Gold World News Flash

---

• Gold Market Update
• International Forecaster August 2010 (#8) - Gold, Silver, Economy + More
• Uncle Scam
• What Does The Junior Sector Say about the Next Move in Gold?
• Monetary Madness
• A Closer Look At The Silver Market
• In The News Today
• Precious Metals, Oil and SP500 Trading At Key Resistance Levels
• Hindenburg Meets Iceberg
• China: Cutting Back on Rare Earth Metals
• Weekly Market Forecast: Re-Testing 1040 Before Heading Downward?
• Guest Post: The Age of Mammon
• Economic Gurus: Economic Armageddon Is Here
• Don’t Touch That Treasury Bond!
• BoJ Decision Disappoints, Yen Surges On No FX Intervention Announcement
• Bernanke Pledge on Economy Gives Some Relief to Oil Prices
• Is The Double Dip The Statistical Equivalent Of A Traffic Ticket? And Guess Which Sole Asset Class' Implied Vol Declined In The Past Month
• Are Gold Stocks Worth the Effort: Update
• Gene Arensberg: Something changed in silver market last week
• Zen and the Art of Economy Repair
• Drop to $18 before middle Sept?
• The Mistake-Correction Cycle of Real World Economics
• A Look At Global Economic Events In The Upcoming Week
• Guest Post:Defeating Demon Deflation
• The Death Of Cash? All Over The World Governments Are Banning Large Cash Transactions
• Economic Volatility: What I Told the Governor
• Swiss Franc Tale
• Jim's Mailbox
• Futures Charts - Aug 29
• Bernanke Fed Drives Deflation With Zero Rate Policy
• Presenting The Findings Of The Working Group On Extreme American Inequality

Gold Market Update Posted: 29 Aug 2010 06:15 PM PDT In the last update we were looking for gold to turn lower, it did turn lower and dropped quite heavily back to its 200-day moving average. However, it has risen all the way back up again and is now within striking distance of breaking out to new highs.

International Forecaster August 2010 (#8) - Gold, Silver, Economy + More Posted: 29 Aug 2010 06:12 PM PDT The Congressional Budget Office thinks the country faces serious budget problems, as well as serious economic problems, because it estimates that the deficit for 2011 will be $1.066 trillion. In addition it sees fiscal 2010, which ends on September 30th, at $1.34 trillion, or 9% of GDP. Last year was 9.9%.

Uncle Scam Posted: 29 Aug 2010 06:07 PM PDT The latest data on global gold trends, Q2 2010, just popped into my email box from the World Gold Council. The bad news is that the higher nominal price of gold has caused a 5% decrease in jewelry sales over the prior year. If you're thinking "Hey, that's not that bad!", you'd be right.

What Does The Junior Sector Say about the Next Move in Gold? Posted: 29 Aug 2010 06:06 PM PDT With gold rising almost each day now, those of you, who are holding the yellow metal as a long-term investment are most likely happy with this situation. However, Speculators, and particularly Contrarians are probably waiting for the slightest sign of weakness in order to profit in the following correction. As we all know, no market - virtually regardless of the fundamental situation - moves in a given direction in a straight line.

Monetary Madness Posted: 29 Aug 2010 06:02 PM PDT Fortunately for me, my throat is spared the violence of continual screaming when I remember that I can still buy gold, silver and oil, at bargain prices, and having thus remembered, am calmed to the point of serene happiness, as evidenced by my saying, "Whee! This investing stuff is easy!"

A Closer Look At The Silver Market Posted: 29 Aug 2010 05:52 PM PDT View the original post at jsmineset.com... August 28, 2010 12:04 PM Dear Friends, I have had a fair number of emails asking me to take a look at the internals of the silver market vis-à-vis the Commitment of Traders report after the explosive move that it underwent this past week. The big move began on Tuesday which is the cutoff day for this week's COT report so we are able to see the state of the market through that date. However, this report will not catch what transpired on Wednesday through today. If you recall, silver tacked on quite a bit more upside since its move on Tuesday. The only thing I can note at this point is that a bit of divergence occurred between the Swap Dealers and the Commercial Producer, User class. The general pattern in silver is that these two groups of traders tend to move in tandem, increasing their net short positions as the market rallies and decreasing it as the market moves lower. It is not an exact match but fairly reliable. This week's report do...

In The News Today Posted: 29 Aug 2010 05:52 PM PDT View the original post at jsmineset.com... August 28, 2010 06:06 PM   Jim Sinclair’s Commentary Our bullion delivery man, JB Slear, says: "No Bank failures for this week after all, can't have a failure on Jackson hole day." Jim Sinclair’s Commentary Remember all the MOPE about Fed tests of reverse repos as a method of draining liquidity? Draining liquidity was all the talk on F-TV with the herd of Talking Heads bobbing their heads in agreement without any doubt. The Fed will tighten? What raving BS. Now is there any further question in your mind that as the Western World economy craters, QE to Infinity will balloon to new heights? It will and illustration number three is the means to Currency Induced Cost Push Inflation. Have you fully protected yourself and the nearest, dearest? Gold at $1650 looks like a minimum projection. Fed Ready to Dig Deeper to Aid Growth, Chief Says By SEWELL CHAN Published: August 27, 2010 JACKSON HOLE, Wyo. — The Fe...

Precious Metals, Oil and SP500 Trading At Key Resistance Levels Posted: 29 Aug 2010 05:38 PM PDT

Hindenburg Meets Iceberg Posted: 29 Aug 2010 04:57 PM PDT Another week in Australia without a new government. Not bad for a Monday. The current Prime Minister is set to meet with three so-called independent members of Parliament to discuss forming a minority government. This gives us a chance to correct an error we made awhile back. "Every election is a sort of advance auction sale of stolen goods," wrote HL Mencken. We misattributed that quote to Mark Twain, another great American wit. But the observation seems especially apt right now. With Australia's election not yet over, the auctioning of future stolen goods continues is on display for all to see in Canberra. The independent MPs each have their own Christmas list of things you must buy them. Paul Hogan must be gratified to know that his large late fee on unpaid taxes will go to making Australia a safer, better-governed, freer, and more prosperous country. But really the big news since Friday is that the media are still taking Ben Bernanke seriously. The Fed Chairman gave a much-anticipated speech last week in which he assured the naive and the hopeful that the Fed would do whatever it takes to support the U.S. economy. Here's a suggestion Mr. Bernanke: fire everyone one that works for you and then resign. That would do more to promote U.S. growth and sound money that anything else you could possibly do. But assuming that doesn't happen, how will the Fed support an economy whose second quarter growth was revised downward last week from 2.4% to 1.6%? Buy everyone ice cream? We're being flippant because it should be obvious to anyone with two neurons firing in the brain that you cannot support growth by adding to the stock of debt. The Fed's quantitative easing programs can fund higher government deficits. And higher government deficits can fund more "stimulus" even as households and businesses hunker down and deleverage. Yet all that stimulus does is seem to support exports and manufacturing growth in places like Germany and China - where the cars and goods Americans by are made. The stimulus stimulates. Just not where you'd expect, like having your feet tickled but feeling it in your ear. This is a critical issue for Australia. The chart we showed you last week clearly demonstrates that Australia's stock market tracks the U.S. That means bad U.S. earnings and a weak economy would be bearish for Aussie stocks. But what about China? The argument is made that Australia's economic growth correlates more with Asia than America. "Our national income will soon be growing at a China-like rate, underpinning a boom investment that is already underway," writes RBS chief economist Kieran Davies in today's Australian Financial Review. "Iron ore is now our largest export, accounting for almost four per cent of the economy, while coal is not far behind at 3.5%." The argument is that strong coal and iron ore prices - even though they may fall in the next quarter as contract prices are correlated with the spot market - support national income, which supports national investment ($112 billion in projects in the mining sector alone, according to RBS), which supports national employment, which supports national spending, which supports national taxes which support all the promises made by politicians who support themselves at your expense. This all sounds mostly true. But it all hinges on the boom in China having nothing to do with the credit boom in America - you know...the one that's deflating and causing the world's nastiest economic hangover in seventy years. Here's what worries us, though. What if China's great economic growth story really is just a derivative or manifestation of the world's greatest credit bubble ever? Writing about this phenomenon at Zero Hedge, Tyler Durden hits close to home: Well, of course, China needs its resources. Soon every open mine will be a "BRIC" to be exploited by Chinese interests, which come, see, and suck the place dry as they build yet more vacant cities, ghost towns, and highways to nowhere, hoping they can sustain the illusion of the world's greatest bubble for a few more months. Which is precisely all those who are betting on a collapse of China are playing it not with China CDS, but those of Australia: for when the worm turns, Bad in Beijing, will be nothing compared to the Massacre in Melbourne. Gulp. So what's our solution? We don't really have one, at least in terms of correcting the errors of the boom. That happens naturally if you let it. The key is to let it and not fight it. Fighting it only makes it worse. But once it's happened, the return to normalcy is painful. There's no easy way out, like spending someone else's money. This, by the way, is probably why so many people don't like Austrian Theory. Its main prescription is that prevention is the cure to monetary madness. With sound money, the rule of law, free trade, and low taxes, you generally promote liberty and prosperity without going into massive government debt. But once you have a credit bubble on your hands, the only way out is liquidating the bad investments, not preserving them. It was interesting that on Friday, while the Dow first fell and then rallied, copper, coffee and corn all rose. The commodities markets see the Fed's QEII program as being inflationary. Either that, or people are starting to think about trading Federal Reserve Notes for things that are actually useful...while they still can. Come to think of it, we like the idea. In a few weeks, we're headed back to America for some business. Earlier in the year we looked at house prices and found they were still falling, so we stayed out of the market. This time, our plan is to hire a storage unit and fill it with the sorts of things that disappear from shelves when people begin to lose confidence in paper money. On our list: coffee, vodka, cigarettes, petrol, vitamins, over-the-counter pain killers, petrol, batteries, bullets, a hatchet, maps, a non-North Melbourne scarf, etc. Not on our list: U.S. government bonds. What's on your list? You can let us know with an email to dr@dailyreckoning.com.au . Investors who take the Fed at its word or who actually still believe the Fed can support the U.S. economy with asset purchases deserve what they get. You have been warned by these morons what they intend to do. Now is the time to get your wealth out of the places where it is likely to be destroyed. All that said, it looks like U.S. bonds are becoming a kind of Noah's ark for people who believe in central banking. Everybody on board the Bernanke Boat if you believe making more credit available is the solution to a world that already has too much debt. All aboard! Judging by vanishing U.S. bond yields, there appears to be quite a few people willing to get on the good ship Death Trap, captained by Helicopter Ben. If you're going to stay out of this trade, just keep in mind that it can run longer than it should or than you might believe is possible, which is fine with us. It gives us more time to stock up on vitamins at Wal-Mart. Iceberg. Hindenburg. Call it what you will. Here's a note from our friend Ron Kitching on what's really going on. Stimulations, Booms and Busts. History shows that freedom of the individual, and the open, competitive spontaneous organizations, customs, and procedures in a free market, secure private-property system, is much more efficient than centralised consciously rational-directed systems of organising the human economic activity. The mystery for any economy, is how people's actions are impersonally coordinated by the market. All classical liberal monetary theorists noticed, that the price system - free markets - does a remarkable job of co-ordinating people's actions, even though that coordination is not part of anyone's intent. The market, wrote F. A. Hayek, is a spontaneous order. By spontaneous Hayek meant unplanned - the market was not designed by anyone, but evolved slowly as the result of human actions. But the market does not always work perfectly. The main cause of market distortions is increases in the money supply by the central bank. Such increases make credit artificially cheap. Entrepreneurs then make capital investments that they would not have made had they understood that they were getting a distorted price signal from the credit market. Artificially low interest rates cause investment to be artificially high, and cause mal-investment and the boom turns into a bust. As readjustment to reality occurs many people are thrown into temporary unemployment. Monetary theorists see the bust as a healthy and necessary readjustment. The way to avoid the busts, they argue, is to avoid the artificial booms that cause them. The "stimulation" commended by many was and remains an artificial boom. Bernanke is getting ready for another one. Dan Denning for The Daily Reckoning Australia Similar Posts: OPEC Agrees Not to Cut Oil Production Until it Meets in May Peking Duck in 1949 and Chinese Returning to China The Chinese and the Fed Both Buying U.S. Treasury Bonds Iron Bulls and Budget Fudges Crude Oil and the Dow Jones Index…a Close-Up

China: Cutting Back on Rare Earth Metals Posted: 29 Aug 2010 04:49 PM PDT Bruce Krasting submits: Bloomberg reports that China is cutting back 72% of its exports of Rare Earth metals. China has said that environmental issues are the reason for the cutbacks. 72% drop in availability of any commodity is important. RE’s are important. I am no expert in this but I believe that RE metals are needed in most things we make and consume. From cars to cell phones. Some more informed comments on the importance of RE would be most welcome. Complete Story »

Weekly Market Forecast: Re-Testing 1040 Before Heading Downward? Posted: 29 Aug 2010 04:39 PM PDT Graham Summers submits: Last week I mentioned that barring any additional intervention (monetary or otherwise) stocks would roll over. That is precisely what happened with the S&P 500 falling to test MAJOR support around 1,040 twice. We looked about ready to fall off a cliff until Friday when Fed Chairman Ben Bernanke stated in his speech that the Fed stands ready to do whatever is needed to fight the financial crisis. It wasn’t a direct monetary intervention, but in these desperate times verbal intervention is good enough, and traders gunned the S&P 500 higher back into the gap created by the Monday/Tuesday sell-off. Complete Story »

Guest Post: The Age of Mammon Posted: 29 Aug 2010 04:09 PM PDT Submitted by Jim Quinn of The Burning Platform The Age of Mammon “Financiers – like bank robbers – do not create wealth. They merely distribute it. While the mob may idolize holdup men in good times, in the bad times it lynches them. What they will do to the new money men when their blood is up, we wait eagerly to find out.”  - Mobs, Messiahs and Markets    As our economy hurtles towards its meeting with destiny, the political class seeks to assign blame on their enemies for this Greater Depression. The Republicans would like you to believe that Bill Clinton, Robert Rubin, Chris Dodd, and Barney Frank and their Community Reinvest Act caused the collapse of our financial system. Democrats want you to believe that George Bush and his band of unregulated free market capitalists created a financial disaster of epic proportions. The truth is that America has been captured by a financial class that makes no distinction between parties. These barbarians have sucked the life out of a once productive nation by raping and pillaging with impunity while enriching only them. They live in 20,000 square foot $10 million mansions in Greenwich, CT and in $3 million dollar penthouses on Central Park West. These are the robber barons that represent the Age of Mammon. The greed, avarice, gluttony and acute materialism of these American traitors has not been seen in this country since the 1920&rime;s. The hedge fund managers and Wall Street bank executives that occupy the mansions and penthouses evidently don’t find much time to read the bible in their downtime from raping and pillaging the wealth of the middle class. There are cocktail parties and $5,000 a plate political “fundraisers” to attend. You can’t be cheap when buying off your protection in Washington DC. Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal: But lay up for yourselves treasures in heaven, where neither moth nor rust doth corrupt, and where thieves do not break through nor steal: For where your treasure is, there will your heart be also. No one can serve two masters, for either he will hate the one and love the other; or else he will be devoted to one and despise the other. You cannot serve both God and Mammon. – Matthew 6:19-21,24 It seems that Lloyd Blankfein, the CEO of Goldman Sachs, may have been overstating the case in saying his firm doing God’s work. With his $67.9 million compensation in 2007 and payment of $20.2 billion to his co-conspirators, Blankfein appears to be a proverbial camel trying to pass through the eye of a needle. This compensation was paid in the year before the financial collapse brought on by the criminal actions of Lloyd and his fellow henchmen. After having his firm bailed out by the American middle class taxpayer at the behest of his fellow Goldman alumni Hank Paulson, Lloyd practiced his version of austerity by cutting compensation for his flock to only $16.2 billion ($500,000 per employee) in 2009. I’m all for people making as much money as they can for doing a good job. But, I ask you – What benefits have Goldman Sachs, the other Wall Street banks, and hedge funds provided for America? Never have so few, done so little, and made so much, while screwing so many. In 2005, the top 25 hedge fund managers “earned” $9 billion, or an average of $360 million. One year after a financial collapse caused by the financial innovations peddled by Wall Street, the top 25 hedge fund managers paid themselves $25 billion, or an average of $1 billion a piece. For some perspective, there were 7 million unemployed Americans in 2006. Today there are 14.6 million unemployed Americans. While the country plunges deeper into Depression, the barbarians pick up the pace of their plundering and looting of the remaining wealth of the nation. Bill Bonner and Lila Rajiva pointed out a basic truth in 2007, before the financial collapse. “On the Forbes list of rich people, you will find hedge fund managers in droves, but no one who made his money as a hedge fund client.” - Mobs, Messiahs and Markets Ask the clients of Bernie Madoff how they are doing. 1920&rime;s Redux The parallels between the period leading up to the Great Depression and our current situation leading to a Greater Depression are revealing. When you examine the facts without looking through the prism of party politics it becomes clear that when the wealth and power of the country are overly concentrated in the clutches of the top 1% wealthiest Americans, financial collapse and depression follow. This concentration of income and wealth did not cause the Stock Market Crash of 1929 or the financial system implosion in 2008, but they were a symptom of a sick system of warped incentives. The top 1% of income earners were raking in 24% of all the income in America in 1928. After World War II until 1980, the top 1% of income earners consistently took home between 9% and 11% of all income in the country. During the 1950&rime;s and 1960&rime;s when Americans made tremendous strides in their standard of living, the top 1% were earning 10% of all income. A hard working high school graduate could rise into the middle class, owning a home and a car. From 1980 onward, the top 1% wealthiest Americans have progressively taken home a greater and greater percentage of all income. It peaked at 22% in 1999 at the height of the internet scam. Wall Street peddled IPOs of worthless companies to delusional investors and siphoned off billions in fees and profits. The rich cut back on their embezzling of our national wealth for a year and then resumed despoiling our economic system by taking advantage of the Federal Reserve created housing boom. By 2007, the top 1% again was taking home 24% of the national income, just as they did in 1928. When the wealth of the country is captured by a small group of ruling elite through fraudulent means, collapse and crisis becomes imminent. We have experienced the collapse, while the crisis deepens. It’s Good To Be the King The Wall Street oligarchs  were able to accumulate an ever increasing portion of corporate profits by inventing securitization, interest-rate swaps, and credit-default swaps which swelled the volume of transactions that bankers could make money on. These products were originally introduced as a means for corporations to hedge their risks. Wall Street shysters chose to use their “creative” financial products to build the biggest gambling casino in the history of the world. They functioned as the house, siphoning off billions in profits, but then got caught up in the hysteria and placed billions of bets themselves. This resulted in the financial industry generating 41% of all business profits in 2007. From World War II through 1980, financial industry profits ranged between 10% and 15%. Simon Johnson explains the despicable hijacking that has taken place since then. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.  The original robber barons amassed huge personal fortunes, typically through the use of anti-competitive business practices. These well known titans of industry included Henry Ford, Andrew Carnage, John D. Rockefeller, and JP Morgan. They may have practiced questionable business ethics, but they did create wealth while benefitting the country as a whole. They introduced the automobile, provided the nation with steel, produced the oil that powered our economy, and brought order to industrial chaos of the day. It seems their fortunes were built by creating rather than destroying. The disgustingly rich Wall Street wheeler dealers who live in Greenwich CT and NYC and summer in the Hamptons have created nothing. Their immense wealth has been created through draining the economic system of its lifeblood. Their financial innovations have created no lasting benefit for our society. Wall Street knowingly created no documentation (liar loans) mortgage loans, Option ARM loans, and subprime loans. You do not create products that beg for fraud unless you want fraud. The packaging of these fraudulent mortgages into CDOs and CDSs by Wall Street’s crime machine benefitted Wall Street only. Those who got the loans defaulted, lost the homes, and had their credit ruined. Wall Street financiers have lured the American public into debt with easy credit and a marketing machine geared to convince the average Joe that he could live just like the rich. Simon Johnson explained the phenomena in a recent article.     “Excessive consumer debt is an outcome of prolonged inequality – in trying to remain middle class, too many people borrowed too much, while unscrupulous lenders were only too willing to take advantage of such people.”    You Call This Capitalism? Capitalism is supposed to be an economic system in which the means of production and distribution are privately owned and operated for profit; decisions regarding supply, demand, price, distribution, and investments are not made by the government; Profit is distributed to owners who invest in businesses, and wages are paid to workers employed by businesses. The American economy is in no way a free market capitalistic system. It has become a oligarchic consumer capitalist society that is manipulated, in a deliberate and coordinated way, on a very large scale, through mass-marketing techniques, to the advantage of Wall Street and mega-corporations. When you hear the Wall Street class on CNBC argue against tax increases for the rich, they hark to the fact that small businesses would be hurt most by the expiration of the Bush tax cuts. There are 6 million small businesses in the US, with 90% of them employing less than 20 employees. These are not the rich. The vast majority of these businesses earn less than $1 million per year. There are only about 134,000 people in America who make on average $2.5 million per year. There are another 600,000 people who make on average $760,000 per year. Out of a workforce of 150 million, less than 1 million rake in over $750,000 per year. These are not small businesses. They are the Wall Street elite, corporate CEOs and the privileged classes that control the power in NYC and Washington DC. The following charts clearly show that  perverse incentives in the US financial system have allowed corporate executives to reap ungodly pay packages, while the middle class workers who do the day after day heavy lifting in corporations have been treated like dogs. Considering the S&P 500, which measures the stock returns of the 500 largest companies in the U.S., has returned 0% for the last 12 years, the CEOs of these companies would slightly embarrassed paying themselves 300 times as much as their average workers. Not in the age of mammon. Big time CEOs are rock stars. Outrageous pay packages are a medal of honor in a world where humility and honor don’t exist. The Depression that currently is engulfing the nation was 30 years in the making. The criminal Wall Street financiers are the modern day John Dilingers. They have mastered the art of stealing from the masses while convincing these same people that they should admire them because they are rich. This is the oddity about Americans as pointed out by Bill Bonner and Lila Rajiva. “The poor genuinely believe the rich are better than they are. They are smarter and better educated. The poor even support low tax rates for the rich, as long as they have a lurking chance of joining them.” -   Mobs, Messiahs and Markets The truth is that the poor have no chance of joining the the rich. The game is rigged. The poor have admired the rich for decades. But, hard times have arrived. And they are about to get harder. The rich have armed guards to keep the poor at bay. They will need an army of guards before this crisis subsides. Leonard Cohen sums it up perfectly in his song Everybody Knows: Everybody knows that the dice are loaded Everybody rolls with their fingers crossed Everybody knows that the war is over Everybody knows the good guys lost Everybody knows the fight was fixed The poor stay poor, the rich get rich That’s how it goes Everybody knows Everybody knows that the boat is leaking Everybody knows that the captain lied Everybody got this broken feeling Like their father or their dog just died

Economic Gurus: Economic Armageddon Is Here Posted: 29 Aug 2010 03:49 PM PDT The worst nightmare forecast by economic specialists over the previous years has come true: new research by economic gurus in the United States of America has revealed a bleak scenario: the United States' economy is in a state of depression. Yes, it is the Double Dip, a roller-coaster ride to economic catastrophe and it has arrived. To come: massive debt default, the failure of entire nations and widespread starvation in the western world. The research referring to the works of a number of leading economists (David Rosenberg, Fred Harrison, Arthur Laffer, Nobel Prizewinner Paul Krugman, Robin Griffiths) is revealed in the article by US based analyst and writer, Terrence Aym*. And it makes terrifying reading. While these leading economists represent different views from opposite ends of the political spectrums both in the USA and the UK, on one thing they agree: the decade ahead is going to get worse. David Rosenberg states categorically that the United States' economy has entered another Great Depression, the beginning of the double dip much referred to in recent years, following the shocking revelation in July that the US real estate market has collapsed 27% compared with July 2009. British economist Fred Harrison explains that property speculation around the globe was responsible for the boom and bust waves ripping through the world economy and claims that tax reforms could have avoided the crisis. What he predicts now is a decade-long depression fueled by "a massive contraction in demand" resulting in a 45 trillion-dollar debt default and unemployment rates of 25% in the USA and UK. Worse still, Harrison predicts the failure of entire nations and "something unseen for hundreds of years could appear again: wholesale starvation of peoples in some Western countries". More Here..

Don’t Touch That Treasury Bond! Posted: 29 Aug 2010 03:48 PM PDT Another week later, and Treasury bond prices have raced up to even dizzier heights, breaking more records for over valuation. According to the Investment Company Institute, outflows from equity mutual funds over the last two years totaled $232 billion, while inflows into bond funds soared to a staggering $559 billion. Today, “bond funds” ranked with “Miss Universe” and “Lindsey Lohan” among Yahoo’s top ten search terms. Companies, like FedEx, are looking to issue corporate bonds maturing in 100 years. No doubt the prospect of 80 million baby boomers bailing on equities so they can become coupon clippers for life is providing some extra juice for this market. In a Wall Street Journal article last week, the Wharton School’s Jeremy Siegel pointed out that ten year inflation protected securities (TIPS) with yields under 1% are selling at a PE multiple equivalent of 100 times, the same valuation that dotcom stocks saw a decade ago (click here at http://online.wsj.com/article/SB10001424052748704407804575425384002846058.html?KEYWORDS=jeremy+schwartz ). Bonds with four year maturities have negative real yields. The last time this happened, in 1955, ten year bonds brought in an annual return of only 1.9% for the following decade. The potential capital losses for these securities now loom large. It looks like the smart money these days is found in China. While American investors have been scrambling over each other to buy more Treasury bonds at historically low yields, China has begun quietly unloading some of its own enormous holdings. In June, the Middle Kingdom sold $21.2 billion of paper, reducing its net long to $839.7 billion. This is little more than 10% of the total $8.18 trillion in federal debt that Uncle Sam has outstanding. Total foreign ownership of US Treasury bonds amounts to $4 trillion, up from $2.4 trillion in three years.  Instead, the Chinese have been buying Japanese government bonds, which today carry a paltry 0.9% yield, but have the merit that they are denominated in a rapidly appreciating currency. The Mandarins in Beijing have also been picking up a variety of bonds in Europe which have seen yields pushed to near records, thanks to the debt crisis there. Officials at the People’s Bank of China say that it is all part of a broader diversification effort away from the greenback. PIMCO’s Bill Gross has apparently been taking Mandarin lessons on the sly because he has also been paring back his own massive holdings in longer dated Treasuries. To understand why, take a look at the chart below of the spread between the Dow dividend yield and the ten year Treasury yield which has turned positive for the first time in 55 years. In the meantime, the short Treasury ETF (TBT) trades at $30.60. Let me run some numbers here. If the yield on the 30 year Treasury bond runs up to last year’s low of 3%, the TBT will fall to a new all time low of $27. If I’m right, and we move back up to the 2010 high of 5.05%, the TBT pops back to $51.50. Running a downside risk of 11% to capture a potential gain of 68% sounds like a pretty good risk/reward ratio to me. But it might get better. Don’t forget that my long term, multi year target for this ETF is $200. If the futures players get this right, a move in the December long bond (ZBZ0) on the CBOT from today’s high of 134.5 to this year’s low of 111.50 multiplies your minimum margin requirement from $3,375 to $23,000, a 6.8 fold return. But wait, there’s more! If you don’t feel like making big bets until you figure out what the new normal looks like, try a limited risk position through the TBT options. The March $30 strike calls are trading at $4. A run up by the ETF to this year’s high puts these babies at $21 at expiration, a net profit of $17, a gain of 425%. I’ll tell you some key targets to watch for to determine the timing on this: when the yen approaches ¥80, the S&P 500 touches 950, the 30 year yield tickles 3%, and the ten year yield slams into 2%, it will all be over but the crying. I’m still keeping my powder dry for taking another shot at this trade, but my trigger finger is getting mighty itchy. To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

BoJ Decision Disappoints, Yen Surges On No FX Intervention Announcement Posted: 29 Aug 2010 03:24 PM PDT The BoJ just released a decision to extend the 3 month lending program to 6 months, to expand the 6 month fixed rate facility to 30 trillion yen from 20 trillion, extended the maturity of QE, and kept the benchmark rate at 0.1%: in essence a nothingburger extension of QE, which has done miracles for the past 20 years. The key item, however, is that there was no direct mention of FX intervention by the BoJ, which was the silver bullet many had hoped for. As a result, the Yen is currently surging. USDJPY below. Futures soon to follow: More from Bloomberg: The Bank of Japan expanded a bank- loan program, stepping up its monetary stimulus for the first time since March after the economy’s recovery weakened and the government pressured the central bank to act. The BOJ will boost the amount of funds in the facility by 10 trillion yen ($116 billion) to a total of 30 trillion, the bank said in a statement after an emergency meeting in Tokyo. Governor Masaaki Shirakawa led the gathering after cutting short a U.S. trip in the wake of increasing calls from politicians for the BOJ to help stem a surge in the yen to a 15-year high. Today’s decision reflects rising concern about growth in advanced economies that sent global stocks tumbling in the past three weeks. Federal Reserve Chairman Ben S. Bernanke three days ago signaled a willingness to implement further steps if needed to avert another U.S. recession, in a speech that triggered a gain in stocks and the dollar. “The BOJ’s additional loosening alone may not be sufficient to reverse the market’s trend, but it could make it easier for the Japanese market to ride the waves of a global market recovery,” Takuji Aida, senior Japan economist at UBS AG in Tokyo, said before the announcement. The bank-loan program that the BOJ is expanding was set up in early December in response to a November climb in the yen to the highest level since 1995. That mark was breached this month, when the currency hit 83.60 per dollar. The yen recouped some of its losses after the announcement, trading at 85.55 as of 12:19 p.m. in Tokyo today. Any moves in the currency market today may be exaggerated by a U.K. holiday, closing the world’s biggest market for foreign-exchange trading.                         Reacting to Yen The extra 10 trillion yen unveiled today will be offered in six-month credit. The term for the other 20 trillion yen remains at three months. BOJ policy makers doubled the size of the bank- loan fund to 20 trillion yen in March. That decision also followed political pressure, with then Finance Minister Naoto Kan urging the central bank to adopt an inflation target to help end declines in consumer prices. Kan, who is now prime minister and battling to keep the post following a challenge to the leadership of the ruling party, last week said “we are ready when necessary to take bold measures” in the currency market. Speaking to reporters Aug. 27 after meeting with business executives, he said he expected the Bank of Japan to take action “swiftly.” In addition to the central bank’s move, Kan’s aides are compiling a stimulus package to buttress growth as consumer prices keep falling and prospects for export growth are hampered by slowing expansions in overseas economies. Kan will meet with Shirakawa today and then decide on the outline of his government’s economic stimulus plan, Chief Cabinet Secretary Yoshito Sengoku said at a regular press conference in Tokyo.

Bernanke Pledge on Economy Gives Some Relief to Oil Prices Posted: 29 Aug 2010 03:09 PM PDT Oil prices recovered some lost ground Friday after Federal Reserve chairman Ben Bernanke said the Fed stands ready to do whatever it takes to support economic recovery. Read More...

Is The Double Dip The Statistical Equivalent Of A Traffic Ticket? And Guess Which Sole Asset Class' Implied Vol Declined In The Past Month Posted: 29 Aug 2010 02:54 PM PDT A few days ago, BNY's Nicholas Colas was kind enough to share his perspectives on why traffic congestion and market structure are comparable, especially in the context of record high cross-asset correlations. Continuing on this series of roadside analogies, today the BNY analyst compares the economic double dip to a traffic violation, and specifically the probability of getting two speeding tickets in the span of one day. "What are the odds of being caught speeding twice in one day? One in five? One in ten? Pretty remote, one would think, given that the ratio of police to motorists on most roads is 1,000:1 or greater. I can tell you from direct and personal experience, however, that the odds of that event are much, much higher than you think. I had my driver’s license suspended for 30 days in 1997 for two tickets, issued on the same day and only a few miles apart. Here’s the thing: most people, after receiving one ticket, will drive more carefully immediately thereafter. But I, working through the math I referenced above, thought “No… The odds are actually in my favor now. I can, in fact, speed with impunity.” This proved to be an error. As it turns out, going substantially faster than the general flow of traffic will gather the attention of the law. This offsets the theoretical odds against discovery, and then some. Oh, and driving a bright yellow car. I should have mentioned that, too." And once again, the specter of market uncertainty raises its ugly head, this time in the form of spiking implied volatility, which has jumped for every asset class in the past month... except gold. Full note from Nic Colas: With capital markets worried about a U.S. “double dip” back into recession, today we examine what sectors/assets classes reflect the greatest amount of concern over this potential outcome. There are now scores of exchange traded funds (ETFs) – and related option chains - tracking everything from tech stocks to gold to high yield bonds. It is therefore a straightforward exercise to look at the “VIX” (the widely known measurement of “fear” related to the S&P 500) for these asset classes and industry sectors. At the top of heap in terms of “double dip” worries: tech stocks and high yield bonds. Their “VIX’s” have jumped +30% in the past month. In the middle of the pack: both emerging and developed economies outside the U.S. And not sweating the chance of a second U.S. recession: gold. The yellow metal was the only asset class to see lower implied volatility (the technical term that “VIX” actually tracks) over the last 30 days. What are the odds of being caught speeding twice in one day? One in five? One in ten? Pretty remote, one would think, given that the ratio of police to motorists on most roads is 1,000:1 or greater. I can tell you from direct and personal experience, however, that the odds of that event are much, much higher than you think. I had my driver’s license suspended for 30 days in 1997 for two tickets, issued on the same day and only a few miles apart. Here’s the thing: most people, after receiving one ticket, will drive more carefully immediately thereafter. But I, working through the math I referenced above, thought “No… The odds are actually in my favor now. I can, in fact, speed with impunity.” This proved to be an error. As it turns out, going substantially faster than the general flow of traffic will gather the attention of the law. This offsets the theoretical odds against discovery, and then some. Oh, and driving a bright yellow car. I should have mentioned that, too. That is an admittedly embarrassing – but hopefully useful – allegory for the whole “recessionary double dips never happen” discussion that dominates market attention at the moment. Economic historians will (rightly) point out that two recessions back to back are relatively rare occurrences. The only one in the modern era occurred in the early 1980s, as then-Fed Chairman Paul Volker raised interest rates to cool rampant inflation. It was effectively a medically-induced coma for the U.S. economy, squashing inflation through a self-inflicted, sharp economic downturn. The first recession, just 2 years before, had been caused by the spike in energy prices created by the Iranian revolution. Aside from that doubleheader, recessions do tend to be  solitary events. However, as my bone-headed speeding story highlights, circumstances matter a lot when it comes to “unusual” events. Customarily, we don’t have double dips because consumers and businesses have some ability, and desire, to start spending again after a period of recession. They usually just need a little nudge, in the form of lower interest rates, to start buying large durable goods or perhaps take out a mortgage for a new house. That spurs employers to start hiring, and the virtuous circle of economic growth kicks into gear. The challenges to that upbeat trajectory at this point in the cycle are manifold: Still low consumer confidence Ditto for corporations Regulatory uncertainties that undermine hiring plans An unpopular President, and a doubly unpopular Congress A central bank that seems to have been overtaken by events. By the way, there is good fun to be had checking out Paul Volker’s old testimonies in  front on Congress from the “double dip” period of the early 1980s. This was long before smoking was banned on the Hill, and Chairman Volker regularly ran through a full Churchill sized cigar while opining on monetary policy. Google Video has some of the clips online. The last month has seen much of the “double dip” debate come to the fore, with a worsening labor market picture headlining other data reflective of a weakening economy. In the graph that follows this note we take a look at what sectors and asset classes seem most “worried” about the chance for another recession. We take the measure of this seemingly “emotional” assessment by looking at the 30 day forward implied volatilities for the exchange traded funds associated with different industrial sectors, asset types, and U.S./foreign stock markets. Don’t be scared off – that’s just the same concept as the CBOE Volatility Index, or VIX. A higher VIX usually means more near term worries about the market. A declining VIX means investors are generally more confident that stocks will rise in the near future. A few observations: U.S. stocks as a whole have seen increasing IV in the past month, to the tune of 22% higher than the same time in July. That’s a sign of concern over the near term, of course, but it also serves as a useful baseline for other asset classes. The most notable increase in IV is actually in the option chain for the most popular High Yield Bond ETF (symbol HYG). Here, IV has actually spiked by 31% over the last 30 days, more than stocks. We hear a lot about investor complacency as it related to bond investments, but it does seem that options traders, at least, understand that a double dip might be just as bad for non-investment grade credits as it would be for stocks. At the other end of the spectrum, and sitting in splendid isolation, is gold. The precious metal has had a pretty good month, up almost 5%. What might be more impressive, however, are the lower levels of apprehension about gold’s next move. The IVs related to the GLD ETF actually fell over the past 30 days, indicating some sentiment that gold is not heading for a fall in the near future. We see that kind of contraction in IVs when assets rise (VIX tends to go down when stocks rise, for example). But given that every single other asset class we looked at saw rising IVs versus last month, we can only look at the ‘Gold VIX” as a real sign of confidence in the metal. Or, of course, a real skepticism in everything else. Among the major industrial sectors, technology seems to be bearing the brunt of the double dip fears. It’s IV is up 23% over the past month, more than U.S. stocks overall. Telecomm as a sector was up more, but it’s coming off a low base, and there are not many stocks in that index to begin with. No, the move higher in the “Tech VIX” really catches the eye. I confess to liking tech as a leveraged play on not getting a double dip, but my enthusiasm seem to be counter to the market’s perception that there is a lot of risk in the sector. Interestingly, worries about overseas markets – in both emerging and developed economies – seem pretty middle-of-the-pack as far as asset classes go. The EAFE developed market ETF (symbol EFA) and the emerging market fund (symbol EEM), have seen their “VIX’s” rise by only 11% and 13%, respectively. Full note (PDF) Attachment Size Colas 8.27.pdf 172.25 KB This posting includes an audio/video/photo media file: Download Now

Are Gold Stocks Worth the Effort: Update Posted: 29 Aug 2010 02:20 PM PDT The physical metal in your very own hands negates any third party risk and from time to time does perform better than the stocks as it has done recently, for instance. Read More...

Gene Arensberg: Something changed in silver market last week Posted: 29 Aug 2010 01:49 PM PDT 9:45p ET Sunday, August 29, 2010 Dear Friend of GATA and Gold (and Silver): Gene Arensberg's weekly "Got Gold Report" concentrates on silver tonight and he writes that something changed in the silver market last week, starting with silver's "outside reversal" day on Tuesday, and it looks bullish. Arensberg's commentary is headlined "Focus on Silver" and you can find it at the Got Gold Report Internet site here: http://www.gotgoldreport.com/2010/08/focus-on-silver-.html CHRIS POWELL, Secretary/Treasurer Gold Anti-Trust Action Committee Inc. ADVERTISEMENT Prophecy to Become Coal Producer This Year with 1.5 Billion Tonnes of Resource Prophecy Resource Corp. (TSX.V: PCY) announced on May 11 that it has entered into a mine services agreement with Leighton Asia Ltd. to begin coal production this year. Production will begin with a 250,000-tonne starter pit as planned in August, with production advancing to 2 million tonnes per year in 2011. Prophecy is fully funded to production and its management team includes John Morganti, Arnold Armstrong, and Rob McEwen. For Prophecy's complete press release about its production plans, please visit: http://www.prophecyresource.com/news_2010_may11.php Join GATA here: Toronto Resource Investment Conference Saturday-Sunday, September 25-26, 2010 Metro Toronto Convention Center, Toronto, Ontario, Canada http://www.cambridgeconferences.com/index.php/toronto-resource-investmen... The Silver Summit Thursday-Friday, October 21-22, 2010 Davenport Hotel, Spokane, Washington http://www.silversummit.com/ New Orleans Investment Conference Wednesday-Saturday, October 27-30, 2010 Hilton New Orleans Riverside Hotel http://www.neworleansconference.com/redirect.php?page=index.html&source_... * * * Support GATA by purchasing a colorful GATA T-shirt: http://gata.org/tshirts Or a colorful poster of GATA's full-page ad in The Wall Street Journal on January 31, 2009: http://gata.org/node/wallstreetjournal Or a video disc of GATA's 2005 Gold Rush 21 conference in the Yukon: http://www.goldrush21.com/ * * * Help keep GATA going GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at: http://www.gata.org To contribute to GATA, please visit: http://www.gata.org/node/16 ADVERTISEMENT Sona Resources Expects Positive Cash Flow from Blackdome, Plans Aggressive Exploration of Elizabeth Gold Property On May 18, 2010, Sona Resources Corp. (TSXV: SYS, Frankfurt: QS7) announced the release of a preliminary economic assessment for gold production at its flagship Blackdome and Elizabeth properties in British Columbia. Sona Executive Chairman Nick Ferris says: "We view this as a baseline scenario for gold production. The project is highly sensitive to the price of gold. A conservative valuation of gold at $1,093 per ounce would result in a pre-tax cash flow of $54 million. The assessment indicates that underground mining at the two sites would recover 183,600 ounces of gold and 62,500 ounces of silver. Permitting and infrastructure are already in place for processing ore at the Blackdome mill, with a 200-tonne per day throughput over an eight-year mine life. Our near-term goal is to continue aggressive exploration at Elizabeth and develop a million-plus-ounce gold resource, commencing production in 2013." For complete information on Sona Resources Corp. please visit: www.SonaResources.com A Canadian gold opportunity ready for growth

Zen and the Art of Economy Repair Posted: 29 Aug 2010 01:29 PM PDT According to an article that appeared in The New York Times, written by Norihiro Kato, the Japanese have gotten good at sloughing off their worldly cares. Japan is no longer the world's number two economy; it was eclipsed this summer by China. But the Japanese are used to slippage. We all know the story of their 20-year economic decline; Japan's GDP actually peaked out about 15 years ago. It has been sliding ever since. That is only a part of the story. In terms of rice production, the Japanese have been downsizing for more than 40 years. Japan's population, too, grew by 1% per year from 1917 to 1977. It peaked out in 2005. There are fewer Japanese now than there were 5 years ago. If the trend continues, eventually there will be none. Our back page dictum: people come to think what they must think when they must think it. What do people on the road to extinction think? Ask the Japanese. According to Kato, they become less competitive and more reflective, almost zen-like, turning an eye inward, away from striving, fighting, jostling and whacking...gracefully accepting whatever the economic gods send their way. In the meantime, they stay at home and save their money; like a lap dancer in retirement, they know it is all downhill from here. Over in the developed West on the other hand, resignation and capitulation have not yet caught on. People still rage against the dying light of the Bubble Epoque and count on quantitative easing to get it going again. In the US, half a million Americans filed for jobless benefits last week - the highest number in 9 months. At this point in a typical recovery, job growth should be strong. Instead, it is shockingly weak. As for house sales, the drop in July was the greatest one-month decrease since 1968. Again, the direction is all wrong. Housing led the US out of 7 of the last 8 recessions. Now, it is holding it back! One out of every 7 mortgages is delinquent or in foreclosure. The nation is on target to foreclose on more than a million houses this year - a new record. So let us take up a serious question. If an economy cannot trot out of recession, what becomes of it? To Japan or not to Japan? There are so many economists voicing an opinion on the subject that if you spent 5 minutes listening to each one you would have to be an idiot. There are those who think Europe and America will follow in Japan's footsteps. And those who think it will not. Taking no chances, our Daily Reckoning has firmly held both opinions at one time or another. The US is not Japan, say many. Japan's 20-year slump was made possible by three unique circumstances: deflation imported from China, falling commodity prices and a current account surplus. The US is confronted with the opposite situation: commodities prices are strong, its current account is in deficit, and China is raising prices. These differences will bring on a crisis Japan never had to face. Interest rates will rise. The dollar will fall. Unable to finance its deficits at low rates, the US will unable to stay on the road to Tokyo. Instead, it will soon be detoured to Buenos Aires. Or Harare. The resulting panic will have nothing in common with Japan's orderly ruination. Those who think the US and Europe are following on Japan's heels have at least the flow of current news to support them. Japan fell into a slump. Rather than let its markets clear, its government supported zombie banks and businesses with money borrowed from the public. This effectively transferred the burden of debt from the private sector to the public sector, while holding the economy in a state of suspended animation for two decades. Meanwhile, Japan's people were getting older...more cautious...and more resigned to slippage. This seems to be what is happening in America too. The private sector is de-leveraging. The latest report shows credit card debt at an 8-year low. Mortgage debt is dropping sharply too - thanks to defaults and foreclosures. Banks and private companies are stockpiling cash in anticipation of a cold winter. Households are playing it cool too. Ben Bernanke must have gotten the message sometime between the 4th of July and the Assumption of the Virgin. On the 11th of August, the Fed announced another round of quantitative easing designed to fight against the decline. Of course, Japan tried quantitative easing too. It failed, just as monetary and fiscal stimulus had failed. But who knows? Maybe the Japanese are just losers. They are the only people on earth to have atomic weapons dropped on them. Then again, that only seemed to encourage them. After 1945, the Japanese and the Germans picked themselves up and went from absolute ruin to become the world's most admired economies. Let us hope the authorities don't draw the obvious lesson: on the evidence, nuking may pack more stimulus punch than quantitative easing. Regards, Bill Bonner for The Daily Reckoning Australia Similar Posts: Japan "Wasted Trillions" on Stimulus Programs Quantitative Easing Explained Japan and its Economy Did Not Have Secret to Everlasting Success Buy Japan Incredible Threat

Drop to $18 before middle Sept? Posted: 29 Aug 2010 01:08 PM PDT I wonder if it will work at GIM, this topic. Do we have time for a drop to $18?

The Mistake-Correction Cycle of Real World Economics Posted: 29 Aug 2010 12:59 PM PDT We went to our last summer soiree last night. It took place at a neighbor's chateau, where a large, ancient stone barn had been transformed into a dining room for 100 people. "We're screwed...so are you..." said a friend. First, an update from Wall Street: the Dow was unable to sustain a bounce yesterday. It fell 74 points. Gold dropped $3. Hiring...house sales...the latest news confirms that there is no real recovery going on. And now this from the AP: The government is about to confirm what many people have felt for some time: The economy barely has a pulse. The Commerce Department on Friday will revise its estimate for economic growth in the April-to-June period and Wall Street economists forecast it will be cut almost in half, to a 1.4 percent annual rate from 2.4 percent. That's a sharp slowdown from the first quarter, when the economy grew at a 3.7 percent annual rate, and economists say it's a taste of the weakness to come. The current quarter isn't expected to be much better, with many economists forecasting growth of only 1.7 percent. Such slow growth won't feel much like an economic recovery and won't lead to much hiring. The unemployment rate, now at 9.5 percent, could even rise by the end of the year. "The economy is going to limp along for the next few months," said Gus Faucher, an economist at Moody's Analytics. There's even a one in three chance it could slip back into recession, he said. In addition, the impact of the government's $862 billion fiscal stimulus program is lessening. That leaves the private sector to pick up the slack. But businesses are cutting back on their spending on machines, computers and software, according to a government report earlier this week. And the housing sector is slumping again after a popular homebuyer's tax credit expired in April. "What we're seeing is that the hand-off to the private sector is not looking as robust as we had previously hoped," said Ben Herzon, an economist at Macroeconomic Advisors. A handoff? What an imagination! As if the private and public sectors were running a relay...cooperating to make our lives richer and better...based on a game plan developed by the coaches at the Federal Reserve! We have news: it doesn't work that way. "Okay, Mr. Smarty Pants, how does it work?" Glad you asked. In the real world, the economy is always making mistakes...and always correcting them. Making mistakes...and correcting them. And markets are always discovering what things are worth. They figure out what one thing is worth, conditions change...and they change their minds. There are times when the economy makes a big mistake - especially when it is given the wrong signals from the Fed. And there are times when markets change their minds dramatically. Investors don't like it much when the economy and the markets turn down. It makes them look like morons...which they usually are. Businessmen don't like it much either. Falling sales or failing businesses make them look incompetent and reduce their compensation. The average person doesn't like it because he loses his job...and sometimes his savings. And the politicians don't like it because they pretend to have everything under control; when things seem to go wrong, voters blame them. So, the politicians - with their lackey bureaucrats and stooge economists - take action. They do something! Newspaper columnists and TV commentators argue about whether they do the right thing or the wrong thing...too much or too little...too soon or too late. But actually, anything they do will be wrong - unless it is merely removing some previous "improvement." "Wait a minute... Are you saying that all these recovery programs...and raising and lowering interest rates...and providing support for key industries...and help for people who are unemployed... Are you saying all that is a waste of money?" Oh no, we're not saying that. We're saying it is worse than a waste of money. It makes people doubly poorer - first because of the actual cost of the recovery programs themselves...and second because the programs interfere with the economy's efforts to correct its mistakes and find proper prices. Even the most apparently benign - and some would say, humanitarian - government interference is far more harmful and costly than people realize. Take jobless benefits, for example. At least they don't do any harm, right? Wrong! Jobless benefits rob Peter to pay Paul because Peter has a job and Paul doesn't. Why do that? Paul might take his time finding a new job. There are no new jobs, you say? Don't be ridiculous. There are always things that need to be done. Jobs are like anything else; you just have to find the market clearing price. If wage rates were low enough everybody would have two jobs. But who wants to work for substantially lower wages? No one. Most people will only do so if they have to. As long as he is getting unemployment compensation, Paul doesn't have to. "Whoa...this is radical...sounds almost subversive. You're saying government shouldn't be involved at all." "Oh no... We don't give advice here at The Daily Reckoning. We're just saying that if people want to be poorer they should invite as much government meddling as possible.... Get government to make lots of rules and then change them often... Put everyone on the government payroll; turn them all into zombies..." "Here in France, we always seem to start out with the right idea," continued our friend last night. "At least, it doesn't sound bad. We're trying to correct a problem or make people's lives better. "So we require towns to have a place where people traveling in trailers can spend the night. Some people live like that. They live in trailers or motor homes...and travel around. And they were causing a lot of problems because they didn't have clean places with water and electrical hookups. So now every town is required to have one of these parks. "Well it didn't take the gypsies long to figure out that they could live permanently in these parks. So they set up encampments and they live there. And if you believe the press reports, they deal in drugs and stolen property. And when the police went into one of these parks the gypsies fired on them with guns. "Sarkozy decided it was time to get rid of them. But now the gypsies are protected because they're a minority. "That's the way it works. Every time you try to do something to help people - like setting up these travel parks...or preventing people from discriminating against minorities - it eventually backfires. People always find a way to twist these things to their own advantage. "And now I've got a situation that really makes me mad. I rented a small house to a young guy who seemed nice enough. He pays almost no rent. But he stopped working almost immediately. And then he brought his girlfriend to live with him. They don't do anything but lie around all day and use drugs, I think. And play loud, awful music. So, I wanted to get rid of them. But they went to some legal counselor - paid for with my taxes, probably. He told them that the house I rented was not up to legal standards...and that they can force me to put them up in a hotel while I make the repairs. And then I can't kick them out because it will be considered retaliation for their causing me to bring the house up to European rental codes. "I'm sure that housing codes and protecting renters all sounded like good ideas. But they always find some way to twist them against you." Enjoy your weekend, Bill Bonner for The Daily Reckoning Australia Similar Posts: Where, Exactly, is this Economy Headed? There is No Real Economic Recovery Taking Place A Correction is Unavoidable Consumer Debt Repayment: The Sign of a Lengthy Correction? The World Economy is in the Worst Shape Since WWII

A Look At Global Economic Events In The Upcoming Week Posted: 29 Aug 2010 12:46 PM PDT Week in Review, from Thomas Stolper at Goldman Sachs US slowdown Attention continued to focus on the deceleration in US activity, with very weak US housing data, durable goods orders and the second reading for US GDP the key data points for the week. In the event, July existing home sales fell more than twice as fast as expected by consensus and the pace of growth in Q2 was revised down from 2.4% qoq annualized in the advanced release to 1.6% qoq in the second print. While this was slightly above consensus and our forecast, the pace of final demand growth was revised down from 1.3% qoq initially to 1.0% qoq in the latest release. Our US team sees implications for Q3 growth from this release as slightly negative, worth noting given our already substantially below consensus growth outlook for the US. Finally, durable goods orders also pointed to continued weak final demand.   Decoupling The flash reading for the August manufacturing PMI for the Euro zone fell to 55.0 from 56.7, a sharper deterioration than expected by consensus (56.1). However, the orders to inventories ratio remained broadly stable, underpinning our relatively constructive outlook for Euro zone GDP. Moreover, the August IFO continued to rise on strong current conditions and economies on the German periphery also show strong growth, as indicated by the August KOF for Switzerland, which remains very high despite coming off slightly the recent record levels.   Markets and policy The market spent much of the week looking for direction, with EUR/$ not sure which way to go, and $/JPY moving briefly below 85 on weak US housing data, but unable to hang on. Governor Bernanke’s speech at Jackson Hole, which acknowledged weak data but also stated that conditions for a recovery next year “remain in place,” finally gave the market direction, with 10y Treasury yields rising 15 bps on a perceived reduced likelihood of QE, while EUR/$ and $/JPY both moved higher as markets – reassured by the relatively benign view on growth – put risk back on.   Week Ahead   Additional BoJ easing? JPY strength continues to be in focus with the stepped up comments and rhetoric from Japanese officials the past few weeks. BOJ Governor Shirakawa is scheduled to meet with Prime Minister Kan on Monday the 30th. Our Japan economists are highlighting that it is possible (around 60% probability) that the BOJ may acquiesce to the government’s call for additional easing. This comes against the backdrop of a big week of macro data (especially in the US where we are below consensus for the key data of payrolls and ISM) and this may continue to weigh on $/JPY.   US payrolls We expect a reading of -125k, below consensus of -105k and a slightly smaller fall than -131k in July. We expect private payrolls to be flat, also below consensus which expects a rise of 46k, following a rise of 71k in July. The unemployment rate is expected to rise to 9.6% from 9.5% in July. We are in line with consensus on this.   FOMC minutes The minutes will shed light on the Fed’s August 10 deliberations around its “baby step” towards unconventional easing, by announcing the re-investment of the pay-down of mortgage-backed securities into Treasuries. A Wall Street Journal article by Jon Hilsenrath hinted at substantial disagreement around this decision on the FOMC, so these minutes will be important to watch for, especially to gage the FOMC’s views on QE2.   Decoupling Because the flash PMI’s for the Euro zone are already known, we will be focusing on China’s PMI and the ISM. Our economists expect China’s PMI to show a modest rebound due to seasonality and improving fundamental growth momentum. In the US, we expect the ISM to fall to 52.0, below consensus of 53.0 and a drop from 55.5 in July. The final August reading of our GLI will also be out on Wednesday—the advanced reading showed some tentative signs of stabilization from negative momentum and we’ll be looking for further confirmation in the final reading.     Monday 30th   Poland GDP (Q2) We expect GDP to grow 3.2% yoy in Q2, in line with consensus, up from 3.0% yoy in Q1.   Canada current account (Q2) Consensus expects the current account deficit to widen to –C$10.5 bn, relative to a deficit of –C$7.8 bn in Q1.   US personal income & spending (Jul) Our US economics team flagged that the slightly better than expected second print for US Q2 GDP has slightly negative implications for Q3 GDP, due to a possible inventory overshoot. However, they caution that much will depend on monthly data to be released, with personal income and spending data for July the first notable data releases. We expect personal income to grow 0.2% mom, below consensus which expects 0.3% mom, and relative to a flat reading in June. The same numbers also hold for personal spending.   Tuesday 31st   Australia GDP (Q2) Consensus expects the economy to grow 0.9% qoq, up from 0.5% qoq in Q1. We are looking for a stronger-than-consensus outturn of 1.2% qoq.   Korea IP (Jul) Consensus expects July IP to grow 0.5% mom, relative to a reading of 1.4% mom in June. We expect IP to remain strong on robust retail sales and exports.   India GDP (Q2) Consensus expects growth to pick up to 8,8% yoy, up from 8.6% yoy in Q1. This uptick in growth looks likely to be powered by robust manufacturing growth as evidenced in the latest IP data, while the service sector has also been recording strong growth.   Brazil IP (Jul) Consensus expects IP to rise 0.5% mom, after a -1.0% mom decline in June. This would be the first positive reading for IP since March. IP has recently been depressed because of the reinstatement of the IPI tax.   Canada GDP (Q2) On the back of weaker US data, consensus has recently been revised down quite sharply to 2.5% qoq annualized for Q2 GDP, down from very strong growth of 6.1% qoq in Q1. This puts consensus below the July Monetary Policy Report by the Bank of Canada, which forecast growth of 3.0% qoq annualized for Q2, with a similar pace of activity for the rest of the year and H1 2011.   FOMC minutes The minutes will shed light on the Fed’s August 10 deliberations around its “baby step” towards unconventional easing, by announcing the re-investment of the pay-down of mortgage-backed securities into Treasuries. A Wall Street Journal article by Jon Hilsenrath hinted at substantial disagreement around this decision on the FOMC, so these minutes will be important to watch for, especially to gage the FOMC’s views on QE2.   USCase Shiller house prices (Jun) Consensus expects a rise of 0.35% mom, following on from a rise of 0.47% mom in May.   Chicago PMI (Aug) We expect a reading of 58.0, relative to consensus which expects a reading of 57.0 and the July reading which was 62.3.   Wednesday 1st   GS Global Leading Indicator (final August) We continue to monitor closely the signs from our proprietary leading indicator of the global industrial cycle. The advance GLI reading showed some stabilization in momentum (back into marginally positive territory).   China PMI (Aug) Consensus expects the PMI to rise to 51.5 in August, up from 51.2 in July. Our economists similarly expect the PMI to show a modest rebound due to seasonality and improving fundamental growth momentum. Seasonality alone in August accounts for a rise relative to July of around 0.7%.   USISM (Aug) Consensus expects the manufacturing ISM to fall to 53.0 in August from 55.5 in July. We expect an even greater fall to 52.0.   Brazil central bank meeting We expect Copom to hike the Selic target another 50 bps to 11.25%, continuing the hiking cycle that began in April. In contrast, consensus expects Copom to go on hold, ending the hiking cycle for now at 200 bps.   Thursday 2nd   Malaysia central bank meeting Consensus expects the central bank to stay on hold at 2.75%, after hiking 75 bps so far this year. We expect another 25 bps hike for the remainder of the year.   Switzerland GDP (Q2) We are looking for sequential growth of 0.7% qoq, slightly below consensus of 0.8% qoq, and below 1.0% qoq in Q1. Our forecast for Q2 GDP is +0.7%qoq (after +1.0% in Q1). As usual, uncertainty with respect to this number is high given the lack of any monthly data from the industrial sector.   Sweden central bank meeting In line with consensus, we expect the Riksbank to hike the policy rate by 25 bps to 0.75%. Beyond this meeting, we remain more hawkish than the central bank in terms of the cumulative path of monetary policy tightening.   ECB central bank meeting Consensus expects the policy rate to remain on hold at 1%.   Initial claims (Aug 28) Consensus expects 478k, relative to 473k last week.   Friday 3rd   Indonesia central bank meeting We expect BI to stay on hold at 6.5%, in line with consensus. We expect 75 bps in hikes in Q4, and another 75 bps in hikes in 2011.   Brazil GDP (Q2) Consensus expects GDP to grow 0.7% qoq non annualized, a return to a more normal pace of growth after the blistering 2.7% qoq pace in Q1 and 2.3% qoq in Q4.   Nonfarm payrolls (Aug) We expect a reading of -125k, below consensus of -105k and a slightly smaller fall than -131k in July. We expect private payrolls to be flat, also below consensus which expects a rise of 46k, following a rise of 71k in July. The unemployment rate is expected to rise to 9.6% from 9.5% in July. We are in line with consensus on this.

Guest Post:Defeating Demon Deflation Posted: 29 Aug 2010 12:40 PM PDT Defeating Demon Deflation Submitted by Machinehead, of Chris Martenson.com Since early April, the yield on 10-year Treasury notes has dwindled from 4.0% to below 2.5% on August 24th.  Meanwhile, the 12-month change in the Cleveland Fed's median CPI has hovered feebly between 0.5% and 0.6% since March.  These abnormally low interest and inflation rates are fanning fears of renewed GDP contraction, a plunge into price deflation, or both.  Boardrooms and blogs are humming with rumors of a 'QE II' (Quantitative Easing II) program to counter a chilly deflationary dip. One reason fears are so acute is that the Federal Reserve's main policy tool, the overnight interest rate on Fed Funds, is flatlined at zero.  Moreover, via 'extraordinary measures' beginning in September 2008, the Federal Reserve added some $1.4 trillion of securities, including $1.1 trillion of MBS (mortgage-backed securities), to its balance sheet in a stimulus bid.  Yet despite these heroic efforts, economic leading indicators have turned weak this summer, as sinking Treasury yields add to the disquiet. In its August meeting, the Federal Reserve downgraded its economic outlook, and backed away from plans to let its enlarged securities holdings run off as MBS mature.  Instead, it committed to buying about $18 billion of Treasuries from mid-August through mid-September, mostly in the 2- to 10-year range, by reinvesting MBS principal payments.  It also set a $2.05 trillion floor for its securities holdings -- thus freezing 'QE I' in place (perhaps forever) and hinting that a larger 'QE II' could follow. But if QE I isn't working, what hope would QE II have of achieving its purpose in a fresh emergency?  This paper discusses a faster-acting alternative, which is feasible within the existing statutory and institutional structure -- namely, targeted purchases of international reserve assets instead of Treasury notes. Papers published by central bankers place great weight on managing expectations.  In Seven Faces of the Peril, James Bullard of the St. Louis Fed discusses how a zero percent Fed Funds rate could actually entrench deflationary expectations.  Now, as fractional interest rates infect the yield curve from the short end into multi-year maturities, expectations are growing more somber, while what may be a dangerous safe harbor Bubble in bond prices develops.  (Bond prices rise as their yields fall.) What if the intended stimulative effects of buying T-notes (cheaper borrowing, more bank reserves) are outweighed by deflationary expectations engendered by plunging yields?  In that case, QE II would be counterproductive.  As Bill Hester of Hussman Funds asserted in a paper titled The Paradox of the Zero Bound, 'In periods where the economy gets stuck in the “unintended” state, long rates become the primary signal for expectations of growth and inflation. Lower rates imply an expectation of deflation and economic weakness, and become associated with weaker stock prices.'  Ouch!  Ungood! Although the Fed's assets are mostly Treasuries, agencies, and MBS, it also holds international reserves -- meaning gold, SDRs, and foreign currencies (specifically, euros and Japanese yen).  As a student of the 1930s, Fed Chair Ben Bernanke is conversant with the competitive devaluations which marked that era.  The US sharply devalued the dollar against gold, from 0.0484 troy ounce in 1933 to 0.0286 troy ounce in late 1934.  Strikingly, the crushing 10% deflation which prevailed during 1929-1932 ended then, and didn't return.  And a brisk economic recovery unfolded from 1933 to 1937. Coincidence?  Perhaps not.  Devaluation is a recognized third way of easing financial conditions, in addition to the traditional policy tools of fiscal deficits and monetary base expansion.  When fiscal policy is tightening and monetary policy is immobilized at the zero bound, currency devaluation is the only tool left in the box to counter deflation. Let's examine the five largest trading partners of the US, as well as the US itself.  We're interested in their bilateral trade volume with the US, their international reserves, and how those reserves compare to the size of their economies: Traditionally, the adequacy of international reserves is evaluated in relation to import volumes, foreign debt obligations, and the like.  The US is a special case, since the US dollar still accounts for over 60% of international reserves globally.  Even allowing for its [revocable] privilege of trading in its own currency, US holdings of international reserves are a miniscule 0.9% of GDP -- one-fifth of Canada's ratio and one-fiftieth of China's.  In dollar amount, US reserves are only 22% higher than Mexico's.  Ay, benditos americanos! According to the New York Fed's most recent quarterly report, Treasury and Federal Reserve Foreign Exchange Operations, foreign currency in the Treasury's Exchange Stabilization Fund totaled $23.8 billion, in euros and J-yen.  Likewise, the Federal Reserve's holdings consisted of $23.8 billion of euros and J-yen, plus $1.2 billion in carrying value of swaps.  Other US international reserves include SDRs and gold held by the Fed. One quick and dirty survey of foreign exchange rates -- The Economist's Big Mac index -- indicates that the euro is overvalued; the J-yen and Canadian dollar are about neutrally valued, while the Mexican and Asian currencies (ex-Japan) are quite undervalued. Source: http://www.economist.com/node/16646178 (July 22, 2010) Since US forex holdings already consist of J-yen and euros, intervention should concentrate on seven other currencies -- those of the 'Asian five' of China, South Korea, Taiwan, Hong Kong, and Singapore; the US's two North American neighbors, Mexico and Canada -- plus gold. While most of these purchases would be straightforward, three issues would nonetheless arise.  First, China has capital controls.  Since China pegs its yuan to the dollar by buying dollars, US sales of dollars to buy yuan securities would run counter to China's intervention.  For its part, the US could point out that China holds 20 times the international reserves of the US. In any event, the US can indirectly pressure China by purchasing other Asian currencies.  Bloomberg reported that China has doubled its allocation to Korean Treasury Bills (KTBs) in 2010.  Why shouldn't the US do a little front-running of China in southeast Asia, to underscore its reasonable demand for access to Chinese securities? Second, US gold reserves have languished at a reported $11.041 billion for years.  This piddling sum is based on a 40-year-old historical value of $42.22 an ounce.  In order to account for new gold purchases, the Fed would be obliged to mark its gold to market, raising its carrying value to over $300 billion.  Though only an accounting change, the substantial numerical boost in the Fed's reported assets would send an expansionary signal while augmenting the Fed's equity. Finally, the lead agency for foreign exchange intervention is the US Treasury.  Practically speaking, bolstering international reserves would be a Treasury project, carried out operationally by the New York Fed.  Prior interventions, such as a loan to Mexico by the Treasury's ESF, have been accomplished without Congressional authorization.  So, apparently, can this one. Will it work?  Ten years have passed since the last US intervention to boost the euro.  A coordinated international purchase occurred after the euro fell below $0.85 in Sep. 2000.  Although the euro fell back to this level several more times through mid-2001, the threat of further purchases seems to have prevented it from sinking much below the perceived intervention threshold of 85 cents.  By July 2002, the euro reached par; it carried on rising to reach a peak of $1.60 in April 2008.  This result is encouraging. Unlike the US, none of the economies targeted for exchange intervention are on the verge of debt deflation.  If they choose, they can counter US intervention with their own dollar buying.  But such offsetting purchases would be expansionary unless sterilized.  In practice, sterilization is rarely fully achieved.  More likely, their central banks would choose to raise interest rates to counter the expansionary effect. And this is exactly the objective: to push up global inflation and short rates a notch or two -- first and foremost in the US -- to help the at-risk large economies (the US, Japan and euro area) extricate their policy rates from reposing at or near the daunting zero bound.  (For our purposes, a 'notch' means a percentage point.) Doubtless, the intervention targets will whinge and moan.  Owing to the dollar's still formidable status as the dominant reserve currency, the US doesn't need as large a stash of forex reserves as others do.  Nevertheless, with the US representing a quarter of global GDP, other countries have a vested interest in its economic well-being.  Ultimately (with a caveat concerning China), they will prefer a bit of exchange rate pain to the more inflexible alternative of hiked tariffs, which remain a political risk.  Cross-holdings of reserves may also confer strategic advantage, if they are viewed from a keiretsu or chaebol perspective as implying cooperation and linked destinies. According to Bloomberg's Alex Tanzi, international reserve assets (excluding gold) have risen a breathtaking 20.6% over 12 months, to a record $8.55 trillion. Nearly 30% of this total is held by China, and over 60% in Asia.  Unless sterilized (and they mostly aren't), these reserves expand foreign money supplies.  By contrast, US holdings of international reserves are frozen and stagnant.  To ward off demon deflation, the US needs to change its timid, catatonic profile in the reserves arena. Buying gold may prove to be even more effective than forex purchases.  Over the past 30 years, the correlation between the dollar and gold has been a strong minus 0.65, reported Jeff Opdyke in the WSJ, citing a study by Ibbotson Associates.  Writing up US gold to market value and announcing further acquisitions would exert a potent downward push on the dollar. A lower dollar will hike import prices, boost exports, and stimulate the US economy.  As a pertinent example, Germany's GDP received a sharp boost from the euro's depreciation in early 2010, rocketing to 9% annualized in the second quarter. Lesson:  Devaluation works.  When interest rates have reached the zero bound, the fisc is tapped out, and deflation fears are tainting the collective consciousness, devaluation may be the only lever that works. One can imagine a less profligate, less interventionist, less militarized US economy, which might not have fallen into this plight to begin with.  Whether the US should have a dirigiste mixed economy and central bank are outside the scope of this essay.  Taking an interventionist bent as a given among present-day policymakers, this paper merely offers a Realpolitik argument that they should intervene effectively, if they intervene at all. machinehead is a member of the ChrisMartenson.com community and a frequent and prolific comment poster to the site.  His views and opinions are his own.

The Death Of Cash? All Over The World Governments Are Banning Large Cash Transactions Posted: 29 Aug 2010 11:45 AM PDT Are we witnessing the slow but certain death of cash in this generation?  Is a truly cashless society on the horizon?  Legislation currently pending in the Mexican legislature would ban a vast array of large cash transactions, but the truth is that Mexico is far from alone in trying to restrict cash. All over the world, governments are either placing stringent reporting requirements on large cash transactions or they are banning them altogether. We are being told that such measures are needed to battle illegal drug traffic, to catch tax evaders and to fight the war on terror. But are we rapidly getting to the point where we will have no financial privacy left whatsoever? Should we just accept that we have entered a time when the government will watch, track and trace all financial transactions? Is it inevitable that at some point in the near future ALL transactions will go through the banking system in one form or another (check, credit card, debit card, etc.)? The truth is that we now live at a time when people who use large amounts of cash are looked upon with suspicion. In fact, authorities in many countries are taught that anyone involved in a large expenditure of cash is trying to hide something and is probably a criminal. And yes, a lot of criminals do use cash, but millions upon millions of normal, law-abiding citizens simply prefer to use cash as well.  Should we take the freedom to use cash away from the rest of us just because a small minority abuses it? Unfortunately, the freedom to use cash is being slowly stripped away from us in an increasingly large number of countries. In fact, as countries like Mexico "tighten the noose" around big-ticket cash purchases, our freedom to use cash is going to erode rather rapidly. The following is a summary of some of the very tight restrictions being placed on large cash transactions around the globe right now.... Mexico In Mexico, a bill before the legislature would completely ban the purchase of real estate in cash.  In addition, the new law would ban anyone from spending more than MXN 100,000 (about $7,700) in cash on vehicles, boats, airplanes and luxury goods. $7,700 is not a very high limit, and this legislation has some real teeth to it.  Anyone violating this law would face up to 15 years in prison. Greece In Europe, some of the "austerity packages" being introduced in various European nations include very severe restrictions on the use of cash. In Greece, all cash transactions above 1,500 euros are being banned starting next year.  The following is a comment by Greek Finance Minister George Papaconstantinou at a press conference discussing the new austerity measures as reported by Reuters.... "From 1. Jan. 2011, every transaction above 1,500 euros between natural persons and businesses, or between businesses, will not be considered legal if it is done in cash. Transactions will have to be done through debit or credit cards" Italy Even Italy has gotten into the act.  As part of Italy's new "austerity measures", all cash transactions over 5,000 euros will be banned.  It is said this is being done to crack down on tax evasion, but even if this is being done to take down the mafia this is still quite severe. The United States The U.S. government has not banned any large cash transactions, and hopefully it will not do so any time soon, but it sure has burdened large cash transactions with some heavy-duty reporting requirements. For example, your bank is required to file a currency transaction report with the government for every deposit, withdrawal or exchange over $10,000 in cash. Not only that, but if a bank "knows, suspects, or has reason to suspect" that a transaction involving at least $5,000 is "suspicious", then another report must be filled out.   This second type of report is known as a suspicious activity report, and it is also filed with the government. But the reporting does not stop there.  As Jeff Schnepper explained in an article for MSN Money, if you are in business and you receive over $10,000 in cash in a single transaction you must report it to the IRS or you will go to prison..... If you're in a business and receive more than $10,000 in cash from a single transaction, or from related transactions within a 12-month period, you have to file Form 8300 and report the buyer to the IRS. Don't file, and you go to jail. The IRS isnt kidding. I had a client who was a dealer in Corvette sports cars. He told me he didnt have time to file the forms. I told him several times to file. He thought he knew better. He went to jail. So did his children who were involved in the business. This is very, very serious. Just because someone forgets to file a certain form with the IRS, that person can go do serious jail time? Yes. According to Schnepper, quite a few Americans have already received very substantial sentences for this kind of thing.... In fiscal 2004, the Internal Revenue Service initiated 1,789 criminal investigations. There were 1,304 indictments and 687 convictions -- and an 89.1% incarceration rate. The average sentence: 63 months. In fiscal 2005, the IRS started 4,269 investigations, winning 2,406 indictments and 2,151 convictions and an 83% incarceration rate. Average sentence: 42 months. The reality is that governments around the world are getting very, very sensitive about large amounts of cash and they are not messing around. They don't want all of us running around with big piles of cash.  They want our money in the banks where they can track it, trace it and keep a close eye on it. On the one hand, it is a good thing to catch criminals and terrorists, but on the other hand how much privacy and freedom are we willing to lose just so that we can feel a little safer? And as cash becomes criminalized, are all of us going to be forced into the banking system whether we like it or not?  If we cannot pay for things in cash, what other choices are we going to have? The truth is that the more you think about this issue, the more disturbing it becomes.  So what do you think about all of this?  Feel free to leave a comment below.

Economic Volatility: What I Told the Governor Posted: 29 Aug 2010 11:35 AM PDT Dr. Bill Conerly submits: Governor Kulongoski met with his Council of Economic Advisers last week. Here's what I told him: The economy is becoming more volatile. The period 1983-2007 was the calmest ever in American history, in terms of macroeconomic fluctuations. This was also the period of time when today's leaders in business, government and non-profits learned how to be leaders. (I'll elaborate on my forecast of greater volatility in the coming decade in a future post.) State revenues are inherently hard to forecast. Fluctuations are driven by corporate profits, proprietors' profits, capital gains, and sales people's commissions, much more than by total employment of salaried employees. I advise business clients to tighten up the time lag between changes in underlying sales an the business reaction to increasing volatility. Companies should pay more attention to their sales pipelines, watch inventories carefully, etc. However, the Oregon legislature, like many other states, will begin debating in January 2011 a budget for the July 2011 - June 2013 period. That's a very long way into an uncertain future. Perhaps the state should budget based on the pessimistic forecast from the state economist, with some "if-funds-available" add-ons to be implemented over the course of the biennium. Complete Story »

Swiss Franc Tale Posted: 29 Aug 2010 11:18 AM PDT I will try to connect some dots on the Swiss Franc story. These are just dots, but there may be some short and longer-term currency implications. There is a EUR/DLR aspect to this as well. Consider first an interview with Philipp Hildebrand President of the Swiss National Bank in the French language magazine L’Hebdo. Mr. H spells out the SNB currency intervention strategy as clearly as he can: “Our mandate is very clear. It is one of the most explicit of all Central Banks: The SNB provides price stability. In so doing, it takes account of changing circumstances. The SNB has no foreign exchange objectives.” He leaves no room for misunderstanding of this simple mandate: “That is what we do not stop repeating. And that is the yardstick that our actions must be judged.” Okay we got it. The SNB will not intervene in the FX market UNLESS there is either inflationary or deflationary pressures. Hildebrand has been true to his word on this. On June 17 he said “The deflationary risk in Switzerland has largely disappeared.” This was a sign that the SNB would no longer intervene and sure enough the EUR/CHF collapsed. It was a wild ride but as of Friday the cross was at 1.31 after hitting a weekly low a tad under 1.30. True to their promise the SNB has been absent from the market. What does this mean for the future? Again from the interview: We in Switzerland have neither deflation or inflation. And the rate of growth should this year be one of the best in Europe. Approximately 2%. So H crows that Switzerland is doing just fine and there is no deflation. To me this is a tip. Hildebrand can’t enter the FX market anytime in the near term and sell CHF and buy Euros. This would run counter to his very clear words from August 26 that he would not. He would look stupid if he did. My read: don’t be long EUR/CHF. That cross may get leaned on any day. More dots. An interview with Pascal Couchepin in the influential newspaper, Neu Zuricher Zeitung (8/29). Mr. Couchepin is a long time Swiss pol. He was president in 2003 and 08. He led the bailout of UBS. He has no official position today, but it appears (to me) that he is looking for one. He has been a long time supporter of Switzerland integrating/joining the EU. The Swiss people have resisted joining the EU so far. There would be many advantages, but it would require that financial and political sovereignty would be lost. That is a Swiss no-no. From the interview: "The accession of Switzerland to the European Union is currently politically" unrealistic.” He explains further: "People are only willing to take a big step if there is a crisis." Here we have a guy who is committed to EU integration, who says it can’t happen unless there is a crisis. So the question to ask is; “What constitutes a crisis?” He tells us: Such a crisis could be related to the Swiss franc. Until now we have had success with the interventions of the National Bank. What happens if the franc against the euro climbs further and further? A possible scenario emerges from this. Assume that the CHF does resume appreciating. The comments from Hildebrand last week suggest that it will. FX markets rarely undershoot. Should we see a 5-7% appreciation of the CHF versus the Euro the Swiss export/tourism industry and (the all important) farmers will be screaming. Couchepin will have his crisis and some very powerful political forces in Switzerland will attempt to elevate the debate on whether Switzerland should join the EU. A debate like that would last a few years, but from the first day that this gets to the MSM the CHF is going to explode. The market will immediately recognize that if Switzerland would consider a link with the Euro the rate of initial conversion would be at a level much lower than we are looking at today. EUR/CHF at 1.10 comes to my mind. If the market agrees with this assessment we are off to the races. If you follow the logic of: “A strong CHF leads to joining the EU”, then you have to ask the question, “What is the politics at the SNB on this issue?” If the powers to be actually believe in the foregoing logic then they have every interest to see that the Franc gets stronger. An interesting conflict of interest. I don’t know what Hilldebrand is thinking. I do know that the number one issue that the Swiss are concerned with is losing their currency to the Euro. On that issue Hildebrand had this to say: L'Hebdo: Can Switzerland keep the franc in case of membership? Hildebrand: Some member countries have this type of arrangement. Nothing makes it impossible. But it is a question that should be put to Mr. Barroso (President of the EU) and Ms. Merkel (German Chancellor) ... This response blew my mind. Did Hildebrand suggest that the door might be a crack open if Merkel and Barroso would let Switzerland keep the Franc? The implication is that if the Swiss joined the EU they would keep the Franc as a local currency, but adopt the Euro for cross border trade and finance. Again, for this to be even considered as a compromise the EUR/CHF has to be much lower. In my opinion Merkel and Borroso would like nothing better than to have Switzerland join the EU. If the price to pay is that there is a bastard float of the currencies for a while that would be a small price to pay. There seems to be some energy developing for yet another big jolt in EUR/CHF. I doubt the article in the NZZ will be missed by too many on the Bahnhofstrasse. The NZZ headline leaves little to the imagination: Strong Swiss franc could force Switzerland to EU In a strong Franc versus Euro market environment the dollar has typically moved higher against the Euro. It is shaping up to be an exciting fall.

Jim's Mailbox Posted: 29 Aug 2010 10:37 AM PDT Jim, It's easy to see why pension funds are in so much trouble. What an ingenious way to cull the gene pool. Best regards, CIGA Black Swan Behind Fraud Charges, New Jersey's Deep Crisis By RICHARD PÉREZ-PEÑA New Jersey got in trouble with federal regulators this week for misrepresenting the health of its pension funds. But the bigger problem may be what the state was trying to hide: a long-brewing crisis in its ability to pay retirees. Experts say that governors and legislators, Republicans and Democrats, have all contributed to the problem by refusing to put state money into the funds as they should have. And even if benefits are cut and taxes raised, they said, there is no obvious fix in sight. "The whole political culture evolved where the purpose in Trenton was to spend and defer the problems until later," said James W. Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University. The state's most recent report said that as of June 2009, the pension funds should have had assets of $112 billion to meet their future obligations, but had only $66 billion — one of the largest shortfalls, known as unfunded liability, in the country. The situation is probably worse today: The state is supposed to contribute about $3 billion a year to the funds, but amid huge budget deficits and spending cuts, it is in the second consecutive year of contributing nothing. More…

Futures Charts - Aug 29 Posted: 29 Aug 2010 10:26 AM PDT   Indexes Currencies   Energy   Metals   Agricultural commodities   Bonds   New Zealand     Australia     Japan     Korea     Hong Kong     Dubai     Shenzen Stock Exchange     Shanghai     India

Bernanke Fed Drives Deflation With Zero Rate Policy Posted: 29 Aug 2010 09:36 AM PDT Last week in The Institutional Risk Analyst, my friend and former colleague from the Fed of New York, Richard Alford, opined on the Fed’s use of “quantitative easing” to help the U.S. economy.  In “Double Dip Economy: Does Quantitative Easing Really Matter?,” Alford asks whether the Fed is actually taking effective action to boost the economy.  He writes: “It is unclear why proponents of quantitative easing or ‘QE’ inside the Federal Open Market Committee (FOMC) are confident that it will be the answer to our current economic woes. Many of the arguments and models linking QE to improved performance of the real economy are unsatisfactory… More importantly, the only available empirical analyses available suggest that QE, when employed in Japan, had little if any effect at all on GDP, inflationary expectations, or measured inflation.” While many economists are worried about whether or not the Fed should increase quantitative easing, my concern has been and remains the toxic effect of the Fed’s intervention on what remains of the private financial markets.  Fed officials and members of the Obama Administration wring their hands over individuals and companies savings too much, but perhaps they should ask why.  It starts with zero interest rate policy. The liquidity and market risk being created in markets by the Fed’s zero rate policy such as structured notes and OTC interest rate swaps should be all the argument needed to convince the Federal Open Market Committee to make changes to current policy and raise interest rates.  Take an example.  The Fed is paying banks next to nothing to park $1 trillion in excess reserves deposited with the central bank.  The Fed should drive rates for bank reserves down into negative territory, essentially penalize banks for not lending or investing in private assets.  The Fed should also “suggest” very strongly that it is time for the large dealers to put some of these reserves to work in the market for mortgage backed securities and other private assets.  See the prescient comment by Alex Pollock of American Enterprise Institute from May 2009 in this regard. By imposing a negative interest rate on bank reserves of say 0.5%,  the Fed would be signaling to banks that the party is over.  Very quickly banks would take their cash elsewhere.  As Alford notes and other risk managers know, assets move for price.  But this is not to suggest that the Fed should be keeping interest rates low.  Quite the opposite. As a growing number of analytics understand, the Fed should begin to manage up the target yield rate on short-term U.S. Treasury debt.  This may sound like madness, but low rates are killing the U.S. economy and have created an interest rates trap for financial institutions and other fixed-income investors.  One of the things that most people do not understand about QE is that by purchasing massive amounts of government bonds and mortgage securities, and not hedging these exposures a la Fannie and Freddie, the Fed is removing equally massive amounts of duration from the fixed income markets.  From an investor perspective, duration measures how much the price of a bond changes given a change in market rates.  Duration is a measure of a bond's volatility, at least in normal markets.  From the perspective of a borrower or issuer of securities, however, think of duration as the time value of money measured in weight.  When the Fed buys securities through QE, it is removing duration from the markets, pushing down yields and volatility.  For a while this boosts the net interest margin (“NIM”) of leveraged investors such as banks, who are able to borrow at lower rates to fund current assets.  As assets re-price to the low rates maintained by the Fed, however, NIM begins to disappear.  Over the medium to longer term, think of duration and NIM as being linked, so obviously a sustained period of QE is bad for NIM.  This is why NIM in the U.S. banking sector is starting to fall.  Let’s recall Inside the yield book: the classic tome by Sidney Homer and Martin L. Leibowitz, which created the science of bond analysis: “The Macaulay Duration of any cash flow becomes large as interest rates fall.  One might be tempted to conclude from this observation that very low interest rate environments can be very treacherous.  When rates can only go up, and when the price sensitivity of any given cash flow is near its maximum, it’s a pretty toxic combination.” Homer and Leibowitz wrote at a time when markets were artificially stable.  Right now, the markets believe that equities are dangerous and bonds are safe, but the fact is that all financial assets have been rendered speculative by the Fed’s irresponsible pursuit of reflation via QE.  Volatility levels indicated by major market indices are greatly understated and do not reflect the true degree of price risk facing all bond investors.  In particular, banks which have used OTC derivatives and short-term debt to enhance NIM face major losses as and when QE ends and visible durations extend. Over the next year, banks, retirees and other interest rates sensitive investors are going to see their cash flow fall further as zero interest rate policy drains the NIM from the dollar financial system.  Not surprisingly, these same individuals and organizations are cutting expenditures to reflect falling cash flow on their investments.  Could this be part of reason behind the retail flight from equities widely reported in the media?  One of the smartest people I know, a retired Goldman partner, said this today in an email: “I think the bond  market is an error waiting to happen…The biggest buyer in the last 6 months has been the banks, but look at the price of JPM and BAC!!!! These guys think the Fed will stay at zero forever.  They just bought a 1.36% 3 year note…  Chris…if the price falls 1.36 points they lose all the coupon.  Everyone from Grant to Rosenberg all think the long bond is going to 2%..they are nuts.  Banks are losing commercial loans and credit card outstandings and replace it with TSY paper?????? Nuts.”   The Fed’s zero rate policy is feeding deflation by reducing the yield on all investment assets to below economic levels.  And the huge price risk embedded in under-priced fixed income securities represents the next bubble in financial assets.  This situation reveals and confirms yet again that there is no free lunch and also that they do not teach the real world rule of unintended consequences in economics class. “It is not the cost of borrowed money that is stopping firms from investing,” notes my friend Richard Field, who argues that falling interest income to millions of American retirees is taking points off of GDP.  “It is the lack of demand from the individuals who could previously afford to buy.  Talk about a foreseeable negative feedback loop.  The Fed apparently missed the real lesson of Japan.” By keeping interest rates at zero, the Fed is forcing individuals and corporations to save more.  If interest rates are zero, then savers must put away the terminal value of their required retirement nest egg, which is currently infinite.  If short-term interest rates were 2%, that would require savers and corporate treasurers to save much less since interest rate compounding would help.  Instead the big banks and mortgage giants such as Fannie and Freddie are milking the Fed’s zero rate policy as long as it lasts, while consumption and employment in the real economy literally implodes thanks to that very same Fed policy. The answer?  It is time for the Fed to declare the end of the crisis and raise interest rates. Chris

Presenting The Findings Of The Working Group On Extreme American Inequality Posted: 29 Aug 2010 09:26 AM PDT America has long had a working group on financial markets (whose sole purpose some suggest is to keep stocks from plunging in times of turbulence), so why not have a working group on that other much more critical phenomenon of US society: a trend of unprecedented unequal wealth distribution, which can be summarized as simply as pointing out that 1% of US society holds more wealth (or 33.8% of total), than 90% of the remaining portion of America (26.0%), and also is in possession of more than half of all stocks, bonds and mutual fund holdings in the US. Well, there is, even if is not formally recognized, and made up of the same distinguished professionals as the PPT (Geithner, Bernanke, Gensler and Schapiro). Hereby we present some of the key findings of the Working Group on Extreme Inequality. Percentage of U.S. total income in 1976 that went to the top 1% of American households: 8.9. Percentage in 2007: 23.5. Only other year since 1913 that the top 1 percent’s share was that high: 1928. Combined net worth of the Forbes 400 wealthiest Americans in 2007: $1.5 trillion. Combined net worth of the poorest 50% of American households: $1.6 trillion. U.S. minimum wage, per hour: $7.25. Hourly pay of Chesapeake Energy CEO Aubrey McClendon, for an 80-hour week: $27,034.74. Average hourly wage in 1972, adjusted for inflation: $20.06 In 2008: $18.52. A look at income data: Median household income in 2008 was $50,303, according to Census data. Half of American households had income greater than this figure, half had less. Between the end of World War II and the late 1970s, incomes in the United States were becoming more equal. In other words, incomes at the bottom were rising faster than those at the top. Since the late 1970s, this trend has reversed. For example, data from tax returns show that the top 1% of households received 8.9% of all pre-tax income in 1976. In 2007, the top 1% share had more than doubled to 23.5%. There is reason to suspect that this level of income inequality is dangerous to our economy. The only other year since 1913 that the wealthy claimed such a large share of national income was 1928, when the top 1% share was 23.9%. The following year, the stock market crashed, which led to the Great Depression. After peaking again in 2007, the U.S. stock market crashed in 2008, leading to what some are now calling the “Great Recession.” Between 1979 and 2008, the top 5% of American families saw their real incomes increase 73%, according to Census data. Over the same period, the lowest-income fifth saw a decrease in real income of 4.1%. In 1980, the average income of the top 5% of families was 10.9 times as large as the average income of the bottom 20 percent, according to Census data. In 2008, the ratio was 20.6 times. The current recession has hit incomes hard across the board. Median household income declined 3.6% in 2008, the largest single-year decline on record. Adjusting for inflation, incomes reached their lowest point since 1997. (Center on Budget and Policy Priorities analysis of Census data). Wealth Facts Wealth is equivalent to “net worth,” which is equal to your assets minus your liabilities. Examples of assets include checking and savings accounts, vehicles, a home that you own, mutual funds, stocks and bonds, real estate, and retirement accounts. Examples of liabilities include a car loan, credit card balance, student loan, personal loan, mortgage, and other bills you still need to pay. Median net worth in 2007, the latest year for which figures are available, was $120,300. Half of American households had net worth greater than this figure, half had less. Net worth is even more unequal than income in the United States. In 2007, the latest year for which figures are available from the Federal Reserve Board, the richest 1% of U.S. households owned 33.8% of the nation’s private wealth. That’s more than the combined wealth of the bottom 90 percent. The top 1% also own 50.9% of all stocks, bonds, and mutual fund assets. Retirement accounts like 401(k)s are more equally distributed. The top 1% owns only 14.5% of all retirement account assets, while the bottom 90% owns 40.5%. The total inflation-adjusted net worth of the Forbes 400 rose from $502 billion in 1995 to $1.6 trillion in 2007 before dropping back to $1.3 trillion in 2009. Net Worth is highly unequal when it comes to race. In 2004, the latest year for which Federal Reserve figures are available, the typical white household had a net worth about seven times as large as the typical African American or Hispanic household. Since the 1980s, Americans have spent more and more of their income on expenses, leaving less for savings. The U.S. Personal Savings Rate declined from 10.9 percent in 1982 to 1.4 percent in 2005 before rising to 2.7 percent by 2008. Facts on CEO Pay: From 2006 through 2008, the top five executives at the 20 banks that have accepted the most federal bailout dollars since the meltdown averaged $32 million each in personal compensation. One hundred average U.S. workers would have to work over 1,000 years to make as much as these 100 executives made in three years. (Institute for Policy Studies, Executive Excess 2009) Since January 1, 2008, the top 20 financial industry recipients of bailout aid have together laid off more than 160,000 employees. In 2008, the 20 CEOs at these firms each averaged $13.8 million, for a collective total of over a quarter-billion dollars in compensation. (Institute for Policy Studies, Executive Excess 2009) These Top 20 Financial Bailout CEOs averaged 85 times more pay than the regulators who direct the Securities and Exchange Commission and the Federal Deposit Insurance Corporation. These two agencies, many analysts agree, have largely lacked the experienced and committed staff they need to protect average Americans from financial industry recklessness. (Institute for Policy Studies, Executive Excess 2009) And lastly, wage facts: Between 1972 and 1993, the average hourly wage dropped from $20.06 to $16.82 in 2008 dollars. Since 1993, the average hourly wage has regained only a part of the ground lost, rising to $18.52. Adjusted for inflation, the average wage in 2008 was still lower than it was in 1979. So now that we know that the US middle class is making less than it did in 1970 in real terms, that the uber-rich control the majority of America's wealth, and control more net income that 90% of society, the rich are getting richer, the poor are getting poorer (and in general all of society is starting to read like a skewed non-Gaussian distribution curve comparable to something one would find in a Taleb novel), it is more than clear that the US middle class is now on the endangered species list. And while the slow by sure decline of that social buffer that has kept the civil peace within American society for so many years is a fact, it is no surprise that pundits like Jim O'Neill is suggesting to forget the historical driver of 70% of US GDP (and 30% of the world's), and focus on those up and coming societies whose middle class still has at least a fighting chance. Full working group presentation

You are subscribed to email updates from Gold World News Flash To stop receiving these emails, you may unsubscribe now.	Email delivery powered by Google
Google Inc., 20 West Kinzie, Chicago IL USA 60610