27 Aug 2011

Bernanke proposes no new steps to boost economy at Jacson's hole

SEPTEMBER 2: Federal Reserve Chairman Ben Bernanke speaks during a hearing of the Financial Crisis Inquiry Commission on Capitol Hill September 2, 2010 in Washington, DC. The commission called Bernanke and Federal Deposit Insurance …
Photographer: Photo by Brendan Smialowski/Getty Images

JACKSON HOLE, Wyo. (AP) - Federal Reserve Chairman Ben Bernanke signaled Friday that Congress must do more to promote growth, or risk delaying the economy's return to full health.

Bernanke proposed no new steps by the Fed to boost the economy. But at a time when Congress has been focused on shrinking long-run budget deficits, he warned lawmakers not to "disregard the fragility of the current economic recovery."

Bernanke, who spoke at an annual economic conference in Jackson Hole, said that record-low interest rates will promote growth over time.

His speech follows news that the economy grew at an annual rate of just 1 percent this spring and 0.7 percent for the first six months of the year. Only slightly healthier expansion is foreseen for the second half.

Bernanke said he's optimistic that the job market and the economy will return to full health in the long run.
Stocks fell after the speech was released but then recovered. The Dow rose slightly in midmorning trading.

Bernanke left open the possibility that the Fed will take further steps to strengthen the economy. He said its September meeting will be held over two days instead of just one to allow for a "fuller discussion" and that the Fed "is prepared to employ its tools as appropriate to promote a stronger economic recovery."

A plan Congress passed this month means annual deficits are expected to be reduced by $3.3 trillion over the next decade through spending cuts.

The Fed chairman said long-term deficit reduction is necessary. But he said that future economic health could be jeopardized if hiring and growth are not strengthened now.

Bernanke also was critical of Congress' handling of this summer's battle over raising the debt ceiling. He said it disrupted the economy and that a similar episode could hurt it in the future.

Analysts noted the lack of new proposals in Bernanke's speech.

"He essentially hit the ball over to fiscal authorities and said, `There's only so much we can do,'" said Aneta Markowska, senior U.S. economist at Societe Generale.

But she said the extension of the Fed's September meeting to two days might suggest something new could be unveiled.

"Maybe that's a subtle signal they might announce something," Markowska said.

Bernanke's speech comes at a critical moment for the economy. Some economists worry that another recession might be near. A big reason is consumer spending has slowed. Home prices are depressed. Workers' pay is barely rising. Household debt loads remain high.

All that, compounded by Europe's debt crisis, has spooked the stock markets and unnerved consumers. That's why many have looked with anticipation to the Fed to do more. It has already kept short-term interest rates near zero for 2 1/2 years. And earlier this month, it said it would keep them there through mid-2013.

"I'm a little fearful that there are a lot of expectations built in that I don't think Bernanke can deliver on," said Jack Ablin, chief investment officer at Harris Private Bank.

To promote growth, Bernanke said the government must pursue tax, trade, and regulatory policies that encourage economic health.

The approach of this year's Jackson Hole conference raised expectations. In last year's speech, Bernanke signaled that the Fed might unveil a Treasury-buying plan to help lower long-term rates. In November, the Fed announced a $600 billion such program. The bond purchases were intended to lower long-term rates, lift stock prices and spur more spending.

Immediately afterward, stock prices started rising and continued up until May, when they leveled out. Even counting the past month's 12 percent drop in the Dow Jones industrial average, the Dow remains about 12 percent above its close the day before Bernanke spoke last August.

Still, critics, from congressional Republicans to some Fed officials, have raised concerns that the Fed's Treasury purchases could ignite inflation and speculative buying on Wall Street, while doing little to aid the economy.

Others have wondered whether any further lowering of long-term rates is needed. Investors seeking the safety of U.S. debt have forced down the yield on the 10-year Treasury note to 2.18 percent - a full point lower than it was when the Fed completed its Treasury purchases about two months ago. Yet the economy is still sputtering.

The Congressional Budget Office this week estimated that the unemployment rate will hover around 8.5 percent when President Barack Obama seeks re-election next year. And it predicts that unemployment will stay above 8 percent through 2013.

That continued weakness is why many speculated that the Fed would still embark on some new plan to help the economy. They note that while inflation has risen, it's still within the Fed's target range.

Many economists note, however, that the economy's main problem is not that interest rates are too high. They say the main problem is that consumer spending remains too weak. So businesses feel little incentive to hire, expand and invest.

Until demand for goods and services steps up, the Fed may have limited ability to strengthen the economy.

Paul Dales, senior U.S. economist at Capital Economics, noted that Bernanke didn't hint at a new round of bond purchases.

"In fact, he appears to be saying that the Fed has largely played its part and that the politicians need to step up their game and sort out the fiscal situation," Dales said.

Joshua Shapiro, an economist at MFR Inc., said that by dwelling on budget and tax issues facing Congress, Bernanke was conceding that the Fed has "basically exhausted its tools."

"It was nothing more than an economic pep talk," said Greg McBride, senior financial analyst for Bankrate.com. "Right now, uncertainty about the economy still prevails," McBride said.

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Russia Moves Closer To A Gold Standard And A Quick Comment On Bernanke

Kudos to "Ranting Andy" for sourcing this story. Russia's Central Bank has announced a program to offer short term, gold-backed loans LINK It's not clear to me if this facility will will be available only to Russian banks or if non-Russian banks will have access to the program. What IS clear to me is that the Russian Central Bank, which has been an aggressive monthly accumulator of physical gold, has decided to include gold, along with high-quality bonds, as part of its acceptable collateral policy. It would not surprise me to see more eastern Central Banks offer gold-backed loans. And eventually I suspect that these Central Banks will no longer accept sovereign-issued bonds, like Treasuries, as loan collateral.

As for Bernanke's speech at Jackson Hole today, I thought it was a pathetic attempt to vindicate himself and place the failure of his monetary policies squarely on the shoulders of Congress and the White House. To blame the current economic weakness on the debt-limit debacle is utterly absurd. And in the epitome of hypocrisy and disingenuousness, he lectured that Congress needed to be more "transparent" with and accountable for its legislative procedures and objectives. I really can't believe he made a statement like that considering the fact that the Fed spent millions lobbying Congress to kill Ron Paul's audit the Fed bill. Quite frankly, and quite alarmingly I find Bernanke to be one of the more deceitful and spineless public figures in my lifetime. Nixon would be embarrassed by Bernanke's antics.

Looks like BP's oil well in the Gulf of Mexico is leaking again: LINK We can only hope, contrary to what is likely the case, that Obama did not negotiate a "fence" around BP's liability and that the corrupt oil company will be held financially accountable for its crimes. Of course, given that the Teleprompter's track record has been to alleviate corporate accountability, I'm sure he gave BP a get-out-of-full-liability card last time around the monopoly board.

On a final note, I hope anyone reading this who owns/owned Bank of America stock took yesterday's price action as an opportunity to unload their shares or any mutual funds that have a big holding in BAC. BAC is desperate for liquidity and I would bet a 1 oz. gold eagle that Buffet's deal with the 5% takeout premium was structured as a short term "bridge" deal to keep BAC liquid until a bigger bailout can be put in place, at a time that makes it politically feasible, and takes Buffet out at that 5% premium plus accrued information. God bless crony-capitalistic insider trading!


25 Aug 2011

James McShirley talks with James Turk

James McShirley talks with James Turk

James McShirley, President of the Allied Building Center, and James Turk, Director of theGoldMoney Foundation, talk about gold price manipulation and the statistically significant caps on daily gold price rises. These caps seem to apply regardless of fundamental, technical or news driven factors.
They see this as a clear sign of market intervention and as evidence that GATA’s thesis on gold market manipulation is correct. They also point to exceptions to these rules as red flags, marking the end of the gold price suppression scheme.
This interview was recorded on August 6 2011 in London.

Gotta Love Those Juniors

Gold and silver have been pretty much the best things to own during the past few years. But the mining stocks…not so much. This is no secret, though why the miners are underperforming is a subject of debate. You hear about high energy prices (though oil is way down lately) and potential nationalizations (though most of the biggest mines are in relatively stable countries). But the most likely explanation is that there isn’t one. Sometimes otherwise strong relationships diverge for a while and then snap back. Wondering why just gets in the way of exploiting the divergence.
So the real question, assuming precious metals don’t plunge from here, is which miners to load up on? Based on the chart below, it looks like the juniors win hands down:
The black line represents the McEwen Capital Junior Gold Index, a list of mostly Canadian exploration companies that have yet to start producing. This is generally the cheapest type of miner in terms of share price per ounce of metal in the ground, because until they start producing there’s always a chance they won’t. Once an explorer moves successfully into the producer category its valuation frequently pops.
As you can see, these juniors have returned nada in the past three years, which is on a par with the Dow Jones Industrials — a pathetic showing for companies whose metal reserves are worth two or three times per ounce what they were in 2008. In a long-term bull market successful explorers would be expected to outperform the underlying metals. So the upside potential is pretty obvious: If gold and silver hold their recent gains, lots of explorers will either be bought out for nice premiums or start producing and see their reserves revalued to twice or more their current levels.

24 Aug 2011

QE3 or GFC2?

US Federal Reserve Chairman Ben Bernanke.Will it be another case of a "relief, then grief" rally for stocks?
Each year, the world's central bankers gather in Jackson Hole, Wyoming, in the shadow of the Grand Teton mountains to discuss arcane monetary policy - and in recent gatherings, devise ways of saving the global economy.
This time last year, the event spawned QE2 - not an ocean liner, but the second round of quantitative easing by the US Federal Reserve. The easing was in fact pressing - as in the Fed hitting the button on the country's printing press - to the tune of at least another $US600 billion for QE2.
The result was immediate. Investors snapped up assets from property to commodities in anticipation of funds flooding world markets. Stocks joined the rally, with the Dow Jones benchmark jumping 28 per cent between August 2010 and April this year.
Buoying hopes was the expectation that QE2 would spark a recovery in the US economy, extra demand that would flow from the world's largest economy to everywhere else - particularly in regions also pouring funds in money markets.
One year on, though, most economic indicators, particularly in the US and Europe, are turning decidedly lower. Debt woes in both regions are mounting and growth is slowing.

QE3 for GFC2?
Renewed fears of another recession - if not Global Financial Crisis Mark II - sent share markets tumbling earlier this month.
In recent days, including on local and overseas markets, the mood has turned more positive, with US markets alone up 3 per cent overnight.
The spark: hopes that US Fed chairman Ben Bernanke will use the Jackson Hole bankers fest to indicate support for QE3 - the third attempt to revive the US economy since the 2008-09 recession.
European stocks were also mostly higher, and locally shares rose as much as 1.6 per cent, adding to yesterday's 2.2 per cent advance, before giving up all of the gains.
The pullback underscores some traders' doubts that a QE3 will do the trick.
"I guess grasping at straws drives (the market) higher in the expectation that this one might work,” said Kevin Massey manager of corporate broking at Foster Stockbroking. "Everyone is betting on this QE3 thing (but) we've got inflation much higher now than last time and core inflation is high. So I'm just not sure the Fed can do it.”
Critics also contend QE itself also poses a risk for creating future inflation.

More the same?
“The last two (rounds of QE) lifted stock prices and traders expect another will do the same so are positioning early,” said Dave Hofman, director at Sydney-based CCZ Statton Equities. “Markets, as we know, are driven by confidence and expectation.”
“It is clear that governments are trying all they can to avoid large scale unemployment and are displaying a previously unseen willingness to intervene in the private sector.”
But with the improvement in the US and euro zone economies needed to sustain corporate profits elusive, a longer term cause for optimism is missing, he said.
“In the short term (the rally) is irrational and it's unlikely to last,” said Mr Hofman.

Rates view
Despite the fizz of optimism by investors, sentiment remains fickle.
One gauge of that fecklessness is short-term money market allowing investors to bet on what the Reserve Bank of Australia will do at its next interest rate meeting on September 6.
Earlier today, those credit futures showed an even-money chance that the RBA would cut its cash rate next month to 4.5 per cent from 4.75 per cent. Last Friday, the bet was a 100 per cent chance of a cut.
The RBA, of course, will ignore such punting, focusing instead on trying to assess where Australia's economy is headed, particularly the inflation rate.

Slowdown signs
As officials have said in recent days, that forecasting is getting more difficult as financial markets swing. More concrete, though, are the latest signs the North Atlantic economies are slowing.
US-based economic research group IHS Global Insight believes there is one-in-four chance of a recession in the US and a 40 per cent chance of a recession in Europe, either of which could create yet another drags on global growth.
Peter Warnes, head of equity research for Morningstar Australasia, said the market wants a QE3 announcement on Friday in Jackson Hole but there is no telling what Mr Bernanke might actually say. The speech will be made Friday evening, Australia time.
“If I was a trader, I wouldn't be going into the weekend, 'long' the market,” he said, referring to traders' bets that an asset will rise in price.
“I wouldn't be relying what Bernanke is going to say in Jackson Hole.”

Less is more
Perversely, the weak housing data released last night, showing 298,000 new home sales, less then the 310,000 expected by the market, stoked hopes of further stimulus from the US Fed.
“Weaker US economic data gives investors very little to be optimistic about which is why the rally most likely reflects the market's hope that weak data will push the Fed to do more,” said New York-based Kathy Lien Director of Currency Research at GFT.

Read more: 

Welcome To The Third World

One upon a time, the US was a place where police came when you called, a basic safety net caught those who fell on hard times, and a lifetime of work was rewarded with a decent retirement. A First World country, in other words. To be born here was to win life’s lottery.
But apparently this was an illusion fueled by borrowing and money printing, and now that we can’t borrow quite so much, many things we took for granted are going away. Consider this video of Chicagoans being dropped from state health care assistance.
And these recent news stories:
Spiraling public safety costs and plummeting revenues have pushed Orange County cities to the brink. Many can’t pay their bills without raiding their reserves, an analysis by the Orange County Register has found.
The Register also found that the unfunded portion of accrued pension and health care costs for Orange County and its cities now total $8.75 billion — boosted by the cost of retirement for police officers and firefighters.
Most cities do not have a plan in place to address that debt. Like a consumer who has pegged his credit card, they are paying only what’s due immediately.
Declines in city revenue have pushed Costa Mesa to dismantle its two-helicopter air patrol and consider outsourcing half the jobs at City Hall. Stanton has locked the public out of its police station, hoping to reopen the office with volunteers. Anaheim cut $5 million from police and fire budgets, sidelining a fire engine and its crew.
The cuts to come could be worse, experts say. “It has been a painful couple of years and I think it will be painful still,” said Chapman University economist Esmael Adibi.
The Register looked at audited financial reports for each city as well as state pension documents and found:
Twenty-three Orange County cities outspent their general fund revenues during fiscal 2009-10, the most recent audited year.
Santa Ana spent 77 percent of its general fund on police and fire protection. Westminster, Stanton and Garden Grove also spent more than 70 percent on public safety. The city of Vallejo was at 80 percent when the costs of public safety drove it to bankruptcy.
Orange County cities face a combined $4.1 billion in unfunded pension and health care liability. County agencies face another $4.65 billion. Those figures are growing at 7.75 percent annually. Anaheim has the single highest city debt at $787 million for retirements and medical benefits, with Santa Ana following at $626 million.
“With (the benefits) that municipalities have agreed to, they’ve put themselves in a real squeeze,” said Bob Burton, spokesman for the California Public Employees Retirement System, which administers the pensions for nearly all Orange County cities. “They negotiated benefit packages they are having a hard time paying for.”
Illinois’ budget stiffs the dead
Memo to residents of the Metro East: Come Monday, don’t die if you can’t afford a funeral. The state no longer is willing to pick up the tab.
Illinois has a budget deficit of about $9.4 billion, despite raising income tax rates by roughly 66 percent earlier this year. It owes $2.4 billion in tax refunds, $4.6 billion in unpaid bills to its vendors and $2.4 billion in Medicaid and insurance obligations.
As part of trying to make ends meet, effective Monday, the state will suspend its practice of paying $1,655 to funeral homes that bury the approximately 12,000 public aid recipients who die each year. The Illinois Funeral Directors Association says that barely covers the cost of a simple funeral and burial.
In the past, the state set aside about $15 million for indigent funerals. The budget for the current fiscal year, which began July 1, was just $1.9 million. As of now, that’s gone.
North Miami Beach’s proposed cop layoffs spark protest
Katrina Pinillos marched up and down the sidewalk in front of North Miami Beach City Hall, occasionally joining in a “No More Bonner” chant bellowed by nearly 80 people.
For more than an hour on Tuesday, the crowd rallied in front of city hall before the commission meeting, protesting City Manager Lyndon Bonner’s proposed cuts to the city’s police department, including the layoff 24 officers.
“I am angry,” said Pinillos, a Plantation resident whose husband and brother both serve on the North Miami Beach department — and are both facing layoffs. “Who is going to protect the city when there are minus 24 officers? It is the residents who hear the gunshots and see gang oppression,” said Pinillos, who teaches at a North Miami Beach public school. “When they let these officers go, this stuff is going to double.”
According to Bonner, who recently became city manager, there is a $7.5 million shortfall for the 2011-2012 budget.
The New Retirement Plan: No Retirement
Already battered nest eggs took another beating this month with the market’s wild swings. With interest rates essentially at zero since 2008, income from Treasurys and certificates of deposit is pretty paltry. … On top of that, housing prices [leave] homeowners with much less equity to tap.
Here is the survey mentioned in the article: The New Retirement: Working
• The survey found that for many Americans, the foundation of their retirement strategy is simply not to retire, to work considerably longer than the traditional retirement age, or work in retirement:
–39 percent of workers plan to work past age 70 or do not plan to retire
–54 percent of workers expect to plan to continue working when they retire
–40 percent now expect to work longer and retire at an older age since the recession
• Workers’ greatest fears about retirement include “outliving my savings and investments” and “not being able to meet the financial needs of my family.”
• Most workers will continue working out of financial necessity:
–Workers estimate their retirement savings needs at $600,000 (median), but in comparison, fewer than one-third (30 percent) have currently saved more than $100,000 in all household retirement accounts
–Most workers, regardless of age or household income, agree that they could work until age 65 and still not have enough money saved to meet their retirement needs
–Of those who plan on working past the traditional retirement age of 65, the most commonly cited reasons are of need versus choice
–Many workers (31 percent) anticipate that they will need to provide financial support to family members
NY cops preparing for civil unrest
In the aftermath of last week’s riots in the United Kingdom, the NYPD has held a “mobilization exercise” to train police to prepare for civil unrest in the United States, while also launching a program designed to spot signs of potential trouble via social networking websites.
The NYPD Disorder Control Unit brought together police from all five of the city’s boroughs to rehearse what the response would be “should out-of-control riots break out here”.
“Approximately 180 police officers total from each borough’s task force, including the horseback and aviation units, came out for the drill,” reports the Metro.
However, unlike in the United Kingdom where the rioters mainly comprised of teenage kids taking the opportunity to steal iPods and other high-end electrical goods, civil unrest in the United States is far more likely to have a political motivation.
With many Americans now becoming “pre-revolutionary” as a result of their fury at the Obama administration and equally unpopular lawmakers in Washington, potential civil unrest could spring not just from a poverty-stricken underclass, but also the shrinking middle class.
Perhaps that’s why the Department of Homeland Security is increasingly focusing its anti-terror apparatus on white middle class Americans, portraying them as domestic terrorist in a series of PSA videos.
In addition to the riot training, a new NYPD unit has also been set up to “troll sites like Twitter and Facebook for suspicious activity” in order to pre-empt potential flash mobs and other civil unrest.
Social networking websites like Facebook and Twitter came in for harsh condemnation following the UK riots, with Prime Minister David Cameron advocating authorities have the power to shut down access during times of public disorder.
For his part in decrying social media, Cameron was praised by none other than Communist China, which habitually censors the Internet to hide political corruption or prevent legitimate protesters from receiving media attention. The Communist state routinely uses such powers, which Senator Joe Lieberman has called to be introduced in the United States, to cover up atrocities and abuses against its own citizens.
Twitter, Facebook and Youtube are all banned in China and even sanitized government approved versions of these websites are now being shut down for long periods of time so that they can “remove all politically sensitive content under orders from Chinese internet authorities”.
Some thoughts:
It’s painful to think about how totally we blew it. In the 1980s and 90s we had the chance to get borrowing — both public and private — under control and live within our considerable means. We did the opposite, choosing to live big on credit cards, T-Bills and derivatives, and now we’re broke and those least able to cope will suffer through a decade that didn’t have to happen.
Note the progression of these articles: From state/local financial problems, to cutbacks in basic services, to evaporating nest eggs, to civil unrest, to a police state. Look around the world for examples of what’s coming.


India and China have been largely responsible for gold’s surge in the first half of the year, with the two highly populated nations accounting for 52% of global end-user investment and 55% of jewellery demand worldwide. Year over year growth in consumer demand was 38% in India, in the second quarter of 2011, compared to a growth rate of only 7% for the globe. This is only the beginning of the demand push for these developing economies.
India’s Festival Season Will Push Gold Prices Higher
As the second half of the year progresses, India is entering its festival season, where holidays and weddings, which are culturally linked to purchases of precious metals, can be expected to provide more demand and drive gold prices up. The second half of the year offers 54 days for hosting opportune weddings, according to the India’s major religions, compared with only 44 days in the first six months of the year.
Moreover, Diwali, the festival of lights, an important event for Jains, Sikhs and Hindus is set to occur in late October and is usually a positive driver of gold demand. The day of Dhana Trayodashi, occurring on the 13th day of the second half of the lunar month, is an important day within Diwali for businessmen and families as investment purchases, often in precious metals, are considered especially fortunate.
Records Being Set and Broken
India is set to reach record imports for gold in 2011 with the Bombay Bullion Association predicting up to 1,000 tons to enter India for the year. A record 540 tons was already purchased in the first half of 2011 keeping India on pace to beat the yearly record set last year at 958 tons. India’s consumption purchases grew 60% in the second quarter of 2011 to 267 tons, and investment demand skyrocketed 78% to its second highest quarterly recording of 108.5 tons.
Gold Beats the Alternatives
Gold is an ideal investment for Indians as they are facing a volatile equity market and high inflation. Gold is in its 11th year of positive returns, most of which are double digit increases, and the metal is outperforming almost all asset classes when considering volatility and risk. For the year ending June 30, 2011, depositing cash in a bank earned only 3.5%, equities returned 6.3%, and 10yr bonds yielded 7.94%, according to the World Gold Council. Over the same period gold significantly trumped all of the above by returning a whopping 16.68%.

23 Aug 2011

The Black Market for Easy Money

Gold finally cleared $1,900 in the market this morning. It's been a spectacular run. Gold has doubled since the beginning of the credit crisis in 2008. Or, more accurately, the US dollar has halved against gold as the Federal government ran up enormous deficits and the Federal Reserve created a black market in easy money.
--There's no doubt the Fed played a role in yesterday's gold move. That role began in the crisis days of 2008. The Fed made over $1.2 trillion in emergency loans to dozens of international banks, financial firms, and even a few industrial conglomerates over a period of three years. Over 29,000 pages of documents obtained by Bloomberg revealed the details.
--The details are indeed revealing. Morgan Stanley borrowed as much as $107 billion from the Fed at the peak of the crisis. At one point, Fed cash was the sole source of Morgan's profits. Citibank borrowed $99.5 billion. Bank of America borrowed $91.4 billion.
--If you ever needed proof that the Fed is run by and for its member banks, there you go. Just 10 banks received 56% of all the loans made by the Fed, a total of $669 billion. Without Fed backing, the American banking sector would have collapsed under the weight of its own liabilities and bad risks. The Fed saved Wall Street's bacon.
--There were dozens of other firms that needed Fed cash in order to survive. National Australia Bank put its hand out for $1.5 billion at one point. Westpac received $1 billion. These are modest numbers compared to the amounts required for survival by American banks. But if anything, yesterday's report shows just how thoroughly monetary policy is being run entirely for the benefit of the banking sector.
--Of course, you might counter that it's a good thing the banking sector didn't implode. That would lead to a general worldwide implosion. Isn't it better to have prevented that? Didn't the Fed save the world?
--What investors are starting to realise is that the Fed habit of bailing out bad risk takers is precisely what's created such an unbalanced, unstable financial system. Now the whole system is so heavily encumbered by debt that it's too big to survive without more loans from the Fed or the European Central Bank. That doesn't seem like a long-term survival strategy.
--And you wonder why the gold price is making record highs.
--The gold price would have to be making Ben Bernanke nervous. Gold is telling everyone that it thinks monetary policy is bad and getting worse. It's reminding everyone that fiscal policy - huge government deficits as a percentage of GDP in the Western World - aren't much better. Gold's price communicates this information.
--Will central bankers try to silence gold? Central bankers have been net buyers of gold so far this year, adding 198 tonnes to their vaults. What they do is more important than what they say. But watch out for what they say.
--The annual Fed confab in Jackson Hole, Wyoming takes place this week. Poor old Bernanke. He knows that investors are desperate to hear what he's going to do next. Is he going to buy more bonds? Maybe longer-term bonds? Maybe corporate bonds? Is he going to buy stocks? Is he going to buy gold mines? What is he going to do to get the unemployment rate down and GDP growth back up?
--Our guess is that anyone who thinks the Fed may have a real plan is going to be bitterly disappointed. Markets rallied in New York for no apparent reason. If we were a betting man we'd expect to see another two to three days of 4-5% losses in financial markets, once everyone realises the Fed has no plan.
--One note of caution if gold has you excited: it can correct too. Gold's recent run is pretty breathtaking. And given the revelations about how close the financial system was to a meltdown in 2008, the appetite for gold isn't surprising. But keep in mind a great deal of liquidity in the gold market comes from the various exchange traded funds (ETFs) that now own over 2,000 tonnes of gold.
--Institutional gold buyers can become sellers in the blink of an eye. So prepare yourself. A 15% correction in gold from these levels would see it back around $1600. It wouldn't surprise us to see that. And we'd absolutely love a chance to buy down there again.
--In such an unbalanced financial system - huge amounts of debt on one side, with unreliable counterparties, and real assets like precious metals and energy on the other side - you'd think having an institutional bias toward growth would be a big liability. At least we'd think that. But hey, what do we know?
--Nonetheless, most Aussies who own the default balanced fund option via Super are still heavily biased toward growth. We wrote on the dangers of owning what you don't know last week. Adele Ferguson reports in today's Age:
'Most people think a balanced fund is 50 per cent growth (shares, property, alternatives, private equity, infrastructure) and 50 per cent defensive (cash, fixed interest, bonds).Some funds masquerade as balanced but they are 85 per cent growth and 15 per cent defensive, according to financial adviser Matthew Ross from Roskow Independent Advisory.
'Ross cites a few super funds that he believes are not offering balanced options, but say they are. "This is an issue that really gets under my skin ... Australian Super's balanced fund is 85 per cent growth, 15 per cent defensive. This is not balanced. Host Plus balanced fund is 76 per cent growth. REST Core Strategy is 75 per cent growth and Catholic Super is 68 per cent growth," he says. "They're high-growth funds, calling themselves balanced. Higher risk equals higher reward. So the more risk they take in the balanced fund, the more return they can boast about - but they're taking risks consumers aren't aware of."
'But even the defensive category might not be as conservative as some funds claim. When it comes to cash, some funds that invest in cash-plus and cash-enhanced funds, are investing in things other than cash. Such funds offer better returns than straight cash by investing in shares and property as well as bank bills and fixed-interest securities, but they are much higher risk - and some investors don't realise this.
'Fixed interest can also be deceptive. While some fixed interest products might be AAA-rated Australian government bonds, others are junk bonds, including insurance linked securities, which are a euphemism for catastrophe bonds.'
--Did someone say catastrophe? More on how to survive one tomorrow.

$8,000 Gold & $500 Silver

22 Aug 2011

Understand History To Understand The Current Crisis

Every professional has their own method of analyzing markets, finance and economies, and some do well coming up with the direction of social and political issues as well. The other 97% miss one-half to two-thirds of the time. That is not very good and one asks why? The answer is simple they really haven’t studied history as well as they should have.
Some believe that the crisis in Europe is the heart of today’s problems. It certainly is a strong integral part, but not the primary causation. The 3-year old finance bubble was created by the Federal Reserve, which began the situation starting in 1993. We saw the dotcom boom, which they could have stopped in its tracks. All they had to do is raise margin requirements from 50% to 60% temporarily. After that collapse in mid-March 2000, they decided rather than purge the systems, as they as well should have done in 1990-92, they created another bubble in real estate. They have been trying to recover from that bubble and other layover problems since we’d say 2000.
Yes you can blame Europe for its part, but the blame lies with the Bank of England, the European Central Bank, and the banks and personages, who control those entities. Those in England, Europe and in the US, who control business, finance and economics from behind the scenes, have played the parts they have in order to bring about world government. If you can perceive and accept that from an historical perspective, they you can understand what is really going on.
European banks are struggling with their fundings and credit is drying up. This is what happened in 2008. As a result Europe is a disaster waiting to happen. Europe is finally realizing this is all about debt. The socialists want it go away, just disappear but it does not happen that way. Debt and credit default swaps will in the end rule the day.
Few reflect back to 12 years ago when the Maastricht Treaty was being approved. The cornerstone was public debt that was not supposed to be more than 3% of GP. That did not last long. Then Italy and Greece, with the help of Goldman Sachs and JPMorgan helped these two basket cases qualify for the euro and euro zone by Mickey Mousing their balance sheets. We saw one interest rate fits all and we knew the euro was doomed before it got started. The condition of the euro zone and Europe is certainly terrible, but so are US debt problems. Policy decisions are bad, but not any worse than they are in the US.
We see pundits trying to separate sovereign debt from bank debt. They are one in the same, because the banks control the governments, and tell them what to do. Europe particularly France, was very upset last week when SoGen was rumored to be insolvent. The answer from those accused was rubbish. SoGen has a history of one of the most criminal banks in the world, so what is new. Just more criminality. SopGen and France are under pressure because they own loads of PIIG debt and are being asked to supply more funds to bail out their neighbors, a role they cannot fulfill without going under themselves. The situation France is in is three times worse what it was in 2008. Everyone expects France and Germany to bail out the bankrupts and that cannot happen. Neither the banks nor the governments can continue to do what they have been doing and at the same time control their financial systems and economies. Now you can understand why CDS credit default swaps trade above 180, when they traded at 80 in 2008. We feel that if the six countries in trouble are not allowed to default it will take the other nations under as well. There is much at stake here. Not only the insolvency but also the breakup of the euro zone and the euro and the dream of using them as a template for a new world order.
In addition it is very significant CDS for Brazil jumped from 35 to 152 as did Mexico, which is an indirect result of what is going on in Europe, UK and the mortgage bond market and by cutting back 30% on loans to small and medium sized businesses. Although they are very leveraged in their other operations, such trading and global leveraged speculation include great counterparty risk. This time exposure is somewhat different but the exposure in the theatre could be just as bad risk wise as it was in 2008. Generally speaking they are not long gold and silver bullion and shares, they are for the most part short. The venue that could be very dangerous is derivatives. The way these major banks and countries have become interconnected the danger always persists and once a fallout begins it could bring down all major banks and countries. Don’t let that fact escape you. They dodged the bullet in 2008, but they might not the next time. The carry trade is as large as it has ever been and the cost of borrowing is close to zero, again, encouraging taking on too much risk.
This past two weeks currency markets have seen large swings, especially in second and third tier countries. No one knows the size of carry trades affecting these countries. We have seen a number of countries quickly give up almost all of their dollar gains of the past several months and the Swiss and Japanese have spent billions of dollars trying to push down the value of their currencies, but to no avail. The euro and the dollar have stayed about the same, but we see the euro weaker due to ongoing financial problems, which contrary to conventional wisdom have not been solved. Throughout Europe not only has money been lent at very low rates, but also much of it is uncollectible. This broken European bubble will deflate for some time to some. It will affect all other sovereign debt negatively as well. These are the borrowers of part of that $16.1 trillion that was lent by the Fed over the last few years, which has never been paid back. European banks are buried in debt and the politicians, whom they own, will do their best to protect them. Unfortunately, there is no painless solution. The contagion is underway and the latest meeting to solve these problems was a failure. The latest European version of the issuance of quantitative easing to buy Italian and Spanish bonds will prove to be futile, just another attempt with taxpayer funds to bail out the banks. This possible “Black hole of Calcutta” at this point puts Europe in a worse position compared to the US, which is no piece of cake, and probably won’t far any better in the future. The working out of US problems will just take longer. As each day passes and in spite of the disinformation, confidence in Europe and the US falters and rightly so. The US has no periphery to support essentially Europe does and that is in favor of the US, but ultimately US problems are far more overwhelming.
The recent commitment of the Fed for zero interest rates for the next two years showed great weakness and will in time come back to haunt them. This was another reward for Wall Street speculators and another moldy bone thrown to the nations savers and elderly. There is no question Wall Street and banking, which own the Fed are desperate, to make such a commitment. The decision for QE 3 was made 15-months ago when we predicted it. We could see it coming and we know the decisions of the last 11 years and the pressure being exerted on the Fed will ultimately bring about its demise, and its days of looting the American public will be over. What the Fed and the ECB have done in greed and for their dream of world government is over. We are closing in on payback time, as desperate measures become more noticeable and a solution remains out of their reach. They will pay for what they have done to us.
Even though we expect at least a few more years of unrestrained leveraged speculation, it will then come to an end. It has become a crucial factor for monetary policy championed by both Sir Alan Greenspan and Ben Bernanke. Wall Street and baking love it, because their positions allow them to create inside information, which allows them to make money consistently with little or no risk. We also have the SEC and the CFTC perpetually looking the other way aiding and abetting their criminal behavior. If you add in that there are no limits to what they can do you essentially have an ongoing free for all. This is unrestrained finance via a policy of zero interest rates. This gives Wall Street and banking a license to steal.
All this has caused a bubble and that bubble is in the process of bursting, a product of fiscal and monetary stimulus. That is not only in the US, UK and Europe, but worldwide As a result confidence in the global system is being lost. De-leveraging of bullish bets in markets of bonds and stocks is underway. Ironically these speculators are short gold and silver and the shares. Short covering is in process with some even switching to the long side in the gold and silver bullion and share markets. How any economist could believe that leveraged speculation reduces risk is beyond us. Fortunately the other shoe has dropped and such theory has been disproved.
The result of all this is that we have an escalating debt crisis worldwide and now the experts in and out of government do not have any solutions as to how to rectify the situation. The sovereign debt crisis has been underway since the early 1970s. This experience shows you how long bad things can last. Before this is over trillions of dollars will be defaulted upon. The days of overwhelming stimulus to gain traction in the economy or economies is in the process of being ineffective. We like to call it the law of diminishing returns. The $2.3 to $2.5 trillion we project that the Fed will have to create in the coming fiscal year will at best produce GDP growth of zero. The minute the Fed and Congress stop feeding the system we will be looking at negative growth of 5%. We are headed toward crunch time and there is no avoiding it. Uncertainty and instability are America’s and the world’s next challenge. Currencies are going to react widely. Gold and silver will fly along with the gold and silver shares as a result of debt and falling economies accompanied by inflation. The big problem will not only be de-leveraging, but also the opaque derivative markets and the Exchange Traded Funds, many of which are leveraged. Yes, it will be a very rough ride, so you had best get ready for it. We never had a recovery and the trappings of growth are quickly falling away. Extending the time line for all these problems is coming to an end, but it probably will not be abrupt. There will be all kinds of terrible events, but it looks like the elitists are going to play this out over an extended time frame before they attempt to pull the plug. That means these problems could be extended out five or even ten more years on a degenerating basis. That also means we will continue to have limited wars for financial gain and distraction. The strategy has been and will continue to be to keep creating money and credit and allow inflow to reduce the size of the debt. These comments regarding debt quoting Bernanke and throwing money from helicopters and Greenspan’s admission that the US cannot be downgraded, because it can always print money are flippant and very unprofessional. What they have both done rather than allow the US government to default is to perpetually create money and credit to paper over the economy’s failure. This process increases inflation that quietly steals the value of purchasing power like a thief in the night. Both men can be classified as thieves for having done to the American people and others by stealing the fruits of their labor. This trick used by money masters and politicians for centuries is little understood by the public and most cannot understand how it works and the ultimate ramifications. These characters and others create additional debt, which is followed by other nation’s central banks, which has created a race to the bottom and eventually all nations cannot pay their debts and default. Eventually in order to prevent a collapse in the financial system a meeting is held such as was held at the Smithsonian talks in the early 1970s, or the Plaza Accord in 1985 and the Louvre Accord in 1987. All currencies are revalued and devalued and there is multilateral debt settlement. We believe that is how all this will come about.
Evidentially a deal has been made from behind the scenes to relieve the Fed of having to produce $850 billion in stimulus and that task has been delegated to Mr. Obama. The President, while calling for budget cuts, is calling for $850 billion for stimulus 3. Observing recent actions by Congress some idiotic excuse will be made up and like magic stimulus 3 will appear. We also suggest that the President will use the London rioting as a cause for such stimulus. Remember never let a crisis go to waste. It is sure to be sold in the behalf of preservation of order. We do not believe the powers behind government will get the desired results.
Admittedly, Ben Bernanke inherited a can of worms from Sir Alan Greenspan. Ben has been able to accumulate $3 trillion worth of an assortment of Treasuries, Agencies and CDS, and MBS’s, also known as toxic waste, over the past few years. Those moves decidedly have been negative for the rating of US government debt. The rating really should have been lowered five years ago during the Greenspan years and perhaps even sooner than that. Due to massive increases since 2006 by the Fed we now already are in a bubble.
The 12 person congressional debt commission, we like to refer to as the Obama Enabling Act, patterned after Adolph Hitler’s legislation of 1933, which allowed him to become dictator of Germany, supposedly will produce moderate spending cuts. Knowing that Standard and Poor’s has warned this “Star Chamber” proceeding, which bypasses Congress, that there are not substantial cuts in Social Security and Medicare, that S&P will again lower the US debt rating. Everyone seems to overlook that fact. That means that if there is not large Social Security and Medicare cuts and an increase in taxes, S&P will strike again, and the bond market will burst, and Mr. Bernanke’s house of cards will collapse. As we explained previously the debt extension could have been passed in 15 minutes, but it wasn’t because the powers behind government the Council on Foreign Relations, wanted to chop up SS and Medicare, and to put this panel in place. All is never what it seems to be.