24 Jun 2011

Silver Is And Remains The Best Investment Opportunity Of Our Lifetime

How many times did Bumbling Ben Bernanke say "uh" or "um" while answering questions at his press conference today?  Watch it.  I swear that "uh" and "um" were every other word out of his mouth.  The guy is freaking clueless!  Princeton professor?  Is it too late for his students to get a refund?  

I fell asleep listening to him...[no, really, I did].  The economy is going to get better because Ben Bernanke says it is going too?  Unemployment is going to improve because he says it is going too?  What fool believes this jibber-jabber?  Ben Bernanke has been 100% wrong about everything he has "predicted".  E-V-E-R-Y-T-H-I-N-G!!!  

Bernanke must go 
The problem with rewarding incompetence and failure in high places is that even a well-regulated financial system — which we are still very far from achieving — cannot serve the public interest if the chief regulators don’t do their jobs. Secrecy, lack of accountability, and incompetence — these are weapons of mass destruction for America’s economy.

Enough of Bumbling Ben's blah-blah...if you are reading this blog, you are already well aware of this mans incompetence...

Of course Gold and Silver were pressured after the "genius" gave his pep talk to prove that he is "on the job"... and the poor results of all his efforts are "temporary"...

Let's take a look at Silver today.  What are the prospects for Silver moving forward from here?  The following an assortment stories and essays I have been collecting since late May:

Silver Should Be $150 Today
By Eric King, KingWorldNews.com
King World News interviewed one of the top ranked money managers in the country, Dr. Stephen Leeb, Founder of Leeb Capital Management.

Stephen Leeb:
...Another critical metal, silver, which the Chinese have been accumulating is vital. Vital for building out anything resembling solar energy. You really cannot produce solar without silver...so silver really becomes a critical metal. What are we doing with silver? We raise margin requirements on the commodity exchanges and we think we’ve solved the silver requirement.

...We are stuck in a world of resource scarcity and unless we figure out a way around this we won’t even be able to build out renewable resources...and if we are not careful, sooner or later the Chinese will control most of the silver.”

When asked about the seriousness of the silver situation Leeb stated, “I think it’s desperate, literally. I’m using that word in a well-measured way. I think when you look at Japan right now in the wake of that horrible nuclear accident, Japan is on record as saying that they are going two ways with their energy situation. They are going to try to conserve, and that leaves renewables. Well we know they are very limited in terms of wind, why? Because of the rare earth situation, they can’t get those high temperature rare earths from China.

That leaves solar and in order to really build out solar in any meaningful way you need silver, and silver becomes a very, very critical metal. Yes it is, silver is an extremely special metal as you said Eric...You need it across the board in military applications, in electronic applications and especially in my view of the world, building out renewable energy.”

When asked where silver is headed in terms of price Leeb responded, “I could just look at it from a monetary point of view, forget about all of the industrial applications. The ratio of silver to gold in the world is about ten to one, maybe seven and a half to one, above and below ground if you look at reserves. So as a monetary metal you could make a case that silver should already be no more than a ten to one ratio with gold.”

When asked with the ten one ratio putting silver $150, is that an outrageous price for silver today Leeb responded, “No it isn’t, it’s not at all outrageous. Silver at $150 is in no way outrageous. I’m not counting the critical applications in the industrial and renewable areas.” 

Hi-Lo Silver

By: Neeraj Chaudary, Investment Consultant and Hemant Kathuria, Managing Director 
In nominal dollars, silver peaked at roughly $50/oz in 1980. But in inflation-adjusted terms, silver would have to reach $131/oz just to get back to its 1980 high. And that only counts inflation to the present day. With The Fed seemingly determined to debase the US dollar for the foreseeable future, the ultimate destination for a new inflation adjusted high becomes hard to estimate.

Of course, no market moves in a straight line. Recent gyrations should remind us that silver can be a wild ride, with movements often exacerbated by possible market manipulation. But in our view, the moves in the silver market over the last two months do not invalidate our long-term outlook. For those who can stomach the thrills, silver remains a means to simultaneously gain protection from dollar devaluation while harnessing the benefits of global economic growth. The big boys may push and pull the market to their own temporary advantage, but they can't alter its fundamental direction.

Silver to move towards $50, reach nominal all time highs
Commodity Online
Because silver has been so undervalued for so long with a gold/silver ratio averaging north of 50 for the past century, most silver produced in recent decades has been consumed by industrial purposes and there are actually much larger inventories of gold available above ground today. Most likely we will probably see the gold/silver ratio overcorrect to the downside, possibly down to 10 or lower. Only 10 times more silver has been produced in world history than gold so a gold/silver ratio of 10 is actually a very realistic possibility. This means those who own silver will likely more than quadruple their purchasing power from current levels this decade, while Americans with savings in U.S. dollars lose all of their purchasing power.

COMEX registered physical silver inventories have declined 30% over the past six weeks down to 28.8 million ounces or just $1 billion worth of silver. A major shortage of physical silver is developing. A COMEX default is likely coming in the near-future as those holding futures contracts demand physical delivery and COMEX can't deliver. This could cause an explosion in silver prices, possibly to $100 per ounce overnight.

Silver Shift Shows Defensive Bent
By Alix Steel
NEW YORK (TheStreet) -- A significant decline in levels of registered silver suggests major investors are taking a defensive stance when it comes to the metal.

There are two kind of inventories on the Comex -- registered and eligible. Registered is available silver not yet spoken for. Eligible is silver that investors have purchased, but is stored by the CME for them, otherwise known as taking phsyical delivery.

Since the beginning of 2011, the amount of registered silver has fallen almost 38% with a steep drop coming in mid April. Registered silver now stands at 28.7 million ounces as of June 8th while eligible silver has risen 23% to 72 million ounces.

Part of the explanation for this shift was that Scotia Mocatta, one of the banks that holds the Comex' silver, reclassified a large portion of their silver from registered to eligible, which means more silver was being taken off the shelf and being claimed by investors.

This shift occurred when the silver price was at $43.26 and continued as silver rallied to nearly $50 an ounce, which means investors might have been scared of supply crunch and grabbed the metal while they could, leaving less silver in the marketplace for everyone else.

"More and more people are taking delivery of the product," says Phil Streible, senior market strategist at Lind-Waldock. The silver futures market is also in backwardation, meaning that the most current month trades higher than future months. Backwardation often indicates that investors are worried about an immediate supply crunch.

Mark O'Byrne, executive director of Goldcore, a bullion dealer, says the small amount of registered silver is dangerous because if a "tiny fraction of those in the futures decide to take delivery, there is the potential to default." If the Comex can't make good on their commitments, O'Byrne predicts there would be a huge rush into the physical metal or allocated storage and out of paper silver. He also wonders if the steep and aggressive margin hikes silver saw in May, which led to a more than 30% correction in the silver price, were a way of the Comex shaking out investors to prevent them from taking physical delivery.

650 Years of Silver Prices
This is a 650 year graph of silver prices and silver/gold ratio.
[Silver is cheaper today than you can even imagine!]

Silver Prices live silver prices

Silver Preparing For Another Shock And Awe Move
By Eric De Groot
Money flows reflect a bullish setup despite the negative headlines and growing pessimism towards silver.

Open interest continues to decline as the weak hands are flushed. This action is consistent with paper operations in which the weak hands are flushed in an environment of headline fear.

Accumulation by strong hands has achieved statistical concentration. Statistical concentration tends to precede tradable bottoms.

The only hitch in the setup at this point is retail money. Retail money with its tendency to be concentrated on the wrong side of the trade near inflection points remains relatively neutral as of June 7th. Short side concentration by retail money would galvanize the bullish setup. Watch for it in the coming weeks.

Silver’s next move has the potential to be “shock and awe”. Smart money is buying long contracts hand over fist. This type of concentrated buying has not been seen since late 2008. The concentrated buying of 2008 foreshadowed nearly a doubling and quadrupling in price by early 2009 and 2011. In other words, the money flow setup foreshadowed a ‘shock and awe’ run that few experts saw coming.

Silver Will Trade Like an Internet Stock to the Upside 
Eric King, KingWorldNews.com
King World News interviewed one of the most street-smart pros in the resource sector, Rick Rule Founder of Global Resource Investor.

Rick Rule:
“The interesting thing about silver is that it doesn’t respond to fundamentals very well in the sense that most silver that’s produced, is produced as an adjunct to mining other metals. What you are seeing is a slight increase in pure silver supplies as a consequence of the high price bringing production in place at the same time that you are seeing capital constraints in the base metals industry constraining the byproduct supply of silver.

Investment demand for silver has been extraordinarily robust. Both James Turk and Sprott Money have indicated that on a dollar for dollar basis, demand for silver bullion is outpacing demand for gold bullion...It suggests that the silver demand relative to gold demand is extraordinary. And ironically as a consequence of fabrication, silver supplies are lower than gold supplies with demand much, much higher. That would seem to be supportive of a higher silver price to me.”

The Case For Silver
By Prieur du Plessis 
To me the most important factor to watch in the silver market to get a lead where the silver price is heading is the open interest in derivatives in silver on Comex. The commitment of traders is given on Tuesdays. In the graph below I plotted the open interest (futures and options combined) with the closing price of silver the week prior to the announcement of the open interest. Amazing stuff! The week before the silver price plummeted in the closing week of April, the open interest fell by 24 000 contracts equal to 120 million ounces of silver! Somebody made big bucks at the expense of others.

What the relationship suggests is that when the open interest is trending upwards you should be buying silver and conversely, when it trends down you should cut your longs and if you are brave enough you can even short the market with some confidence. The current situation is a clear bottoming of the open interest and that, together with increased interest in physical silver interest is indicating to me that the current bounce in the price of silver is likely to be extended.

The 2011 Silver Quiz
by Jeff Clark, BIG GOLD
If you’re a silver investor, or are concerned about the recent selloff, you may find the following data very compelling. It provides an inside track on the market and will certainly make us all more knowledgeable investors.

4) Silver represented what percent of global financial assets at the end of 2010?


D. In spite of last year’s record-high prices, silver is, by any account, a miniscule portion of the world’s wealth.

The ratio’s high occurred in 1980, reaching 0.34% of financial assets. Silver as a percentage of global assets would have to grow over 48 times to match the record. It is true that many more paper assets exist today than 30 years ago, but the renaissance in silver will continue to increase its portion of worldwide assets.

At the close of business on the CRIMEX today: 

The registered CRIMEX Silver inventory rests tonight at 27.72 million oz...an all time low.  Silver Open Interest in the front silver delivery month of July is 33,656.  These contracts, at 5000 ounces each, is the equivalent of 168.28 MILLION ounces of Silver.  First Notice Day of intent to take delivery of a July Silver contract is one week from today.  Ray Charles is phoning in the supply versus demand shortfall to the CFTC as I type this.

No matter the diarrhea that drips from the lips of our bumbling Fed Chairman, Silver is and remains the best investment opportunity of our lifetime.  Accumulate! Accumulate! Accumulate!


23 Jun 2011

Government to Change CPI Measure to Represent $220 Billion Lower Spending

WASHINGTON -(Dow Jones)- Lawmakers are considering changing how the Consumer Price Index is calculated, a move that could save perhaps $220 billion and represent significant progress in the ongoing federal debt ceiling and deficit reduction talks.
According to congressional aides familiar with the discussions, the proposal would shift how the Consumer Price Index is calculated to reflect how people tend to change spending patterns when prices increase. For example, consumers tend to drive less when gas prices increase dramatically.
Such a move is widely seen by economists as resulting in a slower rise in inflation. That would impact an array of federal programs that are linked to CPI including the Social Security program and income tax brackets set by the federal government.
The proposal could lower federal spending by around $220 billion over the next decade, based on calculations by last year's White House deficit commission, which recommended the change as part of its final report.
According to two congressional aides familiar with the budget negotiations, the shift is being "seriously discussed" as part of the ongoing talks to strike a budget deal, that would be used to ease the passage of a required increase in the country's debt limit.
Those talks involve Democratic and Republican lawmakers from both chambers and are led by Vice President Joe Biden. The group held its latest meeting Tuesday as they strive to reach the broad outlines of a compromise on federal spending by the end of the month.
In a press conference that took place before the meeting, House Majority Leader Eric Cantor (R., Va.) declined to comment on the specific proposal, other than to say that "a lot of things are on the table." But asked whether the proposal would be interpreted as a tax increase and therefore a non-starter for Republicans, Cantor said it could be seen as both impacting tax rates and benefits paid out by the federal government.
When asked about the idea after the meeting, Rep. Jim Clyburn (D., S.C.) said everything is being discussed.
It is a rare proposal in that it would likely lead to both lower benefits paid to seniors and higher taxes paid by most people who pay federal income tax. As such, it could allow Republicans to argue they are tackling federal entitlement programs such as Social Security, and permit Democrats to say they are increasing taxes as part of any budget deal that is reached.
It could be easier for both parties to agree on than a significant overhaul to the Medicare proposal or an increase of taxes on wealthier Americans.
"It's certainly something that is going to be considered," said James Horney, director of federal fiscal policy at the Center for Budget and Policy Priorities, a liberal think tank. "There are questions whether it would be politically easy."
Several senators that are not party to the Biden-led talks voiced support for the proposal including Budget Committee Chairman Kent Conrad (D., N.D.), while Sen. John Thune (R., S.D.), a member of the Republican leadership team, said it should be looked at as part of the negotiations.

Gold chart analysis

The FOMC release this morning basically reaffirmed what most of the market has been thinking for some time now, namely, that the economic "recovery" is proceeding at a moderate pace though "somewhat more slowly" than had previously been expected. What a surprise? It is more like "YAWN". 

The translation - they will be keeping interest rates near zero for the next few months, or in their words, "an extended period of time". 

They repeated that the QE2 program would come to an end this month but at this point they had no intention of actually reducing their balance sheet or selling any of the $600 billion in Treasuries which they have purchased over the last 6 months or so. What they will do however is to reinvest the proceeds from maturing Treasury bonds. That will give some stimulus but compared to the massive sum of $600 billion, amounts to a drop of water into the bucket.

Gold liked what it heard and shot higher taking out the sellers who had been stalking the $1550 level. They were forced to retreat towards $1560. 

From a technical perspective, the strong move past this solid resistance level, takes the market out of the recent tight range trade bounded by $1550 on the top and supported at $1520 on the bottom. It is now poised to make a run towards $1570-$1575. Downside support moves up initially towards $1540 followed by good support near $1530. 

Keep in mind that this is occuring during the summer, not a time in which one generally expects to see a very strong gold market. A grinding move higher during this time frame would set this market up for a move to a fresh all time high later this year when the seasonally stronger period of the metal arrives.This just further underscores how currency concerns are moving gold as distrust in paper currencies continues to increase. Gold is signaling investors' lack of confidence in their monetary authorities and political leaders. 

By the way, Gold priced in British Pounds set another all time record high price today.


Steffen Krug Interview with James Turk

Steffen Krug (IFAAM) talks to James Turk (GoldMoney Foundation) about the reasons that he founded the Institute for Austrian Asset Management to combine value investing techniques with knowledge of Austrian Business Cycle Theory. They talk about the dangers of fiat currency, inflation and how difficult economic calculation is when the unit of account is unstable and the price of money, interest rates, are distorted and centrally planned, not reflecting real free market supply and demand. They move on to discuss the monetary history of Hamburg and its 250 years of 100% reserve silver banking with the Mark Banco until Bismarck replaced it with the Goldmark in 1873. They then discuss the Euro and how it is almost taboo in Germany to discuss the monetary system. They talk about how the Euro is subject to political influence, as witnessed with its buying of Greek bonds. Steffen explains that despite the taboo, some discontent is starting to show. The interview was recorded on 14 May 2011 in Hamburg, Germany.

Peter Schiff on the Potential for QE3

22 Jun 2011

China issues more gold and silver coins to meet soaring demand

From Xinhua News Agency, Beijing
Monday, June 20, 2011
The People’s Bank of China (PBOC), the central bank, announced today that it will issue more gold and silver commemorative coins featuring the giant pandas to meet soaring demands for precious metals in the country.
PBOC said the maximum circulation of the one-ounce gold coins with a face value of 500 yuan ($77.3) will be raised to 500,000 from 300,000 previously set at the end of last year.
The maximum circulation of four other gold coins with different gold purity and face values ranging from 20 yuan to 200 yuan will increase to 600,000 each set from the previous 200,000.
Also, the maximum issuance of one-ounce silver coins with a face value of 10 yuan each will double to 6 million from the previous 3 million, according to PBOC. Chinese investors have rushed to buy precious metals this year to hedge against rising inflation, where the Consumer Price Index (CPI), a main gauge of inflation, shot up to 5.5 percent year-on-year in May. The CPI rose 5 percent in the first quarter and 5.3 percent in April.
The benchmark interest rate of one-year deposits stood at 3.25 percent after the central bank raised the interest rate twice this year to curb inflation.
In contrast, the price of gold has so far risen by about 9.4 percent from the end of last year, making precious metals more attractive to investors.

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The Next Stage of the Crisis Is Starting Now

We're about to see a return to crisis-like conditions in the world's credit markets. This will devastate financial stocks. It should also hit commodity prices and commodity-related stocks hard. In today'sDigest, I'll show you why I believe this will happen.

As longtime readers know, I write Friday's Digestpersonally. In general, I try my best to teach our subscribers something useful. I've always run my research company with a few simple principles in mind. Among them, I strive to provide you with the information I would expect if our roles were reversed. You should know… abiding by this principle often requires me to share information with you before I can be 100% certain it's correct.

That's the case with today's Digest. I want to show you the warning signs as I see them, right now. I want to guide you through my thinking process. And while I'll give you my predictions about what these things mean, I hope you'll realize that, as Yogi Berra famously said, predictions are tough – especially about the future. 

The next stage in the ongoing global financial crisis will feature the collapse of both the Spanish and the Italian economies. This should occur within the next six months. Concurrently, I believe the "Chinese miracle" will be unmasked as mostly a fraud powered by a huge increase in bad lending from state-controlled banks.

Ironically, the coming wave of financial trouble will probably force people back into U.S. dollars. Gold will also do well. In the currency markets, I believe the euro will collapse in the second half of this year, as will the Australian dollar, which serves as a proxy for the Chinese economy.

I expect this next "down leg" in the world's markets to be more severe than the crisis of 2008, because the balance sheets of the Western democracies are now less prepared to manage the losses.

Finally, I believe the euro will simply cease to exist.

The first thing I want to show you is the share price of UniCredit. You have probably never heard of UniCredit, but it is a major European bank, with significant operations in eastern and southern Europe. UniCredit is based in Italy. I've been keeping my eye on UniCredit for years, for reasons I'll explain below. UniCredit is the ultimate "canary in the coal mine" of the world's global currency system.

Most people don't know that UniCredit is the direct descendent of Oesterreichische Credit-Anstalt, the largest bank in Eastern Europe before World War II. Translated the name means: Imperial Royal Privileged Austrian Credit-Institute for Commerce and Industry. It was a Rothschild bank. The family founded it 1855, and it became one of the most important banks in Europe.

Credit-Anstalt held assets and took deposits from all over Europe. In 1931, the bank failed as a direct result of the U.S.'s Smoot-Hawley tariff. The act crippled Germany's economy and led French investors to redeem all the capital they'd lent to the bank. The failure of Credit-Anstalt caused Austria to abandon the gold standard, which set off a series of economic dominoes. Germany left gold… then Great Britain… and finally, in 1933, so did America.

The failure of Credit-Anstalt is what really kicked off the Great Depression. I have long been convinced the failure of its successor bank – now called UniCredit – would presage the next global monetary collapse.

I first began warning investors about UniCredit's likely collapse and its historic role in the world's monetary history back in March 2010. Since then, the bank's shares have grown weaker and weaker. And since March, the shares have fallen off a cliff, hitting lows not seen since March 2009.

The sudden weakness in UniCredit's shares (down 21% in the last several weeks) indicates to me that big trouble is brewing in Europe. I don't believe efforts to stop the crisis in Greece will work. The austerity measures undertaken in Ireland, Spain, Italy, and Greece have severely weakened these economies, causing loan losses to banks like UniCredit.

And if there's a run on UniCredit (and I believe there will be), the losses will be too large for Italy to manage without a huge international bailout. UniCredit has borrowed $300 billion from other European banks. And Italy's government already owes creditors more than 120% of GDP. There aren't any easy solutions to this problem.

Another warning comes from a friend who is a senior executive at a major Wall Street bank. He sees more high-yield bond deals than just about anyone else in the world. He told our Atlas 400 group last weekend that credit markets around the world were suddenly shutting down. Yields were moving up. Spreads (the cost to borrow above the sovereign rate) were getting wider for the first time since March 2009.

Why? Because the market knows that the U.S. Federal Reserve is going to stop buying $85 billion-plus per month of U.S. Treasury debt. But the Treasury is going to continue to issue more debt. In total, 61% of the entire federal debt will mature within four years. That means roughly $10 trillion in U.S. Treasury bonds will have to be sold, plus whatever the total deficit adds up to over the next four years – maybe another $6 trillion.

It's difficult to imagine this amount of Treasury issuance won't have a big impact on the world's credit markets because these bonds always sell first and at the lowest yields. As these yields "back up" because of the large issuance, they should drain liquidity away from other issues, causing other bond prices to fall. This will reduce liquidity and make issuing debt more expensive across the credit spectrum.

China's boom since 2009 was fueled by massive domestic debt issuance, which was unsustainable and is reversing. In addition, one Chinese company after another is being revealed as a fraud – and then crashing. These are not isolated events. I have studied Chinese companies for more than a decade. Out of all the stocks I've analyzed closely, I've only seen a handful I didn't believe were fraudulent.

So far, none of the major Chinese banks have come under serious scrutiny. But I believe they will… and I believe major fraud will be discovered. Take the recent weakness in the shares of China Life Insurance (LFC), for example. This isn't a minor company. It's a $90 billion life insurance company. As fraud allegations spread into major Chinese financials, the entire underpinning of the Chinese boom will fall apart. It has all been fueled by debt and fixed-asset investments (land, buildings, equipment, and machinery). Consider just a few of these facts…

Fixed-asset investment remains greater than 50% of GDP in China, for the 12th year in a row. No other country has ever had more than nine years of this kind of sustained fixed-asset investment.

In the first five months of 2011, fixed-asset investment grew by 25.8% according to China's National Bureau of Statistics. That's $1.39 trillion worth of investment.

Jim Chanos, the famed short seller, says China is currently building 30 billion square feet of commercial real estate. That is enough to provide every person in China with a five-square-foot cubicle.

Jeremy Grantham, one of the world's most astute investors, points out that China has been purchasing gigantic quantities of raw materials. The scale of these purchases makes them impossible to sustain. China makes up 9.4% of the world's economy, but it is currently consuming 53% of the world's cement, 47% of the world's iron ore, and 46.9% of its coal.

A massive increase in China's domestic debt fueled this investment. In 2010, for example, Chinese banks extended $55 billion in loans – up 95% from the year before. Now, banking regulators are increasing reserve requirements, greatly reducing the amount of available credit. In May, lending was down 25% versus last year.

With Europe's crisis heating back up, with credit tightening in the U.S. (thanks to the end of quantitative easing), and with China's boom unraveling… it's time to be extremely cautious. I don't know when it will start… but we're entering another period of soaring volatility, increasing interest rate spreads, and falling stock and bond prices. How the authorities deal with these problems will set the stage for what happens next. If they try to paper over these continuing crises again – with new money-printing programs from the Federal Reserve – you can expect a massive inflation and what I call The End of America.

Our best hope for more stability and a return to prosperity is for people to realize that bailing out banks doesn't solve these problems. It only makes them worse. But… I'm not optimistic. In the June issue of my newsletter, Stansberry's Investment Advisory, I detail my best two new ideas to profit from the next stage of this crisis.


Don’t Trust the U.S. Government, says Marc Faber

Speaking with UK-based financial magazine, Money Week, famed Swiss investment manager Marc Faber said America needs to experience “a devastating crisis” before real growth and jobs can be created.
Foretelling the inevitable burst in debt several years before the collapse of Bear Stearns, Faber’s has gained a reputation as someone who is able to spot the effects of years of mal-investment within the U.S. (and globally), dispassionately, while others cannot, or won’t.
As today’s disciple of the Austrian School’s Karl Menger, Ludwig von Mises, and Friedrich Hayek, Faber’s track record of “getting it right” has amassed him a huge following of investors grown weary of the 1984-like communications and deceptive practices of the U.S. government and its financier cohort, the U.S. Federal Reserve.
Faber’s forecasting record and delivery style on the deteriorating state of the U.S. has taken on a air akin to the counterculture revolutionaries of the 1960s but with a viewpoint more focused on financial and economics matters—ironically, maybe, directed to the same a demographic most affected due to inability to recover in time for retirement—the Babyboomer.  Faber, himself, is 65-years-old—another Babyboomer who still sports a ponytail and distrusts those in authority to take selfless actions for the sake of the greater good.
Faber told Money Week that the debt hasn’t gone away in the U.S.  Instead, it’s grown much larger but shifted into the form of public debt and away from the ones who created the original oversized debt load in the first place.  And the only way out of a default (either outright, or through inflation) is “to impose a flat tax and cut government expenditures by 50%.”  But only a financial catastrophe would affect those cures, he said.
The consequences of attempting to solve a U.S. solvency crisis with ever more debt from Treasury and the Fed doesn’t have Faber chanting the “king dollar” mantra on public airways to millions of U.S. viewers each day on programming outlets such as CNBC.
He points out that in dollar terms, the rebound in the S&P from the March 2009 low appears to some investors that an economic rebound in the second half of 2011 and 2012 is expected.  But when the S&P is priced in other currencies, such as the Swiss franc, Australian dollar, Japanese yen, as well as the monetary metals, gold or silver, equities have dropped from 50% to 80% since the market peak of 2007, he said.
Of the various forms of protection from future dollar declines, gold is his favorite.  Gold (and silver) doesn’t have a constituency to placate, especially as it relates to the U.S. dollar.
“Not to own gold is to trust the value of paper money and the government’s integrity,” said Faber.  “No one in his right mind could trust the U.S. government any more.”
And finally, Faber shrugs off the talk of a gold bubble.  He insists that the bubble is NOT in the gold market.
He said the world is, instead, “grossly underweight gold” but “flooded with U.S. dollars.”

21 Jun 2011

Greece Collapse Will Trigger A Global Domino Effect

The rest of the world needs to sit up and take notice of what is going on in Greece right now.  This is what can happen when you allow government debt to spiral out of control.  Once it becomes clear that you can't pay your debts, a financial collapse can happen very suddenly and you start losing your sovereignty to those that you must turn to for financial help.  So is the financial collapse of Greece the "canary in the coal mine" for the global economy?  EU finance ministers have given the Greek government two weeks from Monday to approve another round of brutal austerity measures.  If the austerity measures are not approved, Greece will not receive the next bailout installment of 12 billion euros.  If that happens, the whole globe better buckle up because it is going to get crazy.
July 3rd is the deadline.  Basically the EU has put a gun to the head of the Greek government.  Without this bailout money, Greece will default and economic hell will break loose all across the country.
It is important to keep in mind that this is just the first Greek bailout that we are talking about.  Last year, the EU and the IMF agreed to provide the Greek government with a 110 billion euro bailout. The current 12 billion euro installment is part of that package.
Sadly, it has become apparent that the first bailout is not going to be nearly enough for Greece.  A second bailout, which will be the same size or even larger, is already being discussed.  This is going to put the Greek people even more under the heel of the money powers in Europe.
Keep in mind that all of these "bailouts" are just more loans.  There is no way that the Greeks are ever going to be able to repay all of this money.
But this is what happens when a nation lets debt get out of control.  For years and years it can seem like all of that debt does not have any consequences, but then the day of reckoning comes and it is a complete and total nightmare.
In order to get the next installment of 12 billion euros, European finance ministers are insisting that the Greek Parliament approves a package of austerity measures that will be worth approximately 28 billion euros.
At this point, it is uncertain whether those austerity measures will pass.
However, the pressure on the Greek government to get them pushed through is immense.
These austerity measures include tax increases, budget cuts and a "large-scale privatization program".
This is often what happens to third world nations that cannot pay their debts.  Organizations such as the IMF or the World Bank will come in and insist that they tax their people more, cut back on their spending and sell some of their public assets to big corporations.
As we can see from the wild protests that have been taking place in Greece, a significant percentage of the Greek population is not happy with all of these austerity measures.
Unfortunately, the EU and the IMF are able to put a lot more pressure on the Greek government than the Greek people are.
Greek Prime Minister George Papandreou recently gave the following warning to the Greek people about what could happen if this debt crisis ends badly....
The consequences of a violent bankruptcy or exit from the euro would be immediately catastrophic for households, the banks, and the country's credibility.
Not only would a Greek default be a total disaster for Greece, it would potentially be a total disaster for the entire global financial system.
Sung Won Sohn, an economics professor at California State University,recently made the following statement about the seriousness of the debt crisis in Europe....
"The European debt crisis has the potential to have as big an impact as the subprime mortgage crisis did in the United States"
So will these bailouts solve the problem?
No, giving Greece more loans is only going to kick the can down the road for a little while longer.
The truth is that Greece is bankrupt.  Unless huge amounts of Greek debt are forgiven, Greece is going to default sooner or later.
When confidence in the finances of a nation is lost, borrowing costs can go up very quickly.  Today, the yield on two year Greek bonds is up to 28.6%.
Anyone that has ever been late on paying their credit cards knows how painful an interest rate like that can be.
So why doesn't Greece just slash government spending to the bone and get their financial house in order?
Well, it is not that easy.  Harsh austerity measures have already been implemented.  As a result, unemployment is rampant and there is rioting in the streets.
The truth is that, as an article in The Guardian recently explained, austerity has taken a brutal toll on the Greek economy....
A year of wage and pension cuts, benefit losses and tax increases has taken its toll: almost a quarter of the population now live below the poverty line, unemployment is at a record 16% and, as the economy contracts for a third year, economists estimate that about 100,000 businesses have closed.
As the economy crumbles, Greece has descended into an almost permanent state of civil unrest.
after nearly two weeks of demonstrations, Greek farmers used their tractors to block border crossings and highways across the country for days, demanding financial help from the government. A farmer hits a riot police officer with his crook at the main port of Piraeus, near Athens, Feb. 2, 2009The fact that the EU and the IMF want even more austerity measures has sparked some wild rioting In Greece in recent days.  You can see video of the stunning violence going on in Greece right here.
Not all protesters are being violent.  Some of them are showing their displeasure in non-violent ways.  For example, workers for Greece's state-owned electric utility are staging 48 hours of rolling strikes that are designed to create blackouts over large areas.
The frightening thing is that Greece is not alone.  Ireland has already received a bailout and they are probably going to need another one at some point.
Portugal is a financial basket case and they are probably next in line for a bailout.
The employment situation in Spain is absolutely nightmarish.  Spain will probably be able to squeak by without a bailout if the global economy stays stable, but if the dominoes start to fall Spain could be in a massive amount of trouble very quickly.
Not that many people are talking about Italy, but the truth is that Italy has a huge debt problem.  On Friday, Moody's warned that it may downgrade Italy's Aa2 debt rating at some point within the next 90 days.
Belgium and France also have very substantial debt problems.  They probably would not be the first dominoes to fall, but if the "contagion" starts to spread they could certainly have massive problems.
The truth is that Europe's entire financial system is extremely vulnerable right now.  Big banks all over Europe (and especially in Germany) are leveraged to the hilt.  All it would take to topple many of them is a stiff breeze.
When Lehman Brothers collapsed, it was leveraged 31 to 1.
Today, German banks are leveraged 32 to 1.
German banks are also holding a massive amount of Greek debt.
That is why there is so much fear that the crisis in Greece could spread across the rest of Europe and start toppling dominoes.
The sovereign debt crisis in Europe did not happen overnight and it is going to be with us for a long, long time even if the global economy remains relatively stable.
At the moment, the best that officials in Europe can seem to come up with is to put off the pain for another day.  Pimco's Mohamed El-Erian told CNBC the following on Monday....
"This problem is not going to go away. It's going to weigh on markets here and we're going to see the same set of headlines over and over again. We simply cannot continue to kick the can down the road, because we're coming to the end of the road in Greece."
So if Europe starts having major problems will the U.S. step in and help?
Yes, if the crisis in Europe gets worse, the Federal Reserve will probably step in just like they did back in 2008.
But the U.S. is rapidly approaching a day of reckoning like the one that Greece is going through.  The U.S. government has piled up the biggest mountain of debt in the history of the world and faith in the U.S. dollar is dying.
The economic crisis in the United States gets worse with each passing year.  Yes, the Federal Reserve can print up stacks of money and send it over to Europe, but that isn't going to solve anything in the long run.  The truth is that the U.S. is not even going to be able to keep itself from drowning.
The world financial system is far more vulnerable today than it was back in 2008.  The next wave of the financial collapse is going to hit at some point, and when it does it is going to probably be even more painful than the last wave.
Our world is becoming an incredibly unstable place.
You better get ready.

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