itself with a decade of runaway non-productive debt growth. China and the “developing” economies had not yet succumbed to historic Credit booms, overinvestment and economic maladjustment. Central banks hadn’t yet resorted to really dangerous measures.

The implication: This world, levered to the hilt in response to the policy mistakes and financial crises of the past few decades, is more complex and fragile than the systems that (barely) survived the bursting of the tech stock and housing bubbles. So this bubble and its aftermath might be a whole different animal.