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- Jim?s Mailbox
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- Gold Approaching the Upper Channel Line
- “The Great Dollar Devaluation Disaster” is Only Just Beginning – and the Intended Victim is YOU!
- Gold & Silver Spike on Bernanke Speech as "Hot Money" Flows Force "Competitive Devaluation"
- Gold & Silver Spike on Bernanke Speech as "Hot Money" Flows Force "Competitive Devaluation"
- Encompass Fund Likes Teva, Gold Miners and Rare Earth Elements
- Gold: Strong Bullish Action
- Gold: Strong Bullish Action
- Fed, Fire When Ready
- Quantitative Easing, Inflation, Hyperinflation and Global Deflationary Depression: by Bob Chapman
- While the Getting is Good
- Plaza II
- A Great Short is Setting Up for the Euro
- [Audio & Text] Felix Zulauf: Any Correction In Gold Is A Buying Opportunity For The Next ...
- Why the U.S. has Launched a New Financial World War -- And How the the Rest of the World Will Fight Back
- A Look at the US Dollar Index
- John Williams Warns of Severe and Violent Sell-Off
- Robin Griffiths Says QE2 Could Sink Markets, Cautions on Gold
- End The FED. Get The Gold.: Gary North
- Can We Expect a Dollar Reversal Now?
- Weekly Recap, And Upcoming Calendar - Here Are The Main Events To Look For
- Hedge Funds Pass High-Water Mark
- The Last Resort Of A Dying Economic System: From "Beggar Thy Neighbor" To "Beggar Thyself"
| Posted: 17 Oct 2010 07:38 PM PDT View the original post at jsmineset.com... October 17, 2010 09:05 AM Growing Strain of Control in Silver CIGA Eric Commercial traders continue to cover their short positions into strength in silver and gold. The size and speed of the short covering is particularly acute in the silver market. This unusual activity relative to price, first discussed as a money flow footprint, suggests a subtle shift within highly controlled markets. Any shift should be monitored close as it can imply growing strain on control. Silver London P.M Fixed and the Commercial Traders COT Futures and Options Stochastic Weighted Average of Net Long As A % of Open Interest: Gold London P.M Fixed and the Commercial Traders COT Futures and Options Stochastic Weighted Average of Net Long As A % of Open Interest: More… Dear Jim, The following article attempts to explain how Bank of America is using "creative" accounting techniques to reduce its required reserves for failed residential...
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| Posted: 17 Oct 2010 07:38 PM PDT View the original post at jsmineset.com... October 17, 2010 02:03 PM Jim Sinclair's Commentary This is a Western World problem. Nothing has been done about the cause (OTC derivatives) so the downward spiral will continue. Confidence this time sunders in all currencies of the Western World due to continuing violence of price. The result you are already seeing is currency induced cost push inflation. It starts moderately such as in energy and copper. As Dean Harry and I have said, all of sudden it explodes. Hyperinflation is the extreme side of currency induced cost push inflation. ‘We’re at risk of financial collapse’: Ken Clarke’s warning for Western economies By JAMES CHAPMAN and JAMES SLACK Last updated at 4:01 PM on 15th October 2010 The West is in 'grave danger of financial collapse', Kenneth Clarke warned last night. We face 'quite the most dramatic' spending cuts in 'living memory', the former chancellor added as the Coalition prepares to ...
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| Gold Approaching the Upper Channel Line Posted: 17 Oct 2010 07:00 PM PDT
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| Posted: 17 Oct 2010 06:57 PM PDT The handwriting is on the wall: This great dollar disaster is only just beginning. Obama and Bernanke have no choice. Either they dramatically devalue the dollar over the next three years, or they go down in history as the first administration to default — to welch on the government's debt obligations. Words: 2120
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| Posted: 17 Oct 2010 06:47 PM PDT
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| Gold & Silver Spike on Bernanke Speech as "Hot Money" Flows Force "Competitive Devaluation" Posted: 17 Oct 2010 06:47 PM PDT
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| Encompass Fund Likes Teva, Gold Miners and Rare Earth Elements Posted: 17 Oct 2010 06:38 PM PDT Benjamin Shepherd submits: Although you should be leery of stock tips overheard at a cocktail party, there’s value to information gathered from a long-standing network of research analysts and industry contacts. Marshall Berol and Malcolm Gissen, co-managers of Encompass (ENCPX), aren’t afraid to apply a little elbow grease to the tips they glean from industry experts. The duo thoroughly vets these recommendations and will continue to add to positions, provided their investment theses remain intact. This strategy propelled Encompass to the top of Morningstar’s World Stock category in 2009. Berol and Gissen spoke with us about their market outlook and favorite sectors.
Complete Story »
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| Posted: 17 Oct 2010 06:12 PM PDT Peter Schiff submits: By Mary Anne & Pamela Aden Gold's strength is unusual. Just when we thought that gold was taking a breather from its stellar rise, it quickly turned up. Complete Story »
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| Posted: 17 Oct 2010 06:12 PM PDT Peter Schiff submits: By Mary Anne & Pamela Aden Gold's strength is unusual. Just when we thought that gold was taking a breather from its stellar rise, it quickly turned up. Complete Story »
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| Posted: 17 Oct 2010 05:51 PM PDT We now have had a weaker Employment number than was expected, and a softer CPI figure than was expected. Bernanke is sounding increasingly strident about the need to flush even more money into the system (the operative word here may be “flush”). The only mystery left about QE2 is how big it will be, and whether the Fed will also eliminate the payment of interest on excess reserves (IOER), without which the quantitative easing is likely to be fairly ineffectual in the near-term. There is some small suspense about timing, but it would be hard to come up with a good reason to delay past November if, in fact, the Fed feels that QE is necessary at all. With many of the Fed speakers having held forth recently, only two seem to have serious reservations about the plan (Fisher and Hoenig). Those guys aren’t going to come around any time soon (Hoenig because he is entrenched; Fisher because he is strongly influenced by the gold price), so the Committee is unlikely to develop a stronger consensus a month later. So why wait? The CPI figure was surprising, and presumably doubly so to those investors who had been buying TIPS with reckless abandon over the last week. The inflation markets set back hard, although the weakness retraced only a very small part of the recent outperformance. That market still looks very strong, as well as currently expensive with real yields negative to 2017 and only 0.45% at the 10-year point. Complete Story »
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| Quantitative Easing, Inflation, Hyperinflation and Global Deflationary Depression: by Bob Chapman Posted: 17 Oct 2010 04:04 PM PDT Wages and salaries and asset prices have been falling with inflation rising, as we have endured a credit crisis for the past three years. The dollar is close to its lowest levels and gold is flirting with $1,360 an ounce. That is a disastrous situation for Americans, except the 2% to 3%, who have had sense enough to invest in gold and silver bullion, coins and shares. That excludes the ETFs, GLD and SLV, which we believe are a disaster waiting to happen.
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| Posted: 17 Oct 2010 03:57 PM PDT That Ben Bernanke. What a tease. His Friday remarks gave investors just enough hope that the Federal Reserve will soon pull the trigger on massive purchases of U.S. bonds (otherwise known as quantitative easing). Investors, speculators, doormen, taxi drivers, and the dog across the alley have all been buying stocks, bonds, and commodities ahead of this planned "queasing." But Ben was just coy enough to keep us guessing until the Fed's November 2nd meeting. In a speech Friday he said, "Given the committee's objectives, there would appear - all else being equal - to be a case for further action." Exactly what the real objectives of the Federal Reserve are - price stability and full employment or engineering a giant wealth transfer from the Middle Class to Wall Street - is another matter. However it's not hard to characterise the market's reaction to Friday's cryptic speech. It was a resounding, "Meh!" Stocks were down. Gold sold off a bit. If anything, Bernanke's boring and pedantic speech put everyone to sleep, which is another way of calming things down, if you think about it. Calm is good. Complacent is not. Keep this in mind: since the "robo signing" mortgage foreclosure scandal began to gather steam last week, shares in Bank of America (NYSE:BAC) have fallen almost 10%. The more people understand this story, the scarier it gets. Lest we be accused of fear mongering, though, let's just put it out where what's at stake here: the rule of law in the American housing market. That's all. Nothing too important. Or is it? Our view is that there are three parts to this crisis, the legal, the political, and the sociological. The legal side part revolves around the trail of documents that establish ownership of mortgage. If the banks securitised and sold mortgages they can't prove they owned, the investors in those securities will put them back to the banks and the banks will have to pay. More capital will be needed. A lot. Expect class action lawsuits by investors who claim the banks made false representations. The political aspect - being all about a bunch of elected cowards - is easy. The politicians will not reverse engineer a legislative solution that allows banks to more easily foreclose on millions of homeowners when the banks are clearly guilty of at least some level of fraud in the documentation process. No elected official worth his own vanity is going to cast a vote to save the banks' bacon again. Even a deadbeat Congress returning to Washington after the November elections but before the new Congress is sworn in is unlikely to take up the cause of the banks. If anything, a still-Democratic lame-duck Congress may push for the to-big-to-fail firms to be nationalised in GM-style. That brings us to the sociological. A growing number of American homeowners - those in good standing on their mortgage and those underwater - will begin considering sticking it to the bank (strategic default) as a legitimate non-compliance strategy. The lawyers and the community organisers will be keen to surf this rising tide of popular rebellion. Imagine millions of Americans - en masse - simply refusing to pay their mortgages or leave their foreclosed homes. What do you think happens in a market where title can't be transferred? Where prices don't communicate any information because buyers and sellers don't trust anyone? That's not a market. That's chaos; chaos which threatens all the securities whose value is derived from mortgages. Neither the financial press nor Wall Street seem are looking at this issue with much imagination. They see it mainly as a matter of establishing the paper trail. But for millions of homeowners, this is emotional confirmation of what they've suspected all along: somehow they got screwed. The drive to right this perceived wrong by stiffing the banks is going to be very strong and politically irresistible. We'll see how it plays out. The worst case scenario is quite plain: this is the undoing of one or two major banks in America. They never cleaned up their mortgage act. They are not adequately capitalised. They will be nationalised. And the whole affair feels very Lehman-like. Whether it has the same consequences for the global financial system is yet to be seen. On the "uh oh" side of the ledger are soaring commodity prices and rising stocks. Markets are at the same heady highs as they were pre-Lehman. On the "not so fast" side of the ledger is the fact that this would appear to be largely a problem with the collateral/capital structure of the American banking system. Australia, like the rest of the world, must be hoping that it can decouple from the American housing train wreck. Capital flows already indicate a strong desire by investors to exit the dining car, find a platform, jump from the train, wave to Chief Engineer Ben Bernanke, and get well clear of the tracks. Meanwhile, all the rest of the central bankers, central planners, bureaucrats, free loaders, and zombies on the train are shouting, "Stop the train!" Too late people. This train left the station in 1971. It ain't coming back. But where is it going? Probably the total destruction of the U.S. dollar. This sounds radical. But it is usually the fate of fiat currencies. And this is the trouble with the current global financial system. The U.S. dollar is the world's reserve currency. The drivers of the dollar are taking it down on purpose. Like an air show tricks team where each pilot follows a fixed spot on the plane ahead of him, the rest of the world's central bankers are driving their money into the ground too. If there is any decoupling ahead, it may come in the equity markets between developed debtor country markers and emerging creditor country markets. If stocks beat inflation - and that' a big if - the better bet may be emerging market equities over the S&P 500. Keep in mind that at the micro level, independent of inflationary monetary policy, each commodity market has its own supply/demand dynamic. That dynamic contributes to the general outlook for that commodity. The outlook is, at least to some extent, independent of the monetary realm. One example is the current rare earths mania. We began covering the story a few years ago, when it sounded mostly like crackpot/cranky fear mongering about obscure modern metals in your television and iPod. Now, investors/speculators can't get enough of the story. One share we'd never even heard of went up by 105% in the first five minutes of trading last Thursday because it said it had discovered rare earths mineralisation in the Northern Territory. No details on the characteristics of the deposit or even any plans for production. Meanwhile, the one Aussie company that is actually already mining rare earths ore - and which Kris Sayce told you about in late July - is up 133% since then. The point? You can make money in this market. But you'll have to do it as a speculator. And you'll have to be early on the best stories to make the most money. Dan Denning
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| Posted: 17 Oct 2010 03:38 PM PDT Keynes was right about one thing... Peace talks broke down last weekend. Observers had expected the IMF meeting on the weekend to result in the equivalent of the Peace of Amiens or the Surrender at Appomattox. But Treasury secretaries and central bankers went home, unpacked their bags, and resumed their premeditated mischief. The dollar went down. Why would anyone pay 100 cents for an old, worn out greenback when the Fed promises to create trillions more of them, brand spanking new? Europe and Japan resumed firing with their new QE guns. Asian nations sent out snipers to intervene in the currency markets directly. And China and the US resorted to "trench warfare," reported The Financial Times, neither apparently ready to give up an inch; that is, neither was prepared to allow its currency to buy more today than it did yesterday. In America, China has become an election- year bogeyman. The electorate seems convinced that any nation that stockpiles $2 trillion worth of America's I.O.U. greenbacks must be up to no good. So, the war goes on. But it is an ersatz war. All the combatants really want the same thing - to debauch their currencies at the expense of savers and creditors. Sooner or later, they'll conspire to get the job done. A full 93% of US financial professionals believe the Federal Reserve Bank is on the case. It is expected to launch major debauch in November. Investors have run up almost all asset classes in anticipation. The Dow passed 11,000 on Friday. Soft and hard commodities hit new highs. And if, on a given day, gold does not set a new record, it is probably because the markets are closed. What a remarkable period in financial history! We can hardly believe our luck. Absurd things are happening. John Maynard Keynes was wrong about practically everything. But he was right about this: And we get to see it live. And probably dead. The US dollar fell under the control of the debauchers, partially, in 1913...when America's central bank was formed...then fully, in 1971, when gold backing for the dollar was completely eliminated. In the 100 years before the Fed was formed, the dollar lost not a penny of its value. In the almost 100 years since, it has lost almost all of them. If the greenback were to lose another 5% of its 1914 value, there would be nothing left at all. Such slow larceny bothered no one. As long as the dollar slid gradually, and peacefully towards worthlessness it seemed almost natural, even healthy. Central bankers could mix with polite company and hold their heads up. None was arrested, as far as we know. None was so tormented by his crime that he had to be restrained or sedated. But now central banks are committing their felonies in broad daylight. Economists argue for more. But investors are confused and worried. Today, they buy gold. Tomorrow they may buy shotguns. But what else can the managers do? After increasing for 61 years, the volume of credit in the US - and hence, the volume of sales - is no longer expanding. This leaves householders with debt to pay down and exporters with no alternative but to fight for market share. What to do about it? Lower the value of the currency! But in a correction, the natural thing is for prices to go down with a decline in demand. So, money tends to become more upright just when the managers would most like to see it slouch. The poor central bankers. They are victims of their own delusions of competence. They have never actually managed anything successfully. When the economy is expanding, they exacerbate the boom. When it is contracting, they slow down the correction. And now, they fight a currency war not of their own choosing, but of their own making. The war is their response to the correction, which results from the bubble, which was caused largely by the managers themselves. And now they're looking for a hotel where they can do it again. It was at the Plaza Hotel in New York in 1985 that they managed their Treaty of Versailles. It ended the currency war of the early '80s...and prepared the way for an even bigger war later on. Back then, Japan was the go-go economy. Like China today, Japan was the world's leading exporter. It wanted to keep the yen low. The US meanwhile, was losing market share. James Baker and the other US managers threatened sanctions. Japan gave in. By early the following year, the yen was 40% higher against the dollar and Japan's GDP growth rate had been cut in half. But the managers fixed that problem as they fix them all. In Japan, they cut rates 4 times in 1986, creating a flood of hot money. Four years later, Japan was the envy of the entire world. In January of 1990, the Nikkei Dow hit a new record - 4 times higher than it was when the Plaza Accords were signed. Then, the bubble popped. You don't need to be reminded of what happened next. The Nikkei crashed. Real estate crashed. Everything crashed. The economy went into a 20-year tailspin, failing to create a single new job in two decades. Neither stocks, nor real estate, nor the economy ever recovered. No one wants to follow the Japanese down that road. Ben Bernanke manages the dollar, desperately trying to avoid it. And Premier Wen of China said it would be "a disaster for the world" if Western nations tried to force China in that direction. He's right. But he needn't worry about it. Disaster is coming anyway. The managers will make sure of it. Regards, Bill Bonner,
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| A Great Short is Setting Up for the Euro Posted: 17 Oct 2010 03:19 PM PDT
My guest on Hedge Fund Radio this week is Marc Chandler, the global head of currency strategy at the esteemed Wall Street firm, Brown Brothers Harriman. Marc says that the next big focus in the foreign exchange markets will be a strengthening US economy and another slow down in Europe. After one last gasp, that could take the euro as high as $1.45, and a great shorting opportunity will set up that could take it as low as $1.10-$1.15 next year. We won’t see parity until the Fed announces a convincing exit strategy from its monetary easing, which is some time off. Strong US growth in Q4, 2009 and Q1, 2010 combined with a major European identity and debt crises in the spring prompted many to predict the end of the Euro prematurely, the spot trading all the way down to $1.17 and change. But then a combination of innovation and institutional reform and a bout of weakness in the US saved the day, taking the European currency back up to $1.40. But its troubles are far from over. The US elections will remove much uncertainty from the dollar just when American growth is reasserting itself, opening the way for another down leg in the euro. A double dip recession, quantitative easing, and better news in Europe are now fully priced in. Quantitative easing is virtually a sure thing, thanks to a weak US economy. Banks are earning a risk free 25 basis points lending their money back to the government, so money is not making its way it to the main economy. Corporations are cash rich and don’t need to borrow, while small businesses don’t fit into a de risking, deleveraging world. A lot of the good news is already known for the Australian dollar, including the interest rate differential, the health of the banking system, the commodities boom, and exploding trade with China. The market is running a large long position, and the next piece of positive news, like another interest rate rise in November by the Reserve Bank of Australia, could trigger a bout of profit taking. The currency war is a myth, a media concoction, and is just rhetoric to get China to revalue its currency sooner. We are not seeing the downward spiral that brought drastic measures, like the Smoot-Hawly Tariff Act of 1930, which enforced severe restrictions on international trade during the great depression. Still, the currency markets are an arena where nations slug it out to pursue their own interests. Marc thinks that if China really allowed a free float, appreciation is no sure thing, and in fact the Yuan might sink. Global investors are cashing in on this conflict by buying emerging market equities and ETF’s as a proxy for their currencies, such as in South Korea (EWY), Singapore (EWS), Indonesia (IDX), and Thailand (TF), which are often hard to buy outright. Local central banks have tried to lean against flows, so far, with no effect, some of which are now being driven more by fads than by serious fundamental research. This is planting the seeds for the next crisis. Marc reveals his most valuable forex trading rules, including keeping tabs on interest rate differentials, monitoring global capital flows, and careful technical analysis, looking for the driver, the direction and the degree on the next move. The people who reliably make money over time are the more disciplined risk managers. You have to draw the line between a good risk/reward ratio and simple greed. Marc has an undergrad degree from the University of Northern Illinois in history and a master’s from the University of Pittsburgh in international political economy. He has worked as the currency strategist at HSBC Bank and Mellon Bank, moving up to his current post at Brown Brothers in 2005. Last year, Marc published a book entitled Making Sense of the Dollar: Exposing Dangerous Myths About Trade and Foreign Exchange. In his free time, he teaches classes at New York University. To listen to my interview in full with Marc Chandler on Hedge Fund Radio, please click here at http://www.madhedgefundtrader.com/october-12-2010-marc-chandler.html and hit the “PLAY” arrow. If you want to learn more about Marc’s FX research product, you can e-mail him directly at marc.c.chandler@gmail.com . To buy Marc’s insights on the basics of trading the foreign exchange market, please click here at http://www.amazon.com/Making-Sense-Dollar-Dangerous-Bloomberg/dp/1576603210/ref=sr_1_1?ie=UTF8&qid=1286822013&sr=8-1 ). 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.
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| [Audio & Text] Felix Zulauf: Any Correction In Gold Is A Buying Opportunity For The Next ... Posted: 17 Oct 2010 02:57 PM PDT Zulauf is still bullish on gold: "The secular case is as solid as it has been for the last few years and that will continue. The only question is whether we will have some interim corrections or not, and corrections are here not to sell but to buy gold."
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| Posted: 17 Oct 2010 02:53 PM PDT By MICHAEL HUDSON "Coming events cast their shadows forward." – Goethe What is to stop U.S. banks and their customers from creating $1 trillion, $10 trillion or even $50 trillion on their computer keyboards to buy up all the bonds and stocks in the world, along with all the land and other assets for sale in the hope of making capital gains and pocketing the arbitrage spreads by debt leveraging at less than 1 per cent interest cost? This is the game that is being played today. Finance is the new form of warfare – without the expense of a military overhead and an occupation against unwilling hosts. It is a competition in credit creation to buy foreign resources, real estate, public and privatized infrastructure, bonds and corporate stock ownership. Who needs an army when you can obtain the usual objective (monetary wealth and asset appropriation) simply by financial means? All that is required is for central banks to accept dollar credit of depreciating international value in payment for local assets. Victory promises to go to whatever economy's banking system can create the most credit, using an army of computer keyboards to appropriate the world's resources. The key is to persuade foreign central banks to accept this electronic credit. U.S. officials demonize foreign countries as aggressive "currency manipulators" keeping their currencies weak. But they simply are trying to protect their currencies from being pushed up against the dollar by arbitrageurs and speculators flooding their financial markets with dollars. Foreign central banks find them obliged to choose between passively letting dollar inflows push up their exchange rates – thereby pricing their exports out of global markets – or recycling these dollar inflows into U.S. Treasury bills yielding only 1% and whose exchange value is declining. (Longer-term bonds risk a domestic dollar-price decline if U.S interest rates should rise.) "Quantitative easing" is a euphemism for flooding economies with credit, that is, debt on the other side of the balance sheet. The Fed is pumping liquidity and reserves into the domestic financial system to reduce interest rates, ostensibly to enable banks to "earn their way" out of negative equity resulting from the bad loans made during the real estate bubble. But why would banks lend more under conditions where a third of U.S. homes already are in negative equity and the economy is shrinking as a result of debt deflation? The problem is that U.S. quantitative easing is driving the dollar downward and other currencies up, much to the applause of currency speculators enjoying a quick and easy free lunch. Yet it is to defend this system that U.S. diplomats are threatening to plunge the world economy into financial anarchy if other countries do not agree to a replay of the 1985 Plaza Accord "as a possible framework for engineering an orderly decline in the dollar and avoiding potentially destabilizing trade fights." The run-up to this weekend's IMF meetings saw the United States threaten to derail the international financial system, bringing monetary chaos if it does not get its way. This threat has succeeded for the past few generations. The world is seeing a competition in credit creation to buy foreign resources, real estate, public and privatized infrastructure, bonds and corporate stock ownership. This financial grab is occurring without an army to seize the land or take over the government. Finance is the new form of warfare – without the expense of a military overhead and an occupation against unwilling hosts. Indeed, this "currency war" so far has been voluntary among individual buyers and the sellers who receive surplus dollars for their assets. It is foreign economies that lose, as their central banks recycle this tidal wave of dollar "keyboard credit" back into low-yielding U.S. Treasury securities of declining international value. For thousands of years tribute was extracted by conquering land and looting silver and gold, as in the sacking of Constantinople in 1204, or Incan Peru and Aztec Mexico three centuries later. But who needs a military war when the same objective can be won financially? Today's preferred mode of warfare is financial. Victory in today's monetary warfare promises to go to whatever economy's banking system can create the most credit. Computer keyboards are today's army appropriating the world's resources. The key to victory is to persuade foreign central banks to accept this electronic credit, bringing pressure to bear via the International Monetary Fund, meeting this last weekend. The aim is nothing as blatant as extracting overt tribute by military occupation. Who needs an army when you can obtain the usual objective (monetary wealth and asset appropriation) simply by financial means? All that is required is for central banks to accept dollar credit of depreciating international value in payment for local assets. But the world has seen the Plaza Accord derail Japan's economy by obliging its currency to appreciate while lowering interest rates by flooding its economy with enough credit to inflate a real estate bubble. The alternative to a new currency war "getting completely out of control," the bank lobbyist suggested, is "to try and reach some broad understandings about where currencies should move." However, IMF managing director Dominique Strauss-Kahn, was more realistic. "I'm not sure the mood is to have a new Plaza or Louvre accord," he said at a press briefing. "We are in a different time today." On the eve of the Washington IMF meetings he added: "The idea that there is an absolute need in a globalised world to work together may lose some steam." (Alan Beattie Chris Giles and Michiyo Nakamoto, "Currency war fears dominate IMF talks," Financial Times, October 9, 2010, and Alex Frangos, "Easy Money Churns Emerging Markets," Wall Street Journal, October 8, 2010.) Quite the contrary, he added: "We can understand that some element of capital controls [need to] be put in place." The great question in global finance today is thus how long other nations will continue to succumb as the cumulative costs rise into the financial stratosphere? The world is being forced to choose between financial anarchy and subordination to a new U.S. economic nationalism. This is what is prompting nations to create an alternative financial system altogether. The global financial system already has seen one long and unsuccessful experiment in quantitative easing in Japan's carry trade that sprouted in the wake of Japan's financial bubble bursting after 1990. Bank of Japan liquidity enabled the banks to lend yen credit to arbitrageurs at a low interest rate to buy higher-yielding securities. Iceland, for example, was paying 15 per cent. So Japanese yen were converted into foreign currencies, pushing down its exchange rate. It was Japan that refined the "carry trade" in its present-day form. After its financial and property bubble burst in 1990, the Bank of Japan sought to enable its banks to "earn their way out of negative equity" by supplying them with low-interest credit for them to lend out. Japan's recession left little demand at home, so its banks developed the carry trade: lending at a low interest rate to arbitrageurs at home and abroad, to lend to countries offering the highest returns. Yen were borrowed to convert into dollars, euros, Icelandic kroner and Chinese renminbi to buy government bonds, private-sector bonds, stocks, currency options and other financial intermediation. This "carry trade" was capped by foreign arbitrage in bonds of countries such as Iceland, paying 15 per cent. Not much of this funding was used to finance new capital formation. It was purely financial in character – extractive, not productive. By 2006 the United States and Europe were experiencing a Japan-style financial and real estate bubble. After it burst in 2008, they did what Japan's banks did after 1990. Seeking to help U.S. banks work their way out of negative equity, the Federal Reserve flooded the economy with credit. The aim was to provide banks with more liquidity, in the hope that they would lend more to domestic borrowers. The economy would "borrow its way out of debt," re-inflating asset prices real estate, stocks and bonds so as to deter home foreclosures and the ensuing wipeout of the collateral on bank balance sheets. This is occurring today as U.S. liquidity spills over to foreign economies, increasing their exchange rates. Joseph Stiglitz recently explained that instead of helping the global recovery, the "flood of liquidity" from the Federal Reserve and the European Central Bank is causing "chaos" in foreign exchange markets. "The irony is that the Fed is creating all this liquidity with the hope that it will revive the American economy. ... It's doing nothing for the American economy, but it's causing chaos over the rest of the world." (Walter Brandimarte, "Fed, ECB throwing world into chaos: Stiglitz," Reuters, Oct. 5, 2010, reporting on a talk by Prof. Stiglitz at Colombia University. ) Dirk Bezemer and Geoffrey Gardiner, in their paper "Quantitative Easing is Pushing on a String" , prepared for the Boeckler Conference, Berlin, October 29-30, 2010, make clear that "QE provides bank customers, not banks, with loanable funds. Central Banks can supply commercial banks with liquidity that facilitates interbank payments and payments by customers and banks to the government, but what banks lend is their own debt, not that of the central bank. Whether the funds are lent for useful purposes will depend, not on the adequacy of the supply of fund, but on whether the environment is encouraging to real investment." Quantitative easing subsidizes U.S. capital flight, pushing up non-dollar currency exchange rates Federal Reserve Chairman Ben Bernanke's quantitative easing may not have set out to disrupt the global trade and financial system or start a round of currency speculation that is forcing other countries to defend their economies by rejecting the dollar as a pariah currency. But that is the result of the Fed's decision in 2008 to keep unpayably high debts from defaulting by re-inflating U.S. real estate and financial markets. The aim is to pull home ownership out of negative equity, rescuing the banking system's balance sheets and thus saving the government from having to indulge in a Tarp II, which looks politically impossible given the mood of most Americans. The announced objective is not materializing. The Fed's new credit creation is not increasing bank loans to real estate, consumers or businesses. Banks are not lending – at home, that is. They are collecting on past loans. This is why the U.S. savings rate is jumping. The "saving" that is reported (up from zero to 3 per cent of GDP) is taking the form of paying down debt, not building up liquid funds on which to draw. Just as hoarding diverts revenue away from being spent on goods and services, so debt repayment shrinks spendable income. So Bernanke created $2 trillion in new Federal Reserve credit. And now (October 2010) the Fed is proposing to increase the Fed's money creation by another $1 trillion over the coming year. This is what has led gold prices to surge and investors to move out of weakening "paper currencies" since early September – and prompted other nations to protect their own economies accordingly. It is hardly surprising that banks are not lending to an economy being shrunk by debt deflation. The entire quantitative easing has been sent abroad, mainly to the BRIC countries: Brazil, Russia, India and China. "Recent research at the International Monetary Fund has shown conclusively that G4 monetary easing has in the past transferred itself almost completely to the emerging economies … since 1995, the stance of monetary policy in Asia has been almost entirely determined by the monetary stance of the G4 – the US, eurozone, Japan and China – led by the Fed." According to the IMF, "equity prices in Asia and Latin America generally rise when excess liquidity is transferred from the G4 to the emerging economies." Borrowing unprecedented amounts from U.S., Japanese and British banks to buy bonds, stocks and currencies in the BRIC and Third World countries is a self-feeding expansion. Speculative inflows into these countries are pushing up their currencies as well as their asset prices, but. Their central banks settle these transactions in dollars, whose value falls as measured in their own local currencies. U.S. officials say that this is all part of the free market. "It is not good for the world for the burden of solving this broader problem … to rest on the shoulders of the United States," insisted Treasury Secretary Tim Geithner on Wednesday. So other countries are solving the problem on their own. Japan is trying to hold down its exchange rate by selling yen and buying U.S. Treasury bonds in the face of its carry trade being unwound as arbitrageurs are paying back the yen that they earlier borrowed to buy higher-yielding but increasingly risky sovereign debt from countries such as Greece. Paying back these arbitrage loans has pushed up the yen's exchange rate by 12 per cent against the dollar so far during 2010. On Tuesday, October 5, Bank of Japan governor Masaaki Shirakawa announced that Japan had "no choice" but to "spend 5 trillion yen ($60 billion) to buy government bonds, corporate IOUs, real-estate investment trust funds and exchange-traded funds – the latter two a departure from past practice." This "sterilization" of unwanted financial speculation is precisely what the United States has criticized China for doing. China has tried more "normal" ways to recycle its trade surplus, by seeking out U.S. companies to buy. But Congress would not let CNOOC buy into U.S. oil refinery capacity a few years ago, and the Canadian government is now being urged to block China's attempt to purchase its potash resources. This leaves little option for China and other countries but to hold their currencies stable by purchasing U.S. and European government bonds. This has become the problem for all countries today. As presently structured, the international financial system rewards speculation and makes it difficult for central banks to maintain stability without forced loans to the U.S. Government that has long enjoyed a near monopoly in providing central bank reserves. As noted earlier, arbitrageurs obtain a twofold gain: the arbitrage margin between Brazil's nearly 12 per cent yield on its long-term government bonds and the cost of U.S. credit (1 per cent), plus the foreign-exchange gain resulting from the fact that the outflow from dollars into reals has pushed up the real's exchange rate some 30 per cent – from R$2.50 at the start of 2009 to $1.75 last week. Taking into account the ability to leverage $1 million of one's own equity investment to buy $100 million of foreign securities, the rate of return is 3000 per cent since January 2009. Brazil has been more a victim than a beneficiary of what is euphemized as a "capital inflow." The inflow of foreign money has pushed up the real by 4 per cent in just over a month (from September 1 through early October). The past year's run-up has eroded the competitiveness of Brazilian exports, prompting the government to impose 4 per cent tax on foreign purchases of its bonds on October 4 to deter the currency's rise. "It's not only a currency war," Finance Minister Guido Mantega said on Monday. "It tends to become a trade war and this is our concern." And Thailand's central bank director Wongwatoo Potirat warned that his country was considering similar taxes and currency trade restrictions to stem the baht's rise, and Subir Gokarn, deputy governor of the Reserve Bank of India announced that his country also was reviewing defenses against the "potential threat" of inward capital flows." Such inflows do not provide capital for tangible investment. They are predatory, and cause currency fluctuation that disrupts trade patterns while creating enormous trading profits for large financial institutions and their customers. Yet most discussions of exchange rate treat the balance of payments and exchange rates as if they were determined purely by commodity trade and "purchasing power parity," not by the financial flows and military spending that actually dominate the balance of payments. The reality is that today's financial interregnum – anarchic "free" markets prior to countries hurriedly putting up their own monetary defenses – provides the arbitrage opportunity of the century. This is what bank lobbyists have been pressing for. It has little to do with the welfare of workers. The potentially largest speculative prize of all promises to be an upward revaluation of China's renminbi. The House Ways and Means Committee is backing this gamble, by demanding that China raise its exchange rate by the 20 per cent that the Treasury and Federal Reserve are suggesting. A revaluation of this magnitude would enable speculators to put down 1 per cent equity – say, $1 million to borrow $99 million and buy Chinese renminbi forward. The revaluation being demanded would produce a 2000 per cent profit of $20 million by turning the $100 million bet (and just $1 million "serious money") into $120 million. Banks can trade on much larger, nearly infinitely leveraged margins, much like drawing up CDO swaps and other derivative plays. This kind of money already has been made by speculating on Brazilian, Indian and Chinese securities and those of other countries whose exchange rates have been forced up by credit-flight out of the dollar, which has fallen by 7 per cent against a basket of currencies since early September when the Federal Reserve floated the prospect of quantitative easing. During the week leading up to the IMF meetings in Washington, the Thai baht and Indian rupee soared in anticipation that the United States and Britain would block any attempts by foreign countries to change the financial system and curb disruptive currency gambling. This capital outflow from the United States has indeed helped domestic banks rebuild their balance sheets, as the Fed intended. But in the process the international financial system has been victimized as collateral damage. This prompted Chinese officials to counter U.S. attempts to blame it for running a trade surplus by retorting that U.S. financial aggression "risked bringing mutual destruction upon the great economic powers. From the gold-exchange standard to the Treasury-bill standard to "free credit" anarchy Indeed, the standoff between the United States and other countries at the IMF meetings in Washington this weekend threatens to cause the most serious rupture since the breakdown of the London Monetary Conference in 1933. The global financial system threatens once again to break apart, deranging the world's trade and investment relationships – or to take a new form that will leave the United States isolated in the face of its structural long-term balance-of-payments deficit. This crisis provides an opportunity – indeed, a need – to step back and review the longue durée of international financial evolution to see where past trends are leading and what paths need to be re-tracked. For many centuries prior to 1971, nations settled their balance of payments in gold or silver. This "money of the world," as Sir James Steuart called gold in 1767, formed the basis of domestic currency as well. Until 1971 each U.S. Federal Reserve note was backed 25 per cent by gold, valued at $35 an ounce. Countries had to obtain gold by running trade and payments surpluses in order to increase their money supply to facilitate general economic expansion. And when they ran trade deficits or undertook military campaigns, central banks restricted the supply of domestic credit to raise interest rates and attract foreign financial inflows. As long as this behavioral condition remained in place, the international financial system operated fairly smoothly under checks and balances, albeit under "stop-go" policies when business expansions led to trade and payments deficits. Countries running such deficits raised their interest rates to attract foreign capital, while slashing government spending, raising taxes on consumers and slowing the domestic economy so as to reduce the purchase of imports. What destabilized this system was war spending. War-related transactions spanning World Wars I and II enabled the United States to accumulate some 80 per cent of the world's monetary gold by 1950. This made the dollar a virtual proxy for gold. But after the Korean War broke out, U.S. overseas military spending accounted for the entire payments deficit during the 1950s and '60s and early '70s. Private-sector trade and investment was exactly in balance. By August 1971, war spending in Vietnam and other foreign countries forced the United States to suspend gold convertibility of the dollar through sales via the London Gold Pool. But largely by inertia, central banks continued to settle their payments balances in U.S. Treasury securities. After all, there was no other asset in sufficient supply to form the basis for central bank monetary reserves. But replacing gold – a pure asset – with dollar-denominated U.S. Treasury debt transformed the global financial system. It became debt-based, not asset-based. And geopolitically, the Treasury-bill standard made the United States immune from the traditional balance-of-payments and financial constraints, enabling its capital markets to become more highly debt-leveraged and "innovative." It also enabled the U.S. Government to wage foreign policy and military campaigns without much regard for the balance of payments. The problem is that the supply of dollar credit has become potentially infinite. The "dollar glut" has grown in proportion to the U.S. payments deficit. Growth in central bank reserves and sovereign-country funds has taken the form of recycling of dollar inflows into new purchases of U.S. Treasury securities – thereby making foreign central banks (and taxpayers) responsible for financing most of the U.S. federal budget deficit. The fact that this deficit is largely military in nature – for purposes that many foreign voters oppose – makes this lock-in particularly galling. So it hardly is surprising that foreign countries are seeking an alternative. Contrary to most public media posturing, the U.S. payments deficit – and hence, other countries' payments surpluses – is not primarily a trade deficit. Foreign military spending has accelerated despite the Cold War ending with dissolution of the Soviet Union in 1991. Even more important has been rising capital outflows from the United States. Banks lent to foreign governments from Third World countries, to other deficit countries to cover their national payments deficits, to private borrowers to buy the foreign infrastructure being privatized, foreign stocks and bonds, and to arbitrageurs to borrow at a low interest rate to buy higher-yielding securities abroad. The corollary is that other countries' balance-of-payments surpluses do not stem primarily from trade relations, but from financial speculation and a spillover of U.S. global military spending. Under these conditions the maneuvering for quick returns by banks and their arbitrage customers is distorting exchange rates for international trade. U.S. "quantitative easing" is coming to be perceived as a euphemism for a predatory financial attack on the rest of the world. Trade and currency stability are part of the "collateral damage" being caused by the Federal Reserve and Treasury flooding the economy with liquidity in their attempt to re-inflate U.S. asset prices. Faced with U.S. quantitative easing flooding the economy with reserves to "save the banks" from negative equity, all countries are obliged to act as "currency manipulators." So mu
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| Posted: 17 Oct 2010 11:46 AM PDT At this time sentiment on the US Dollar Index is about as bearish as ever and at least equivalent to that at the bottom in December 2009. Expectations for a meltdown to all time lows in the context of rampant devaluation via Quantitative ... Read More...
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| John Williams Warns of Severe and Violent Sell-Off Posted: 17 Oct 2010 11:39 AM PDT John Williams utters his most ruthless words of condemnation not only toward the Fed, but to everyone who is stupid enough to be chasing returns in the face of what is a hyperinflationary collapse. Euphoric Inflation Insanity. Buying U.S. stocks because the Fed says it will proactively debase the U.S. dollar is like sitting on the beach in order to get a great view of an incoming tsunami. Any pleasure so derived should be short-lived, when the terror of underlying reality quickly takes hold.... Relative to gold, which tends to hold its purchasing power over time -- albeit sometimes in an anticipatory manner -- the S&P 500, Dow Jones Industrial Average and NASDAQ Composite have declined respectively by 22.1%, 18.8% and 17.5% year-to-year. This is against the prospective inflation environment being discounted by the gold market... Given the current systemic distortions and extreme irrationality in the equity markets, a severe and violent sell-off in stocks would not be a shock, and it could come with minimal, if any, warning. It also might be coincident with a U.S. dollar-selling panic. More Here.. 
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| Robin Griffiths Says QE2 Could Sink Markets, Cautions on Gold Posted: 17 Oct 2010 10:11 AM PDT  Prieur du Plessis submits: The stock market is at risk of a decline because of the artificiality of the Fed’s liquidity-boosting measures, Robin Griffiths, technical strategist at Cazenove Capital, told CNBC. Although bullish on gold, he also cautioned about a short-term correction in the yellow metal. Click to play: Complete Story »
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| End The FED. Get The Gold.: Gary North Posted: 17 Oct 2010 10:10 AM PDT The Powers That Be fear the transfer of authority over money to the general population, because that would transfer enormous power politically into the hands of the people. It would let them veto the spending policies of the Federal government. The fear of that veto is great inside the Washington Beltway.
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| Can We Expect a Dollar Reversal Now? Posted: 17 Oct 2010 10:06 AM PDT ETF Prophet submits: By Skill Analytics BZB and I have both looking at the same issue from different angles. Looking at his recent post on UUP – I took specific note of this quote… Complete Story »
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| Weekly Recap, And Upcoming Calendar - Here Are The Main Events To Look For Posted: 17 Oct 2010 09:43 AM PDT
Week in Review – QE2 and Asian FX Stays in the Spotlight From Thomas Stolper, Goldman Sachs
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| Hedge Funds Pass High-Water Mark Posted: 17 Oct 2010 08:18 AM PDT
FinAlternatives reports, Hedge Funds Pass High-Water Mark:
It's pretty much all about beta. Markets are up, credit spreads are tightening, and hedge funds are playing the Bernanke put. One risk officer at a fund of funds told me that most managers are having a hard time with their short books. "Any pickup in M&A activity can kill them, so they're reducing net exposure". Going into yearend, we"ll see is Foreclosure-Gate hurts hedge funds, the majority of whom remain long financial shares. But activity in the hedge fund industry is definitely picking up. Bloomberg reports that UBS, the largest Swiss bank, said it has been in talks with “dozens” of proprietary traders from firms worldwide who may start their own hedge funds as banks seek to comply with new U.S. rules aimed at curbing risk. And in Asia, Chris Howells of ChannelNewsAsia.com reports that hedge funds are making a slow comeback in the region since many had suffered losses amid the financial crisis two years ago. We'll see how this all plays out, but hedge funds will play an important role in reflating risk assets. Finally, I recommend you download and go through this presentation by Eric Chaney, Chief Economist at AXA Group. Eric's five key assessments:
There is a lot of food for thought in this presentation, and many hedge funds and asset managers are positioning their portfolios accordingly.
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| The Last Resort Of A Dying Economic System: From "Beggar Thy Neighbor" To "Beggar Thyself" Posted: 17 Oct 2010 06:57 AM PDT
The phrase of the week comes from The Privateer's Bill Buckler, who has coined the one term that best describes the lunacy that has gripped the world: "Beggar Thyself." Unlike the 1930s when the theme of the day was "beggar thy neighbor" and which culminated in World War 2, this time the emerging paradigm is one in which the first to defect wins... if only for a few seconds. Because when the "beggar thyself" process is complete, it will mark the end of not only the central banking regime, and the days of excess wealth accrual to the financiers of the world, but also the termination of the 140 year old Bismarckian "welfare state" which is the primary culprit for the creation of trillions of imaginary wealth out of thin paper. When the fiat system ends, so will end the hallucination that developed societies are capable of providing for their hundreds of millions of existing and future retirees. And with that will come the "social instability" that always marks the closure of a failed monetary regime and the admission of global bankruptcy. From the October 17th edition of Bill Buckler's Privateer:
In other words, with each passing day the fraud that is the concept of Bismarckian social cohesion and stability, brought to you by a hundred years of central banker subjugation, like a putrid onion, loses layer after layer of its mask, until soon the entire world will see behind the lie. The resultant explosion in pent up decades of anger could easily make all prior conflicts seem tame in comparison. Hopefully it can be avoided. But for that to happen, the fate of the dollar as the reserve currency must and will end. Buckler again:
What are the alternatives? These should seem obvious.
There is little, if anything, that can be added to this.
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