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Friday, January 28, 2011

Gold World News Flash

Save Your ASSets First

Gold World News Flash

S&P Touches 1300, 1300 Says it Liked it

Posted: 27 Jan 2011 06:08 PM PST


Despite new claims for unemployment putting up the largest weekly increase since September 2005 (and you all remember September 2005, right?  Alan Greenspan was still a genius, iPads were still just the truncated spelling of a sanitary napkin, and Kim Kardashian's vagina was still underwraps (and some guy named Damon Thomas too)), despite Japan being downgraded by S&P due to greater risk of default than Charlie Sheen's liver, and despite a little bit of happiness being squelched by studies showing breast implants are linked to a rare form of cancer (And no shit, really?  You mean to tell Money McBags cutting open your tit and shoving something artificial in there might be a health risk?  Shit, what's next, finding out that eating Twinkies causes obesity or watching CNBC causes dementia?), the market continued to rally as investors buy the fucking rip.

 

The S&P flirted with 1,300 today in ways that would make the delightful Lisa Ann seem like a cocktease (and Ms. Ann, Money McBags can be reached at moneymcbags@gmail.com should you ever want to tease anything of his) as it nudged above that psychological support level before closing a Robert Reich nut hair below it at 1299.54.  Money McBags doesn't know what to say anymore as the market races to the next bubble top (as opposed to the next muffin top), he just hopes you all are properly hedged and can get out before cookie crumbles.

 

That said, before Money McBags gets to the macro news, he has to go on a bit of a rant today because the Financial Crisis Inquiry Commission released their final report on the global clusterfuck (also known as the ponzeconomy™) and the report was strangely just one sentence: "Everyone acted like a bunch of asshats."  Ok, it was a bit longer than that (probably two sentences claiming that they were asshats and douchelickers) but Money McBags only read the highlights because he is waiting for the book on tape to come out.

 

The point is, and what really puts a turd in Money McBags' punchbowl (or a copy of Pride and Prejudice in his bookcase if you will), is that in a letter to the FCIC, Fed Chariman Ben Bernanke admitted that the Fed just fucking missed the complete collapse of the financial system, no really, he did.  But Money McBags guesses that all is forgiven because it's not like that was their main job.  Oh wait, what's that?  That is pretty much their only fucking job?  Well fuck Money McBags but at least we fired all of the assholes who fucked up and said things in 2005 like: the economy “might bend but would likely not break” from a large home-price drop, and that the market may rest on “solid fundamentals," and now say: " it was hard for many FOMC participants, in the summer of 2005, to ascribe substantial conviction to the proposition that overvaluation in the housing market posed the major systemic risks that we now know it did."  Oh wait, what's that?  The fucking assclowns who said that are the same people who are still running the show?  Are you kidding Money McBags?  Holy shit.  This is more fucking cockposterous than if Exxon rehired Captain Hazelwood and put him in charge of ship safety, neighbors insisted that Roman Polanksi take their RV and drive their babysitter home, or President Obama appointed Michael Jackson's doctor as Surgeon General.  Seriously.

 

Look congress/executive branch/Tina Wallman, Money McBags knows that you like to keep all of your chummy buddies at GS happy and he knows you just recycle the same shitty people through the same shitty jobs, but here is DOCUMENTED PROOF that these fuckers MISSED THE ONLY THING THEY HAD TO NOT MISS.  Fucking A, you think Faye Reagan would keep getting hired if she always ducked and missed the money shot?  Fuck no, because taking it on the chin IS HER JOB.  So how the fuck can these guys still be in charge of this shit when they SUCK AT THEIR JOBS?  They have already shown that they aren't capable, so what makes you think they won't fail again?  Sucking at one's job isn't a random walk and sometimes past performance is an indicator of future success and the fact that we have LEARNED NOTHING FROM THIS DOWNTURN and are still sucking off the assholes who missed it, is so fucking ridonkulous that it makes Money McBags' balls hurt just to think about it (which is why he spends his day thinking about this).  Rant over.

 

Anyway, as for macro news, new claims for unemployment were up to 454k, a jump of 51k and the highest the number has been since October, right before QE2 created all of those jobs, oh wait, what's that?  QE2 wasn't geared towards creating jobs?  It was just supposed to pump up the markets so rich people could have their paper net worth artificially grow and cause them to buy maybe one more tennis bracelet from Tiffany's for their "babysitter"?  Well Money McBags guesses he was misled.  Anyway, witch doctors blame the huge jump in new claims on snowstorms because when in doubt just blame an inanimate variable (and the jump was so large that it made Evel Kneivel roll over in his grave and it wasn't even within a standard deviation of analyst guesses of 405k).

 

In other macro news pending home sales rose 2%, which beat analyst guesses of a 1% rise and is now only 5% below last year's ass awful number.  Meanwhile, bookings for durable goods increased bv .5% according to the Commerce Department, or fell by 2.5% if we take out transportation and anything else that might have made the number look shitty.  Analysts guessed durable goods would rise 1.5% but in fairness to them, no one cares about this number anyway.

 

Internationally, S&P downgraded Japan from "super happy fun times" to "country and western karaoke night."  The ratings agency expressed concerns over Japan's escalating debt (which is now twice GDP) and their inability to stop Godzilla after all of these years.  In their report, S&P said Japan's government lacks a "coherent strategy” to address the debt, before adding  "for fucksake, they don't even speak in English, so how are we supposed to understand any strategy of theirs?"  That said, unlike the PIIGS, most of Japan’s debt is held domestically, so when the Pokemon hits the fan, they will implode rather than explode.

 

In the market, a shit ton of companies reported earnings led by NFLX who grew subscribers by 3.1MM and saw their stock price rise 15% which meant shorts like Whitney Tilson once again took it in the pooper (which of course makes NFLX a win-win stock for Mr. Tilson).  Profits were up 52%, revenue was up 34%, and gullibility was up 900% as the plethora of free subscribers inflated numbers and caused gross margins to go down from 38% to 34.4%, but luckily for NFLX, that part of the press release was pixelated over.  After the quarter, a number of analysts raised their target prices with Cannacord Genuity (formerly Cannacord Adams which, as always, is Canadian for "Roth Capital") leading the way with a target price of $250, which is only about $1 Billionty too low.

 

In other news, 1985's NFLX, MSFT, proved that you can be too big and fail as despite 5% revenue growth, their profit fell slightly as tablet sales started to eat in to sales of computers as if sales of computers were a cheesecake and tablets were Kirstie Alley.  Elsewhere, QCOM shares jumped ~6% after the company put up a good Q and raised its outlook for the year citing the need for mobile phones to have more and better chips to be able to properly display HD porn while users are dropping logs at the office.  Also, Motorola's recently spun off mobility business announced their first Q today and dropped 12% on weak guidance, proving once and for all that you can't polish a turd.

 

Finally, SBUX was flat despite a blow out Q as they announced that higher input prices will start to hurt margins and as a result gave guidance way below Street guesses.  When reminded that Bernanke says there is no inflation, SBUX CEO Howard Schultz replied: "Are you talking about the guy who also missed the biggest economic downturn in our lifetime?  Or are you talking about Scarlett Bernanke, who is causing my assets to inflate?  Either way, they can both go fuck themselves because inflation is here, though if it is Scarlett, then I'd like a window seat for that."

 

As always, Money McBags has a shitload more at the award winning When Genius Prevailed where he self-fellates himself today about his small cap analysis that has pointed out winners such as CRUS and TMRK.  Yeah, Money McBags writes a ton of dick jokes, and yeah, the market is completely full of shit, but his small cap analysis is as good as anyone on the Street and as always, all he charges is your dignity.  And Money McBags is well aware that today's headline sucked, but shit it's 2am and Money McBags needs all of the beauty sleep he can get (especially if this is the beauty).

Predictable Gold and Silver Correction A Half-Done Buying Opportunity

Posted: 27 Jan 2011 06:05 PM PST

Gold has corrected in price by more than 20 per cent no less than 46 times since the present bull market started back in 2001, according to analysts at MidasLetter. Silver has always been even more volatile.


Correction In Gold Nears a Key Target

Posted: 27 Jan 2011 06:01 PM PST

Gold and Silver got whomped again yesterday, adding yet more carnage to a correction that will soon enter its fifth week. For long-term investors who have chosen to ride out the storm, the selloff must have seemed brutal. And yet, from early December's high at $1432 to yesterday's $1310 low, the loss so far has amounted to just 8.5 percent. Granted, it's been worse for some owners of mining shares, which have declined by a little more than 17 percent, basis the ARCA Gold Bugs Index. But even that falls shy of the 20 percent standard that is often applied to separate relatively mild corrections from truly ugly ones.


Hourly Action In Gold From Trader Dan

Posted: 27 Jan 2011 05:23 PM PST

View the original post at jsmineset.com... January 27, 2011 12:39 PM Dear CIGAs, Click chart to enlarge today's hourly action in Gold in PDF format with commentary from Trader Dan Norcini ...


Crude Oil Falls on Profit Taking, Gold Plunges as Investors Flee

Posted: 27 Jan 2011 05:12 PM PST

courtesy of DailyFX.com January 27, 2011 07:51 PM Crude oil fell slightly as the commodity remains well-bid amid improvements in the global economic economy. Meanwhile, gold plunged as investors continue to liquidate the metal aggressively. Commodities – Energy Crude Oil Falls on Profit Taking Crude Oil (WTI) - $85.19 // $0.45 // 0.53% Commentary: Crude fell on Thursday, with WTI shedding $1.69, or 1.94%, to settle at $85.64, while Brent lost $0.52, or 0.53%, to settle at $97.39. The spread between the two benchmarks widened to a record -$11.75. At this point, it’s not even worth looking at WTI as a reflection of global oil supply and demand. Crude continues to consolidate just under the key $100 level as the market digests a significant inventory drawdown over the past few months and a surge in global demand during the second half of 2010 (3mmbbl/d+). Evidence that growth is slowing or OPEC production is picking up will be necessary to change the bias in pric...


Alan Greenspan Entertains Metal Standard, Again

Posted: 27 Jan 2011 05:08 PM PST

Few casual observers of the world of international finance would see Alan Greenspan as an advocate for sound money. After all, he led the charge behind one of the largest financial bubbles in world history as chairman of the Federal Reserve. That doesn’t mean, though, that a bad apple is wholly bad. In fact, it was 45 years ago in 1966 when Alan Greenspan wrote in his paper, “Gold and Economic Freedom,” that support for fiat currencies came only from “welfare statists” who were interested in deficit spending, not economic stability. Those words, which have been quoted many times over the years, haven’t been matched in their ferity, especially not from a central banker! However, Greenspan’s famous words were hidden until recently. In an interview with Fox Business channel, he admitted support for a gold standard, or some other form of limit on the amount of currency that could be produced. Greenspan even went so far as ...


A Simple Shake Could Set Silver Free

Posted: 27 Jan 2011 05:06 PM PST

There is no more silver! Really, there isn't any left. There is a danger lurking in the shadows of the COMEX silver market. Prices are (generally) rising, but the supply of silver is falling, and it's falling quickly. Why, you ask? Unfortunately, there has been confusion in the paper and physical metals market…as if silver investors hadn't already noticed. Silent Market in Control With the rise in silver prices came new speculative interest from bankers, average investors, and even the next-door neighbor. The problem is very simple: the supply of silver for the investing class is imaginary—a product of the banking system and fractional reserve silver. In order to supply investment demand, investment banks (JP Morgan and others) have been selling off paper silver in droves, hedging their bets on the futures market, and hoping that no one ever bothers to take delivery. It has become evident, especially in this most recent move toward $30, that the price o...


Nothing Has Changed

Posted: 27 Jan 2011 04:43 PM PST


This article originally appeared in The Daily Capitalist.

It is apparent to me that the factors that underlie the causes of our boom-bust cycle still exist. Nothing has changed.

While the President's message to the nation was optimistic, much of his speech was dedicated to telling us how much we need the federal government to become "winners" in a globally competitive world. Alas, I believe that it is the free market that is needed to spur economic growth, not more government spending.

I found the speech rather depressing in the sense that the Administration is still planning more spending on "infrastructure" including green energy, education, and physical repairs. Unfortunately, none of those things will contribute in any way to growth. My argument is not that we don't need roads, bridges, and schools, but that more spending on these things will not result in our ability to be more competitive or help to revive our economy.

I have written extensively on this blog about the failures of the economic policies of the last two administrations. It is clear that nothing has been accomplished by any of the spending projects and bailouts that were supposed to have bailed us out. Recently a Fed paper tried to justify the bailouts as having saved the world from collapse, but it was nothing more than "curve fitting" to achieve a desired result.

There is no believable evidence that bailouts or fiscal stimulus has done anything positive for the economy. In fact, it is far easier to weigh and demonstrate the damage to the economy of such policies. I and others would argue that all the negative consequences the advocates of bailouts predicted would happen without a bailout happened anyway.

The numbers speak for themselves.

I propose to you that nothing has changed on the policy front that would do anything to revive the economy. While I believe that reducing taxes is a benefit to taxpayers, the Laffer Curve doesn't always work because it depends on the underlying economic problems. Presently those problems are not a lack of spending as almost all Keynesians, Neoclassicists, Monetarists, and econometricians believe. It bears repeating that if we could spend our way to prosperity, then countries like Zimbabwe would be rich.

Presently what the economy needs is capital to fund expansion and it appears that such capital is lacking in the economy, or the economy would be growing. By spending more the federal government only reduces the pool of available capital to entrepreneurs, drives up the cost of capital, and results in more debt piled onto the backs of future generations. Further, QE only serves to diminish the supply of "real" capital. By real capital I do not refer to the money that the Fed creates from thin air, but actual savings resulting from production and other economic activity.

I continue to monitor the numbers every day and while there are some glimmers of improvement, they don't amount to a trend. I see things such as an improving manufacturing sector but it is almost like a mirage, shimmering in the distance: there is an unreal quality to it. If the dollar should go up, if Europe continue to have fiscal crises, and if inflation becomes rampant everywhere (a not unreasonable scenario), then exports would suffer.

So what do we see on the policy front?

  • The Fed has agreed to continue ZIRP and says it's too early to withdraw QE. I interpret this as the Fed's admission that it doesn't know what to do to revive the economy, and that this is their last shot at it. As long as unemployment remains high, and I believe that will be the case, I would expect QE to continue and that it is likely that we will see more, perhaps a QE3.

  • The president gives lip service to cutting the deficit but says we've got to "win" in the race for international success by spending more on infrastructure, green jobs, and education. Since that hasn't helped so far, we shouldn't expect it to work now. It would be wise to look at Japan for guidance. They have done these exact same things and they have failed too. Moody's announced today that it is cutting Japan's sovereign debt rating because of high sovereign debt.

  • The Administration continues its mercantilist policies and scapegoats China for the failure of our long term policies that have hindered US competitiveness. Those policies include high corporate income taxation, capital gains taxes, bureaucratic barriers, and giving unions broad power to hamper productivity by outdated work rules, too high wages, and work disruption through strikes and intimidation. The best thing it could do is leave China alone and get out of the way of companies who wish to export.

  • Housing continues its decline and foreclosures are still on the rise. Yet Senator Barbara Boxer wishes to recreate the bubble by lowering loan standards to allow people to refi:

The Helping Responsible Homeowners Act of 2011 would remove barriers, such as loan-to-value requirements, in order for certain borrowers to qualify for a refinance.

 

Risk-based fees on loans for which Fannie Mae and Freddie Mac already account for the risk would be removed, and lenders would be prohibited from dismissing second mortgage borrowers. Underwater borrowers would also be eligible to refinance.

 

"At a time when millions of Americans have been forced out of their homes, this legislation will ensure that homeowners who make their payments on time will be able to refinance their mortgages at current low rates so they can stay in their homes," Boxer said.

 

She added that consumer spending would indirectly increase because of the bill because homeowners would have more disposable income.

This shows ignorance of basic economics. We are still trying to get through the housing crises that vastly over-produced and overvalued housing. There have been some basic reforms to the villains, Freddie and Fannie and now Mrs. Boxer wishes to undo all that for purposes of political expediency. In other words, the taxpayers are to be put back into the business of guaranteeing reckless lending behavior. Also, it won't spur the economy. All that money the borrowers save on their mortgages will come from the employees of the banks who have less income to spend themselves. It's the old Robbing Peter fallacy.

  • Adding to that folly, I see where bankers are fighting the new Financial Accounting Standards Board's mark-to-market rules that were adopted to reduce banks' reckless lending behavior. Instead of using current market value in valuing bank assets, FASB has backtracked under bank pressure and has allowed them to use cost as the basis for value. What this means is that if an asset has collapsed in value but the borrower is current on the loan, the bank need not take a hit to capital by reducing the asset to market value. In essence they can keep on lending as if the market had no impact on them. It is a ringing endorsement of zombie banking. More on this later.

Folks, it just more of the same. Don't read their lips, watch what they do. My forecast of stagnation and inflation still stands.

Gold Seeker Closing Report: Gold and Silver End Lower

Posted: 27 Jan 2011 04:00 PM PST

Gold continued yesterday's after hours access trade advance and rose $14.35 to as high as $1347.95 in Asia before it fell back off in London and saw a $2.42 loss at $1331.18 by a little before 9AM EST and then bounced around near unchanged for most of the morning in New York, but it then fell of even further in late morning trade and ended near its 11:30AM EST low of $1316.55 with a loss of 1.1%. Silver climbed 69 cents to $27.81 before it fell back to $27.27 a little after 4AM EST and then climbed back to as high as $27.728 by midmorning in New York, but it also fell back off in late trade and ended near its new late morning low of $26.785 with a loss of 0.41%.


January Largest Monthly Negative Money Flow for SLV

Posted: 27 Jan 2011 02:30 PM PST

LV has shed a net 495.14 tonnes of silver so far in January to 10,426.43 tonnes. Monthly out-flow 130 tonnes larger than next highest silver "get-out" of April 2010. Negative money flow expected by GGR. Look for dip buying to surface soon. HOUSTON – We expected a spate of vigorous January profit taking here at Got Gold Report and repeatedly suggested Vultures (Got Gold Report subscribers) raise a Bargain War Chest in late November and all through December as gold and silver seemed to be straining to mark new highs. Both of our very highly profitable short-term gold and silver trades were recently stopped out as the profit taking correction took out key technical support levels. Both trades proved to be the largest nominal gains for a single trade in our gold and silver trading history.


The World Is Waiting For The Sunrise: A Practical Guide to the Re-Monetization of Silver

Posted: 27 Jan 2011 02:17 PM PST

Gold Price and Silver Price Continue to Fall, Both Metals Still In Primary Uptrend

Posted: 27 Jan 2011 11:49 AM PST

Gold Price Close Today : 1318.40
Change : (14.60) or -1.1%

Silver Price Close Today : 27.045
Change : (0.087) cents or -0.3%

Gold Silver Ratio Today : 48.75
Change : -0.382 or -0.8%

Silver Gold Ratio Today : 0.02051
Change : 0.000159 or 0.8%

Platinum Price Close Today : 1780.60
Change : -31.00 or -1.7%

Palladium Price Close Today : 803.45
Change : -9.55 or -1.2%

S&P 500 : 1,299.54
Change : 2.91 or 0.2%

Dow In GOLD$ : $187.99
Change : $ 2.15 or 1.2%

Dow in GOLD oz : 9.094
Change : 0.104 or 1.2%

Dow in SILVER oz : 443.33
Change : 0.18 or 0.0%

Dow Industrial : 11,989.83
Change : 4.39 or 0.0%

US Dollar Index : 77.75
Change : -0.147 or -0.2%

GOLD PRICE and SILVER PRICE completed in European trading last night (for us) the upward reaction begun yesterday. Mercy there was none once they began falling.

Wow. 'Twas a short-lived silver and gold rally, no?

The GOLD PRICE dropped from a high of $1,347 to $1,310.30. Comex gold gave up $14.60 and ended at $1,318.40. Aftermarket saw it trading near the low at $1,311.40.

The SILVER PRICE held up a little better than gold, but still took a rough beating with a knobbly club. Peaked last night at 2780c, then dropped to 2725c around 4:00 a.m., while Wall Street executives and traders were still wrapped in their beds, with visions of felonies danced in their heads. Silver then danced along that level, even rallied a bit. From the New York open it rallied to 2770c again at 10:30, then staged a Niagara Falls clean down to 2674c by 11:30. Comex silver closed down only 8.7c to 2704.5c.

On both charts today's action looks like a kind of cattywampus key reversal. That is, they tried to break into new high ground, then closed lower -- much lower -- than the day before. That stage-whispers that tomorrow will see more grief, wailing, and lower prices.

Although -- I hasten to emphasize -- both SILVER and GOLD remain in a primary uptrend (bull market) that will last another 3 to 10 years, this present correction has not yet played out. Gold has virtually locked in a further correction to $1,300 - $1,290, maybe the 200 day moving average at $1,279.50 (right now). Silver, too, will fall further, likely heading to 2500c or even to the 200 DMA, now standing at 2209c.

An alternative reality will follow if I am misreading these charts and both metals roar back, but I most strongly doubt that. You would have first warning shot of that if gold climbed over $1,345 and silver over 2800c.

About now y'all will have to prove your mettle, and whether you are a bunch of geese that panic at every breeze, or whether you understand the primary trend and why you must hold on. More than that, you must grasp that the market is about to offer you -- at the bottom of this move -- a colossal buying opportunity.

While the US dollar index continues to wallow and sink like a torpedoed garbage scow, other parts of the world make no more economic sense. Stocks rise, on the hope that a US and world economy will re-materialize out of the speculative mists. Right, they will appear right on the heels of Santa Claus, the Easter Bunny, and the Tooth Fairy. Everything's possible, some things just ain't too likely.

Specifically, the dollar index fell 14.7 basis points today to 77.751. Chart looks like the EKG of somebody on cocaine, up, down, all over the place. Maybe it found some sort of bottom today at 77.60, but I sure wouldn't swing over hell using that for a rope. Falling wedge buildeth still, arguing that an upside move will come. Ahh, but when?

STOCKS measlied along again today, Dow gained 4.39 (Be still, my beating heart!) to 11,989.83. S&P packed in a monstrous 2.91 points to 1,299.54. I don't know who is buying, but I have some fine development land in a Florida swamp I'd like to sell them. Rising wedge will eventually wreak its vengeance and gut the optimists, sadly.

Argentum et aurum comparenda sunt -- -- Gold and silver must be bought.

- Franklin Sanders, The Moneychanger
The-MoneyChanger.com
Phone: (888) 218-9226 or (931) 766-6066

© 2010, The Moneychanger. May not be republished in any form, including electronically, without our express permission.

To avoid confusion, please remember that the comments above have a very short time horizon. Always invest with the primary trend. Gold's primary trend is up, targeting at least $3,130.00; silver's primary is up targeting 16:1 gold/silver ratio or $195.66; stocks' primary trend is down, targeting Dow under 2,900 and worth only one ounce of gold; US$ or US$-denominated assets, primary trend down; real estate in a bubble, primary trend way down. Whenever I write "Stay out of stocks" readers inevitably ask, "Do you mean precious metals mining stocks, too?" No, I don't.

Zerohedge: “Sarkozy Goes Postal On Jamie Dimon, Says Bankers Made World Into Madhouse”

Posted: 27 Jan 2011 10:58 AM PST

Quote Sarkozy talking to Dimon, per Reuters: “The world has paid with tens of millions of unemployed, who were in no way to blame and who paid for everything. It caused a lot of anger. Too much is too much. The world was stupefied to see one of five biggest U.S. banks collapse like a [...]


Just One Stock: Heavy Upside From a Leveraged Play on Rising Silver Prices

Posted: 27 Jan 2011 10:42 AM PST

Ananthan Thangavel submits:
Several times a week, Seeking Alpha's Jason Aycock asks money managers about their single highest-conviction position - what they would own (or short) if they could choose just one stock or ETF.

Ananthan Thangavel is founder and managing director of Lakshmi Capital, a New York-based wealth management firm focused on absolute return and specializing in alternative asset management.

If you could only hold one stock position in your portfolio (long or short), what would it be?


Complete Story »


Inflation: Inevitable…But Not Predictable

Posted: 27 Jan 2011 10:41 AM PST

Government is not like science or technology – where we build, intentionally, on past experience to create something that becomes better and better over time. Instead, it is rather like an evolutionary development…that often ends with extinction.

Since America's modern social welfare democracy is not the product of enlightened rational, accumulated decision-making, America's leaders will be unable to re-design it for the new conditions it faces. Instead, this social welfare democracy will face extinction – like dinosaurs and Neanderthal man…and all previous forms of government…all previous forms of paper money…and all previous monetary systems.

In other words, don't expect the US government to reduce its deficits and bring its finances under control voluntarily. It will take a crisis…and maybe even a revolution.

Let's look at the financial situation more closely. As near as I can tell, the Great Correction continues, much as we thought it would. This is "Year 5" of the Great Correction. There is much more to go.

A Great Correction is very different from a recession. It is not a pause in an otherwise healthy economy. Instead, it is a change of direction…an adjustment to new circumstances (similar and related to the adjustment needed in government itself). After 60 years of near continuous credit expansion, the economy is finally deleveraging…reducing credit in the private sector.

To give you one small indication of the kind of adjustment that is taking place, let's look at some good news. US manufacturing is finally picking up. For the first time in 10 years, more people are now joining the manufacturing labor force than leaving it. Of course, this is just what you'd expect. Labor costs are going down. At the margin, America's competitive position is improving.

But this is not, as the media has advertised, "proof" the economy is recovering. Far from it. It is proof that the economy is not recovering at all. It is going in a different direction…and responding to a different set of circumstances. Much of the last 10 years was spent in bubble territory. During that time the economy was losing manufacturing jobs, not gaining them. The economy is not now "recovering" to the bubble conditions of 2005-2006. It is moving on.

And it's a good thing. Who would want to go back to an economy that destroyed real jobs in manufacturing while creating phony, unsustainable jobs in finance and housing? Now the economy is simply doing what it should do: it's adjusting to new conditions. Unfortunately, it will take time. You don't shift the world's largest economy overnight. So, the rate of joblessness is likely to remain high for many years as the transition takes place.

The other major feature of the Great Correction is the weakness of the housing industry. This too is perfectly predictable. The nation has too many houses – and they're still too expensive. The figures show that about one in four homeowners is underwater. And there is no reason to think he'll come to the surface any time soon.

The latest S&P/Case-Shiller numbers show the housing market seems to be entering a second dip. Once homeowners realize this, they are likely to also come face to face with their grim choices. They can default. Or they can wait it out – paying more for housing than the going rate. Many will choose to default, bringing housing prices down further. Some won't have a choice: they won't be able to meet mortgage payments.

Housing and jobs are the twin pillars of household wealth in America. The papers are full of stories about what happens to people when these pillars give way. High unemployment rates have lowered household income and forced people to take jobs at salaries far below their peaks. A record number, 43 million, of Americans now depend on food stamps. Children are moving back in with their parents – even adult children. And tax receipts are falling. At the local and state level this is causing havoc. The feds can print money. But California, Illinois and New Jersey can't. And between the 50 states there is something like $2 trillion worth of unfunded pension obligations.

So far, all of those things were expected. It is a Great Correction, after all. Also expected – but still not fully appreciated – was the reaction of the US government and the Fed. When the crisis began, we calculated that it would take about seven years to bring debt levels in the private sector down to where a new period of genuine growth could begin.

We just looked at the debt levels and guessed about how long it would take to default, restructure and pay them down. There were plenty of other calculations based on different assumptions. But they all came up with about the same answer: between 5 and 10 years.

But we all underestimated the ability of the feds to muck things up. Thanks to federal intervention, it now looks as though this period of transition may take much longer. Obviously, the feds are adding debt while the private sector is getting rid of it. But it goes beyond that. The feds are also propping up the industries that need to be cut down to size – finance and housing – at a cost of over a trillion dollars.

The feds are also trying to engineer a recovery…and promising one. As I mentioned above, a recovery is just what we don't need. But promising that the economy will return to its previous condition leads people to think that they don't really have to make major changes. All they have to do is wait. This further delays the transition to a new economy.

Pretending the economy will return to its old pre-2007 self also makes people think that they will be safe in pre-2007 investments. So they stick with stocks and bonds…and eschew the one asset they most need. With all the talk of a "slow recovery" investors don't suspect that there is anything really wrong…or at least nothing that a few trillion in stimulus spending can't fix! So, they don't make the sort of changes that they need to make – in their personal finances and in their investments.

The feds are not only stalling the transition, they are also destroying the currency and the credit of the world's largest economy. This further confuses the situation and creates huge uncertainties. Investors are nervous. They don't know what to expect.

They become reluctant to commit to large long-term projects – just the kind the country needs, in other words.

If you can't trust the value of the money, how can you make a capital investment that will only pay off five years from now? How can you even make a budget or a business plan? Serious investors hold off…or put their money into the growth economies overseas, where the risk/reward ratio is more favorable and the financial authorities are not actively trying to undermine the local currency.

What is in some ways most remarkable is that even five years into the correction, the US authorities still seem to have no idea of what is going on. Ben Bernanke recently told us that we could expect 3% to 4% growth this year. Since he completely missed the biggest financial crisis in 80 years, you have to question his forecasting abilities. But even if he is right about the GDP growth rate, he doesn't seem to understand what it means.

He admits that 3% to 4% growth is not enough. He's thinking about employment. At that growth level, you can barely keep up with new people coming into the workforce, let alone reabsorb the 15-30 million who are currently out of work. It is also too slow to keep up with the debt load. The deficit is expected to be about 10% – two to three times more than the anticipated additional GDP. This will mean, grosso modo, an increase in the national debt equal to 6% or 7% of GDP.

You can't expect to do that for very long. But here is the remarkable thing: so far, there is little official recognition of the dark, dangerous road that the feds are driving down. In the fedsʼ minds, the problem is that the economy is growing too slowly. Three percent isn't enough. They believe they need more growth…and they believe they can get it by "stimulating" the economy.

It is as though they were driving down a wet country road at breakneck speed. The radio is not working very well, so they step on the accelerator, trying to catch the radio waves before they get away. When this doesn't work, they go even faster.

This is not the way to make the radio work. It is the way to get in a serious wreck.

To be continued tomorrow…

Regards,

Bill Bonner
for The Daily Reckoning

Inflation: Inevitable…But Not Predictable originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."


All 100 Ounce Silver Bars Will be Gone in a Matter of Days

Posted: 27 Jan 2011 10:35 AM PST

Today King World News interviewed one of the top gold and silver dealers in the United States about tightness in the silver market. Bill Haynes is President and owner of CMI Gold & Silver for and when asked about a shortage in silver he stated, "All of the major suppliers of 100 ounce silver bars are either weeks or months out, some will not even take orders. I had some conversations with a number of people who buy from them, had to dig through the information and some of them revealed that they thought the refineries were having trouble and the manufacturers were having trouble getting the physical product which falls right into the silver shortage."


This posting includes an audio/video/photo media file: Download Now

THURSDAY Market Excerpts

Posted: 27 Jan 2011 10:21 AM PST

Gold futures settle under $1320

The COMEX February gold futures contract closed down $14.60 Thursday at $1318.40, trading between $1315.70 and $1347.50

January 27, p.m. excerpts:
(from Marketwatch)
Gold futures fell to their lowest in nearly four months as Europe's top central banker said the central banks of the United States, the euro zone and Britain are united against inflation. Inflation touches a deep nerve in the gold market, as the metal is often seen as the ultimate storer of wealth and a sure beneficiary of unbridled price increases. The losses for gold puzzled most market observers because the stars seemed to be aligned for a rise on Thursday…more
(from Dow Jones)
Gold initially jumped after data showed U.S. demand for long-lasting goods unexpectedly fell last month and the number of U.S. workers filing new claims for unemployment benefits unexpectedly surged last week. The disappointing data reinforced the notion that the Federal Reserve will stick to its easy money policy of ultralow interest rates and Treasury purchases that helped send gold to its record last year. But the gains proved fleeting as investors weighed the two reports against the longer term positive economic outlook…more
(from Reuters)
Positive U.S. housing and factory data and a warning about inflation by a European Central Bank official kindled speculation that some major economies would move to raise interest rates sooner than previously thought. After a relatively steady morning, bullion abruptly dropped late in the New York session in tandem with crude oil as the euro erased gains after initially setting a two-month high against the dollar. U.S. gold futures for February delivery settled down 1.1%…more
(from TheStreet)
Part of Thursday's slip could also be related to sell stops, which means that traders sell when prices breach a certain level to lock in gains. "More sellers appeared after option expiration, which is not unusual," says George Gero, senior vice president at Lind-Waldock, "chart selling for now may continue until next week." The U.S. dollar index was down 0.05% to $77.76 but the dollar itself was rising 0.72% against the yen after Japan received a credit downgrade from Standard & Poor's to AA-, its first downgrade in nine years…more
(from Bloomberg)
Japanese debt concernsJapan's government lacks a "coherent strategy" to address the nation's debt, the rating company said in a statement. The yen and bond futures fell on concern the downgrade will push up the cost of borrowing for Japan, where public debt exceeds 200% of GDP. "I hope this serves as a warning for the government, they have absolutely no sense of crisis," said Azusa Kato, economist at BNP Paribas. "Once bond yields spike and the fire is lit, the amount needed to finance Japan's borrowing needs is going to jump and it's going to be too late."…more

see full news, 24-hr newswire…

45% of Investors Expect China Financial Crisis Within Five Years

Posted: 27 Jan 2011 10:17 AM PST

In a global Bloomberg poll, 45 percent of investors are expecting a financial crisis in China within the next five years, and yet another 40 percent are expecting that one could take place sometime after 2016. Those polled included investors, traders, and analysts, and about 53 percent indicated that they also consider the Chinese economy to be in a bubble fueled by speculation.

According to Bloomberg:

"On Jan. 20, China's National Bureau of Statistics reported that the economy grew 10.3 percent in 2010, the fastest pace in three years and up from 9.2 percent a year earlier. Gross domestic product rose to 39.8 trillion yuan ($6 trillion).

"Any Chinese financial emergency would reverberate around the world. The total value of the country's exports and imports last year was $3 trillion, with about 13 percent of that trade between China and the U.S. As of November, China also held $896 billion in U.S. Treasuries. The trade and investment links between the two nations were underlined with Chinese President Hu Jintao's visit last week to the White House for meetings with President Barack Obama…

"…Worries center on the danger that investment, which surged almost 24 percent in 2010, may be producing empty apartment blocks and unneeded factories. [...] Jonathan Sadowsky, chief investment officer at Vaca Creek Asset Management in San Francisco, says he is 'exceptionally worried' that the Chinese would eventually face 'major dislocations within their banking system.'"

By region, 60 percent of the Asia-based respondents think exaggerated expectations are to blame for China's overheating asset prices. The potential problems China may face include diminishing exports to consumer-driven economies, how to manage its vast dollar reserves, and soaring inflation… not to mention how it will handle pressure to allow its renminbi currency to appreciate further and faster. You can read more details in Bloomberg's coverage of a global poll showing that investors expect a China crisis within five years.

Best,

Rocky Vega,
The Daily Reckoning

45% of Investors Expect China Financial Crisis Within Five Years originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."


Sarkozy insists Paris and Berlin will never abandon the euro

Posted: 27 Jan 2011 10:06 AM PST

by Sam Edmonds
January 27 2011 (dw-world.de) — French President Nicolas Sarkozy rejected speculation over the future of the euro on Thursday, adding that France and Germany were committed to the common European currency.

"To those who would bet against the euro, watch out for your money because we are fully determined to defend the euro," Sarkozy told delegates at the World Economic Forum in Davos. "Mrs. Merkel and I will never – do you hear me, never – let the euro fail."

In his impassioned speech, Sarkozy urged the audience to consider the importance of European economic integration in a social and historical context.

"You have to understand, the euro is Europe. And Europe is 60 years of peace. We will never allow the euro to be destroyed."

The CEO of investment banking giant JP Morgan Chase, Jamie Dimon, described the EU as "one of the greatest human endeavors of all time."

[source]

MORE…

Sarkozy: No turning our backs on the euro
by Angela Charlton and Frank Jordans
January 27, 2011 (Associated Press) DAVOS, Switzerland — French President Nicolas Sarkozy vowed Thursday that he and European partners will "never turn our backs on the euro," given as extra boost to the rebounding currency by calling it a linchpin of peace and prosperity – despite the debt crises worrying investors and leaders worldwide.

"The disappearance of the euro would be so cataclysmic that we can't even possibly entertain the idea," Sarkozy said.

He acknowledged months of worries about the 17-nation euro's survival since the European Union and International Monetary Fund had to bail out debt-laden Greece and then Ireland last year. But despite those concerns, he said, "the euro is still there."

dominoes

… JP Morgan Chase & Co. chief executive James Dimon said governments were right to act by rescuing Ireland and Greece from default rather than risk a run on the continent's banks.

Europe "did the only good choice, which is to get through this crisis, because if you don't fix it here, you're going to fix it there, which is in the banking system," he said.

… Sarkozy said that global currency imbalances — notably China's low-valued currency and the dominance of the U.S. dollar in world trade — "one of these days will bring down the whole pack of cards unless we attend to this very swiftly and very strongly."

[source]

RS View: One of the primary reasons "the euro is still there" despite what might seem as a loose and untenable hodge-podge of uncoordinated individual national economies, tax structures and sovereign debt burdens is that the euro's central bank has a solid gold foundation of reserves that are prudentially structured with (dare I call it "state-of-the-art") mark-to-market accounting. ANOTHER primary reason that "the euro is still there" despite all else is that the euro is not trying to be anything other than a currency unit for all Europeans who need such a thing. It is not trying to be all things to all people, nor is it overextending itself as the whole world's go-to reserve asset. (To be sure, it is in that overextended capacity that the U.S. dollar uniquely has feet of clay.)

This well-defined mission statement is more or less the context behind the comment of European Central Bank president Jean-Claude Trichet when he said at a session in Davos, "The euro delivered what had been asked from it, namely price stability."

Any fear amongst gold investors that gold reserves might be supplanted by the IMF's SDR program is simply unfounded (it's merely a tactful political diversion) because the special power and potency of reserves is in their ability to command respect in the minds of all counterparties during any "last resort" defense of a regional currency, and only gold universally commands that level of restorative power in the minds of the population. The SDR, by contrast, would be totally impotent and dead on arrival at such a time in the minds of anyone except, perhaps, the bureaucratic economic advisors who continue to advance the silly SDR notion at the present time.

Inflation to Help the Less Fortunate?

Posted: 27 Jan 2011 10:00 AM PST

I almost didn't read the essay by Gary Gibson, the managing editor of the Whiskey & Gunpowder newsletter, because he was talking about Paul Krugman, whom Mr. Gibson refers to as "cheerleader of the state," and for whom I have a much, much lower opinion, probably because of my envy of his career success despite being, as far as I can tell, a complete failure in predicting the bursting messes we are in, or ever warning against them as they were building, when it was obvious to the Austrian economists all along.

I mean, as an economist, how bad can you be and not suffer for it, for crying out loud?

My problem with it is that "gladly suffering fools" was never popular anywhere I ever worked, as all my employers were very specific in demanding "results" and "competence," which I obviously could not deliver, as my career path of perennially bouncing along the bottom, never really getting past the "trainee" rung of the corporate ladder, so richly attests.

Anyway, Mr. Krugman writes that he and his hotshot Democrat buddies view their position as, "It's only right for the affluent to help the less fortunate."

So that, in a nutshell, is it! He, apparently speaking for all Democrats, wants to help the "less fortunate," and he is as full as any Democrat with his own self-righteousness and smug self-satisfaction in proudly declaring himself so.

Well, I got some Hot Mogambo News (HMN) for Mr. Krugman; everybody wants to eliminate suffering, and the affluent have always helped the less fortunate, to one degree or another, although it has never been enough to satisfy everybody, a tradition of whining carried forward even to today when total government spending is almost exactly half of total spending in the Whole Freaking Country (WFC)! Half!

I mean, if spending half of GDP by local, state and federal governments to let them "help" is not enough, how could it EVER be enough?

I thought it was actually funny when he ridiculously villainized all others as greedy and irresponsible, with the laughable mischaracterization, "The other side believes that people have a right to keep what they earn, and that taxing them to support others, no matter how needy, amounts to theft. That's what lies behind the modern right's fondness for violent rhetoric: many activists on the right really do see taxes and regulation as tyrannical impositions on their liberty." Hahahaha!

"No matter how needy"? Hahahaha! "Violent rhetoric?" "Tyrannical"? Again, hahahaha!

But as absurdly silly as this, and he, is, his real comic punch line came with the sublime, "There's no middle ground between these views." Hahahaha! Hahahahaha! Truer words were never spoken! Hahahahahahahacoughcoughcoughhahacough!

That was so funny that I was laughing so hard, and so long, that I started coughing, which I notice, now that I see it written out, does not convey the experience as well as I had hoped, but which still, I hope, conveys the Utter, Utter Contempt (UUC) I have for Mr. Krugman and his egregiously bad economic idiocies, the sum of which is always "more spending, more budget deficits, and more taxation of the rich."

I say this not because Mr. Gibson says, "Mr. Krugman is unquestionably on the side of evil," which is true, but because the most evil thing that you can do to poor people (and the others in that "less fortunate" category) is to make suffer more! Which they do when they must pay higher prices for the things they need to survive. How cruel! How monstrous!

And that – that! – is exactly what Mr. Krugman guarantees – guarantees! – when he urges more monstrous amounts of government deficit-spending, more insane increases in national debt, and an insanely increasing money supply, all thanks to an irresponsible Federal Reserve creating the money necessary to the task.

And then, as Mr. Krugman does, to advocate more taxes when he knows these business expenses are always passed on to the ultimate consumer in the form of higher prices, which fall disproportionately high on the poor, and when he knows that raising taxes inhibits economic growth, he seems to be the epitome of insanity! This is madness!

This man is, obviously then, truly evil. And he is evil because he advocates deliberately inflicting pain on the poor! He is thus a villain. He is thus a monster.

As a guy who has seen a lot of "how things work," I am thus a guy who knows that there is nothing that I can do about horrid people like Paul Krugman, or about Princeton, or about The New York Times, except seethe and bemoan the low quality of public education, so rampant in the American school system, that allows this kind of thing to flourish.

And I'm a guy who also knows that having a lot of silver will be both a terrific financial asset to own in terms of capital gains as silver rises in the massive inflation in prices caused by the massive over-creation of money by the Federal Reserve, and I'm a guy who has seen enough movies to know that silver is also a weapon against werewolves, especially when made into a hollow-point magnum bullet, at which point it becomes a defense against everything else, too! Hahaha!

Being serious for a moment, except vampires, of course, which I figure probably, explains why The Lone Ranger was famous for his silver bullets, although we'll never know because all the documentary evidence is mysteriously "lost."

So while I am not quite sure of the precise utility of silver bullets, either now or in the Old West, I am sure of silver reacting to the sorry economics of Mr. Krugman, as it rises along with, and surely ahead of, the massive rises in other prices caused by the Federal Reserve creating enough money to let the government help the "less fortunate" by making them more miserable.

And that is why the decision to buy gold, silver oil is so easy that you happily say, "Whee! This investing stuff is easy!"

The Mogambo Guru
for The Daily Reckoning

Inflation to Help the Less Fortunate? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."


M2 Surges By Biggest Weekly Amount Since 2008 As It Hits Fresh All Time Record

Posted: 27 Jan 2011 09:42 AM PST


Desperation kitchen sink anyone? The M2, which up until now was merely diagonal, is about to go parabolic. In the week ending 1/17/2011, Seasonally Adjusted M2 surged by $46.6 billion, the biggest weekly increase in the broadest tracked monetary aggregate (ever since the cost-cutting associated with discontinuing the M3) since 2008. One look at the chart below indicates precisely what is fueling the endless market ramp. Furthermore, for those who realize there is a 93% correlation between M2 and gold, we would certainly recommend putting on the M2/Gold convergence trade on.

Money & Markets Charts ~ 2.17.11

Posted: 27 Jan 2011 09:28 AM PST

View this week's chart comparisons of gold against fiat currencies, oil and the Dow. Stay tuned for our next Money & Markets segment of The Solari Report next Thursday, February 3, 2011. Click here to view all charts as a pdf file. See previous Money & Markets Charts blog posts here. Currency charts are from StockCharts.com. Gold vs Oil Gold [...]


Gold Reverses from Former Congestion

Posted: 27 Jan 2011 09:11 AM PST

courtesy of DailyFX.com January 27, 2011 07:35 AM Weekly Bars Prepared by Jamie Saettele Gold is testing a multiyear support line. A break below 1317.10 (10/22 low) would put 1270.30 (June high) in play. Resistance does extend to 1352.70 but price has reversed from the center of a former congestion zone. What’s more, the rally from the low is in 3 waves. Bottom line – gold remains vulnerable....


Inflationary Thursday – Dow 15,000 + $5 Will Get You a Happy

Posted: 27 Jan 2011 09:10 AM PST


Inflationary Thursday – Dow 15,000 + $5 Will Get You a Happy Meal

Courtesy of Phil of Phil's Stock World 

Are they rioting in Africa?

Check – they are rioting in Africa!  Toppling governments in Tunesia?  Check, government toppled. Riots and demonstrations also in Albania, Belarus, Jordan, Libya, Lebanon, Ireland,Egypt, Yemen, Zambia…  Even the British Royal Family attacked in their limo after being booed and jeered by a mob chanting "off with their heads."  

If nothing else disturbs you while you buy your NFLX today – that last one should. Rich folks in an industrialized nation trying to go to the theater in their limo and being attacked by an angry mob. How long before we (in the top 1%) need to armor our cars and hire bodyguards? Is this part of the Fed’s plans to create jobs – make the top 1% so much richer than the bottom 99% that we’ll need to hire guards just to go shopping at Whole Foods as we drive past the bread lines?

“We’re in an era where the world and nations ignore the food issue at their peril,” World Food Bank’s Josette Sheeran said in an interview yesterday at the agency’s Rome headquarters. Risks of global instability are rising as governments cut subsidies that help the poor cope with surging food and fuel costs to ease budget crunches.

The global recession has eroded government aid that helped people in poorer countries afford bread, cooking oils and other staples. The U.N.’s Food Price Index surged to 214.8 in December, exceeding the previous record in 2008 when rising costs and fears of shortages sparked riots from Haiti to Egypt. More than 100 people have died this month in protests in Tunisia against food inflation, unemployment and alleged corruption, according to the U.N.

Michael Klare writes: "Already, combined with staggering levels of youth unemployment and a deep mistrust of autocratic, repressive governments, food prices have sparked riots in Algeria and mass protests in Tunisia that, to the surprise of the world, ousted long-time dictator President Zine al-Abidine Ben Ali and his corrupt extended family. And many of the social stresses evident in those two countries are present across the Middle East and elsewhere. No one can predict where the next explosion will occur, but with food prices still climbing and other economic pressures mounting, more upheavals appear inevitable. These may be the first resource revolts to catch our attention, but they won’t be the last."

Let’s begin with food, the most important and volatile of these commodities. Food prices declined in October 2008 after the onset of the global financial crisis, but that seems to have been an anomaly. The December 2010 index of global food prices compiled by the U.N.’s Food and Agricultural Organization (FAO) hit a record 215, one point higher than in the spring of 2008. (In that index, based on a “bundle” of food staples, a baseline of 100 represents average prices in 2002-2004.) In fact, some food products, including sugar, cooking oils, and fats, are now trading substantially above their 2008 levels; others, including dairy products, grains, and meat, are inching perilously close to record levels.

The numbers are already staggering. According to the IMF’s very conservative measurement, which peg US inflation at just 1.5%, the end of year inflation is 4.6% in China, 3.7% in the UK, 5.9% in Brazil, 8.8% in Russia, 8.3% in India, 4.4% in Mexico, 6.4% in Turkey, 5.7% in Indonesia, 10.9% in Argentina, 11.9% in Iran, 26.9% in Venezuela, 10.4% in Egypt, 11.8% in Nigeria, 15.5% in Pakistan… Judging from who’s rioting and who’s overthrowing their government I’d say about 10% is the point at which you may want to consider doubling up your security detail before you head downtown.  

Don’t worry though, we can easily afford the minimum wage thugs we hire to bash in the skulls of the unemployed thugs who want to get their hands on our stuff, right? POT, for example, announced a 103% increase in earnings last quarter as the price of fertilizer skyrocketed as speculators snapped up supplies. The stock is so high now ($175) that the company is announcing a 3 for 1 split so we can give a few shares to the help next Christmas – isn’t that charming?

India’s market plunged 5% this month, the Shanghai Composite is off 17.5% since November and Egypt (EGPT) dropped 10.6% TODAY but don’t let that bother you – everything is just fine – until it isn’t, of course but then, who could have ever seen that coming, right?  

Most of this Global inflation is being sparked by our own Federal Reserve, since the Dollar is 62% of global reserves and almost all commodities are priced in Dollars and the Dollar is down 4% for the first month of 2011 – putting that much more pressure ON TOP OF those shocking 2010 inflation rates.  

Well The Bernank gave the rest of the World a huge FU yesterday as the Fed announced (unanimously now that Hoenig is no longer a voting member): "The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period." 

That comment has been interpreted to mean until US jobs come back and that means, pretty much, forever. This was enough to send the Dollar down to month-lows at 77.70 and that popped gold back to $1,346 (up 1.5%) overnight and sent oil back to $87.50 (up 1.5%) and copper back to $4.30 (up 1.5%) and silver up to $27.50 (also 1.5%) – so a pretty uniform boost to commodities on a 0.5% dip in the dollar is clearly disproportionate and will, of course, choke the life out of global consumers.  Yay – let’s buy some commodities!!!

Actually, to be honest, we already did. We went bullish on gold on Tuesday and bullish on silver yesterday in Member Chat, even as we took short-term short bets on the indexes because we feared exactly what happened yesterday – the Fed is keeping those free money spigots going full-throttle, no matter what the consequences are for the bottom 99% (hence the title of yesterday’s post).  This is good for the markets but bad for the World.

I feel bad about making money this way but, as I said yesterday: "You’d better be out there making an assload of money because you’ll need it to keep up with rising prices for things you buy and declining values of your US assets." Now we have to factor in the price of security people to guard our gold when we’re going out to the AAPL store for our IPhone 5s (which will also be able to be used as a credit card!). 

Keep in mind that gold and silver are our defensive plays. In Member Chat yesterday, Jromeha mentioned he’s 80% in cash and 85% short the market on the 20% in play and I said I thought that was an excellent way to play what I felt was a blow-off top after the Fed. We added 2 disaster hedges yesterday, a TZA spread that pays 500% if we get to $17 by April and a QID play looking for a quick 66% if they hit $11 by March.  That’s in addition to our very short play on the Dow so we are SHORT in the short-run – DESPITE all the foolishness out of the Fed.

Something has got to give and the dollar remains stubborn above the 78 line and the Russell hasn’t taken back 800 and our "Secret Santa Inflation Hedges" from Christmas and our "Breakout Defense Plays" from early December are up HUGE and need to be protected, as do the dozens of other long-term bullish trades we’ve selected since the beginning of the year. It’s those short, sharp shocks that will get you in this market – the long-term will take care of itself.

454,000 of our fellow Americans were shocked with pink slips last week as Unemployment Claims rocketed back 12.4% up from last week’s 403,000 job losses. That’s the GOOD news compared to Durable Goods, which plummeted 2.5% in December (isn’t that Christmas?) and that is off a whopping 266% lower than "expert economists‘" expectations of a 1.5% gain.  

Hey, at least we’re not Japan, which lost its AA rating this morning as S&P downgrades their long-term debt to AA-. S&P also notes Japan’s demographic situation will strain government finances even more in the future.  Will this cause the Yen to drop and the Dollar to pop? Hell no – Japan’s economy may be a 20-year disaster in progress but it’s not a Bernanke!

Sarkozy is over in Davos talking up the Euro, saying: "Whether it be [German] Chancellor Merkel or myself, never will we turn our backs on the Euro. Never will we abandon the Euro," he said. He added that those who bet against the euro should watch out for their money. "The Euro spells Europe. The euro is Europe and Europe has spelled 60 years of peace on our continent, therefore we will never let the Euro go or be destroyed," he insisted. BUT - "The dollar will continue to be the world’s number one currency," he said.

Spain, Ireland, Greece and Portugal will probably remain “stuck in recession” for the next 18 months and be the laggards in a three-speed European recovery, Standard & Poor’s said.  S&P sees Germany, Europe’s largest economy, and Finland leading the euro region’s recovery this year, with growth of at least 2 percent, Chief European Economist Jean-Michel Six in Paris said today. The U.K., France, Italy, Belgium, Luxembourg and Netherlands will follow, with expansion of in a range of 1.5 percent to 2 percent. The “three-speed” recovery will “complicate” the job of the European Central Bank this year, said Six, who sees the first interest-rate increase at the end of 2011.

If the Pending Home Sales don’t send us off a cliff, we’ll be looking at an upside play on FAS and XLF again (we had one on Tuesday that went very well already).  Our last entry points (with option plays, of course) were $29.25 on FAS and $16.25 on XLF and today is another POMO day, courtesy of the Fed, as is tomorrow and free money always does wonders to cheer up the Financial sector.  

NUE missed earnings and RCL, RTN, PG, MUR, CY, MO, MJN, JBLU, BMY, DHI, CNX, CL, AUO, OI, DRE, ETFC and AMLN all missed either earnings or revenue targets since yesterday’s close but don’t let it bother you as long as the dollar keeps going down – that makes everything we buy more "valuable" – even poorly performing stocks!   Isn’t investing simple?

We can’t wait to clear the last of our technical hurdles (Russell 800) so we can put that sideline cash into play and, like our mindless inflation hedges from December that have doubled and tripled up already – we look forward to betting on the next round of the decline and fall of the United States of America – you burn Rome, we’ll bring the fiddles!  

 

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Sarkozy Goes Postal On Jamie Dimon, Says Bankers Made World Into Madhouse

Posted: 27 Jan 2011 09:08 AM PST


It has just not been Jamie Dimon's day... or week. After a lawsuit earlier in the week implicated his firm in a mortgage scandal for selling "sack of shit" loans, which is very reminiscent of what Goldman did to AIG, the JPM boss had hoped that he could spin his lies and get everyone to forget that he and his klepocratic colleagues virtually destroyed the financial system, and net a reduction in supervision and regulation. After all the banks have been in purgatory where they have had to subsist on bonuses that average just over $300k for JPM (and $400k for Goldman): how on earth are they supposed to do that. During a Davos session Dimon lashed out at persistent bank bashing nearly three years after the global credit crisis began, saying it was "unproductive and unfair.. Not all banks are the same and I just think that this constant refrain 'bankers, bankers, bankers' is just unproductive and unfair. People should just stop doing that." Enter Nicolas Sarkozy, who more so than anyone is concerned by the events in Tunisia and Egypt, considering an increasing percentage of the French population is of North African descent, and quite soon they may decide to do just what their Tunisian (and after tomorrow, Egyptian) brethren have done, and just get rid of their useless president.

Quote Sarkozy talking to Dimon, per Reuters:

"The world has paid with tens of millions of unemployed, who were in no way to blame and who paid for everything. It caused a lot of anger. Too much is too much. The world was stupefied to see one of five biggest U.S. banks collapse like a house of cards. We saw that for the last 10 years, major institutions in which we thought we could trust had done things which had nothing to do with simple common sense. That's what happened... There is an ocean between flexibility and the scandal we saw.  So if people present me as obsessed with regulation, it's because there is a need for regulation. I don't contest the principle of securitisation, but when one offshore country guaranteed 700 times its GDP, are we in the market economy or in a madhouse? Bonuses don't bother me, provided there are also ... draw-downs when there are losses. When things don't work, you can never find anyone responsible. Those who got bumper bonuses for seven years should have made losses in 2008 when things collapsed."

Wow. This could rival the best rant any angry blogger could come up with.

And Jamie's second attempt to make it seem like his feces don't stink suffered massive failure:

Not all banks needed that TARP. Not all banks would have failed," Dimon said at the earlier session. "A lot of banks were stabilising the problem -- JP Morgan bought Bear Stearns because the U.S. asked us to."

Too bad that earlier today, as part of the FCIC disclosure we got the following revelation from none other then Chairprinter Shalom-Packard himself:

"If you look at the firms that came under pressure in that period ... only one ... was not at serious risk of failure. Even Goldman Sachs, we thought there was a real chance that they would go under."

Sorry Jamie. Mission to get you to run the world all over again has experienced massive failure... for now.

Fed to Monetize MOST of the US Debt

Posted: 27 Jan 2011 09:06 AM PST

We begin today with a confession. We have grievously erred. Ironically, it was a government agency (gasp, nooo!) that highlighted our error.

We were trying to get a grip on the Fed's vaunted second round of quantitative easing, the unsinkable QE2.

We made our calculations with the best of intentions: According to the Fed's plan, they were going to purchase $600 billion in Treasury purchases across eight months. And roll another $275 billion in maturing mortgage securities (MBSs) over into Treasuries.

Total price tag: $875 billion.

Here's where we went wrong. On Nov. 4, 2010, we said we thought the Fed planned "to monetize all of the debt that Treasury plans to spit out from now through the middle of next year, and then some." (Emphasis added.)

We assumed a federal deficit of $1.2 trillion. Or $800 billion for the first eight months of the fiscal year. $875 billion meant the Fed was monetizing 109% of the deficit from November 2010-June 2011.

Now, the Congressional Budget Office has upped its estimate of the fiscal 2011 deficit to $1.5 trillion, spitting egg all over our faces.

The Fed is not monetizing "all" of the deficit across an eight-month span "and then some"…it's monetizing only 88%.

We were off by 21%. Nostra culpa.

Although following their line of thinking, it probably leaves the door open for QE2 part deux. Or even QE3.

Indeed, gold has given back much of the late-day gains that materialized yesterday after the Fed announced no changes to its QE2 policy. The spot price is back to $1,334.

Silver, on the other hand, is holding its ground at $27.66.

Ah, well, let's call it even… The CBO report included another nugget that confirms another forecast we've been criticized for:

Yesterday's report indicates Social Security will pay out $45 billion more in benefits this year than it will collect in taxes.

With no changes to the program, CBO says Social Security will now run permanent deficits…and will drain all the Social Security trust funds by 2037.

You may recall during much of 2010, we projected Social Security would go into the red on Sept. 30, 2010…the end of the federal fiscal year. Of course, the reality is worse than even the CBO admits because Congress already spent all the "trust fund" money, leaving IOUs in its place.

Addison Wiggin
for The Daily Reckoning

Fed to Monetize MOST of the US Debt originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."


Masters of Monetary Policy

Posted: 27 Jan 2011 09:00 AM PST

Pity the poor English. Here's the latest:

LONDON – Prime Minister David Cameron 's coalition government received a body blow on Tuesday after official figures showed that Britain's economy shrank by half a percent in the last three months of 2010.

The figures on the economy's performance from October to December are subject to revision as the data are refined in coming weeks. But the message to the Cameron government seemed clear: Its policies of steep spending cuts and tax increases, Europe's most ambitious austerity program, faced, at a stroke, a sharply heightened political vulnerability.

The decline came after four consecutive quarters of economic growth. Spokesmen for the opposition Labour Party and trade union officials seized on the new figures, saying they showed the government had lost its gamble that it could impose the tough austerity measures and still keep the economy growing.

The government responded by blaming the snow blizzards that hit Britain last month, the country's coldest December in 100 years, and saying it would "not be blown off course by bad weather."

The government blames the weather. Analysts blame the conservative government's austerity measures. They're both wrong.

The weather had some effect. But not enough to take a full percentage point off GDP. (The difference between expectations and the actual result.) Cuts in government spending, meanwhile, should reduce GDP – at first. But the cuts haven't even begun yet. It's not the weather. It's not the government. It's the Great Correction, doing its job.

In the minds of most economists, any slowdown, whatever the cause, is bad news. They think economies have to run hot all the time in order to provide "growth," jobs and profits. Here at The Daily Reckoning we take a different view. Sometimes economies need to take a rest. They need to check the map. Just racing along is not necessarily a good thing. They need to be sure they're headed in the right direction.

But there's the problem, right there. London has the same knuckleheads in the drivers' seat as Washington. Mervyn King, England's answer to Ben Bernanke, said that since he and his colleagues took over, "there has not been a single quarter of negative growth." But that speech was made in 2007. To what did he attribute this grand performance? In a more recent speech, he explained that since "monetary policy is a flexible instrument that can be changed in either direction each month, it is the best tool for managing the economy in the short run."

Well, the bank of Mervyn King and the bank of Ben Bernanke are on the same page. Neither government can use fiscal policy – both are out of money. But they still have monetary policy…or to be more exact, they still have the printing press.

So, they push down on the accelerator…and head for a ditch.

And here's an item that helps us understand better how the zombie state works. The New York Times reports:

Mortgage Giants Leave Legal Bills to the Taxpayers

Since the government took over Fannie Mae and Freddie Mac, taxpayers have spent more than $160 million defending the mortgage finance companies and their former top executives in civil lawsuits accusing them of fraud. The cost was a closely guarded secret until last week, when the companies and their regulator produced an accounting at the request of Congress.

The bulk of those expenditures – $132 million – went to defend Fannie Mae and its officials in various securities suits and government investigations into accounting irregularities that occurred years before the subprime lending crisis erupted. The legal payments show no sign of abating.

Documents reviewed by The New York Times indicate that taxpayers have paid $24.2 million to law firms defending three of Fannie's former top executives: Franklin D. Raines, its former chief executive; Timothy Howard, its former chief financial officer; and Leanne Spencer, the former controller.

See how the zombies do it? The mortgage companies collude with the Fed (artificially low rates) and Congress (deductibility of interest payments, implied federal backing of Fannie and Freddie) to stick Americans with trillions in mortgage debt. Then, when the bubble blows, the feds take over Fannie and Freddie, adding $5 trillion to America's national debt. And the taxpayers get to pay the legal bills too.

What's not to like? The lawyers are happy. The feds are happy. Fannie and Freddie's bondholders are happy.

All the insiders are happy.

It's just the outsiders – the poor schmucks who haven't figured out how to get on the gravy train – who aren't happy. And who cares about them?

Regard,

Bill Bonner
for The Daily Reckoning

Masters of Monetary Policy originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."


Chris Martenson Interview With Jim Rogers: Why Inflation Is Raging Worldwide And He's Shorting US Treasury Bonds

Posted: 27 Jan 2011 08:44 AM PST


"I see more inflation and more currency turmoil as we go forward. There are huge debt imbalances in the world. U.S. is the largest debtor nation in the world and all the assets are in Asia. The largest creditors in the world are China, Korea, Japan, Taiwan, Hong Kong, Singapore – this is where the assets are and the debts are in the West. Those imbalances have to be resolved. They frequently lead to more currency turmoil. We’ll see more inflation, we’ll see more governments fall. We just saw Tunisia fall – more are coming because the world is going to continue to have these problems, and especially inflation that is going to cause more social unrest."

So said investing legend Jim Rogers when he spoke recently with ChrisMartenson.com about the inflationary pressures rising dramatically around the globe, despite some governments' best efforts to downplay them. Jim shares his "outside in" perspective on US monetary and fiscal policy, and how international players find themselves forced to react. He sees a lot of fundamental imbalances that need to be corrected for, as well as shortages of almost everything developing. In his words, "It's going to be a real mess before it's over."

Download/Play the Podcast
Read the Transcript of the Podcast
Report a Problem Playing the Podcast

In this podcast, Jim explains why: 

  • Inflation is ramping up worldwide, though many governments are trying to downplay the risk. In fact, the Fed is 'throwing gasoline on the fire' with its prodigious money printing.
  • Higher interest rates are inevitable, which will lead to a lower standard of living for everyone - except those who have recognized the risks and invested accordingly. 
  • Dangerous supply drawdowns are occurring across the commodity landscape (including oil). This will increase the upward pressure on prices.
  • Given a future of higher rates, as well as massive debt issuance, Jim thinks it's now time to short U.S. Treasuries
  • The world economy is more interconnected than ever. All the players need each other, raising the systemic risk posed if countries start defaulting (which Jim notes is a more common occurance than most people realize).

As with our recent interviews with Marc Faber and Bill Fleckenstein, Jim ends the interview with his specific outlook for 2011. 

On Thu, Jan 27, 2011 at 12:28 PM, Adam Taggart wrote: Tyler - Here's an interview between Chris and Jim Rogers we just released. Jim makes the case for higher inflation, higher interest rates, and less of just about any hard asset: http://www.chrismartenson.com/blog/interview-jim-rogers-why-inflation-raging-worldwide-and-hes-shorting-us-treasury-bonds/51747 HTML below. --tx, A

"I see more inflation and more currency turmoil as we go forward. There are huge debt imbalances in the world. U.S. is the largest debtor nation in the world and all the assets are in Asia. The largest creditors in the world are China, Korea, Japan, Taiwan, Hong Kong, Singapore – this is where the assets are and the debts are in the West. Those imbalances have to be resolved. They frequently lead to more currency turmoil. We’ll see more inflation, we’ll see more governments fall. We just saw Tunisia fall – more are coming because the world is going to continue to have these problems, and especially inflation that is going to cause more social unrest."

So said investing legend Jim Rogers when he spoke recently with ChrisMartenson.com about the inflationary pressures rising dramatically around the globe, despite some governments' best efforts to downplay them. Jim shares his "outside in" perspective on US monetary and fiscal policy, and how international players find themselves forced to react. He sees a lot of fundamental imbalances that need to be corrected for, as well as shortages of almost everything developing. In his words, "It's going to be a real mess before it's over."

Click the play button below to listen to Chris' interview with Jim Rogers:

[swf file="http://media.chrismartenson.com/audio/jim-rogers-2011-01-22-final.mp3"]

Download/Play the Podcast
Read the Transcript of the Podcast
Report a Problem Playing the Podcast

In this podcast, Jim explains why: 

  • Inflation is ramping up worldwide, though many governments are trying to downplay the risk. In fact, the Fed is 'throwing gasoline on the fire' with its prodigious money printing.
  • Higher interest rates are inevitable, which will lead to a lower standard of living for everyone - except those who have recognized the risks and invested accordingly. 
  • Dangerous supply drawdowns are occurring across the commodity landscape (including oil). This will increase the upward pressure on prices.
  • Given a future of higher rates, as well as massive debt issuance, Jim thinks it's now time to short U.S. Treasuries
  • The world economy is more interconnected than ever. All the players need each other, raising the systemic risk posed if countries start defaulting (which Jim notes is a more common occurance than most people realize).

As with our recent interviews with Marc Faber and Bill Fleckenstein, Jim ends the interview with his specific outlook for 2011. 

 

A Report on Price Inflation from the Front Lines

Posted: 27 Jan 2011 08:41 AM PST

We asked, you responded. In Monday's edition of your Daily Reckoning, we addressed the steady, inexorable creep of inflation. And this despite our guardian angel central bankers doing their best to maintain price stability…through, we are told, the flagrant manipulation of our currency.

Here's Jean-Claude Trichet, head of the European Central Bank, reporting from the frontlines:

"All central banks, in periods like this where you have inflationary threats that are coming from commodities, have to…be very careful that there are no second-round effects" on domestic prices, Mr. Trichet told The Wall Street Journal from his office overlooking Frankfurt's financial district.

"Can you believe it, Dear Comrade?" we wrote on Monday. "If we are reading Mr. Trichet's comments correctly, it would seem that the world's food and energy communities are consciously rallying against us. Long thought to be soulless, mindless vegetables and minerals, commodities have apparently taken it upon themselves to 'become' more expensive, to raise their own prices. We can almost hear the battle cries coming from the fields: Ears of corn unite!"

Given the fact that we are now at war with self-inflating vegetables and energy sources, we decided to conduct a little front-line reconnaissance operation…with the help of the Daily Reckoning brain trust. Specifically, we asked readers to send us some boots-on-ground anecdotes from their own gas pumps and grocery stores.

"Are you noticing a price creep in your monthly bills?" we wondered. "Could it be that inflation is already here, that it has infiltrated our defenses and lurks in our very midst?"

Reckoners filed the following field reports:

Don, writing from Goffstown, NH, notes that, "Locally, gasoline is up 8-10 cents/gallon. Food is up about 10% over last year. And McDonald's announced this morning it will be raising its prices."

Fellow Reckoner, Anna, observed:

"Those rebels, the vegetables, fruits, corn, and other food items, have attacked our neighborhood stores in ways unimaginable. When growing a lowly bell pepper in my garden this past summer, I had no way of knowing that the scoundrel would turn traitor and cost $4.39 each at my local supermarket. Had I known that, I would have established a green house to grow these crooks in and, thereby, would have used their rebellion for my benefit.

"Ah, the value of hindsight," Anna continued, "it counts for naught. And the asparagus! It was raging at a full price of $3.98 per pound! I couldn't believe my eyes. I could go on but I am sure by now you get the picture. This is not JUST 10%. The bell pepper was at least four times higher than the same item last winter. The asparagus, by comparison, was ONLY around 40% higher. And it was not just these two vegetables but to continue would take more pages than you would want to read."

Chimes another reader, "VTY":

"The recent Scottsdale antique car auction had bidders paying anything just to secure something that wasn't greenbacks. Cars that seemed pricey a year ago at $50K were going for twice that. To me, that means the big money is scared; they have lost faith in government, the Fed and our ability to manage our future.

"Besides," VTY concludes, "it's much harder to steal a 5500 pound Packard than a clutch of Krugerrands (And the Packard seems so innocent by comparison.)"

And from Florida, Larry reckons:

"The Tampa Bay Area has creeping inflation. Food prices, clothing, gasoline have all gone up. Makes stretching the dollar harder. Candy bars and basics like butter, milk and bread are up 20 cents or are the same price, but the sizes are smaller. McDonald's prices are going up and Arby's are closing because beef is too expensive. Go figure!

"1963 Franklin Half Dollar Silver coins have gone up from $7.50 to $12.50. Other silver coins are being bought at 12 times face verses 5 times face value from the prices last year. Silver dimes are being sold for $2.10. Peace Dollars have gone up from $12.00 to $16.00 for junk silver.

"But according to the Feds and the government I must be mistaken, because we only have a 2 to 3 percent inflation rate. So my figures must be wrong! But my better half wants more money to shop for food with! I'm not going to tell her she is wrong!"

And "A. Grocer" has this:

"I have been keeping an eye on things since I stocked shelves at the grocery store here in Elyria, Oh. We used to sell pasta 3 lbs. for $1 as an advertised special about 2 years ago. Now it goes for $1 per lb. Apple juice was advertised for 99 cents for a 64 oz. bottle. You'll be lucky to get it for $1.59 now. I could go on… Things used to go up here and there by 5 to 9 cents at a time. Now they jump 59 cents at a time…and this is just the beginning! It is truly shocking…I reckon' ya better say yer prayers my friends."

There were so many emails inflating our inbox, it was hard to keep up.

From Rick:

"Car Insurance is up 11.3 % yoy…despite all vehicles being one year older. Health insurance up 13.5 % yoy. Homeowners Insurance up 32 % yoy…"

From Rex:

"Domestic beer is up $1.33 on a 12 pk in less then 8 months. That dummy Bernanke. What's next, smaller cans?"

And this, from a Fellow Reckoner in the Lone Star State:

"I work with those 'foot-soldiers' in the corn army. When I went into that field back in '02, you could 'enlist' 6 to 8 of these 'soldiers' for one paper dollar. Now they won't recruit for less than 68 cents. Now, the current generation of corn ears is asking 85 cents to sign on to your dinner table. This is in TEXAS; we grow corn here for crying out loud."

Indeed!

We also received reports from Reckoners in Europe, Asia, South America and far beyond. Who knew we had readers, for example, in Australia? (Which reminds us: Hi mum!)

Thanks to everyone who wrote in. We'll feature more frontline reports, including some international insights, in future issues. For now, let's dive into today's column…also about inflation…

Joel Bowman…and The Daily Reckoning Readership
for The Daily Reckoning

A Report on Price Inflation from the Front Lines originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."


How We Blew It

Posted: 27 Jan 2011 08:37 AM PST

by Addison Wiggin - January 27, 2011

  • The 5 throws itself upon the mercy of readers... How a government agency showed us up
  • Arab leaders try to stave off revolt, drive wheat prices to highest since summer 2008
  • S&P downgrades Japan... prompting Chuck Butler to start thinking "Conspiracy!"
  • Prime foreclosure property... if you're a herpetologist
  • Wide consensus of readers urges us to "ignore the nutball" who told us to "keep politics out of it"

We begin today with a confession. We have grievously erred. Ironically, it was a government agency (gasp, nooo!) that highlighted our error.

We were trying to get a grip on the Fed's vaunted second round of quantitative easing, the unsinkable QE2.

We made our calculations with the best of intentions: According to the Fed's plan, they were going to purchase $600 billion in Treasury purchases across eight months. And roll another $275 billion in maturing mortgage securities (MBSs) over into Treasuries.

Total price tag: $875 billion.

Here's where we went wrong. On Nov. 4, 2010, we said we thought the Fed planned "to monetize all of the debt that Treasury plans to spit out from now through the middle of next year, and then some.” (Emphasis added.)

We assumed a federal deficit of $1.2 trillion. Or $800 billion for the first eight months of the fiscal year. $875 billion meant the Fed was monetizing 109% of the deficit from November 2010-June 2011.

Now, the Congressional Budget Office has upped its estimate of the fiscal 2011 deficit to $1.5 trillion, spitting egg all over our faces.

The Fed is not monetizing “all” of deficit across an eight-month span “and then some”… it’s monetizing only 88%.

We were off by 21%. Nostra culpa.

Although following their line of thinking, it probably leaves the door open for QE2 part deux. Or even QE3.


Indeed, gold has given back much of the late-day gains that materialized yesterday after the Fed announced no changes to its QE2 policy. The spot price is back to $1,334.

Silver, on the other hand, is holding its ground at $27.66.


Ah, well, let’s call it even… the CBO report included another nugget that confirms another forecast we've been criticized for:

Yesterday's report indicates Social Security will pay out $45 billion more in benefits this year than it will collect in taxes.

With no changes to the program, CBO says Social Security will now run permanent deficits… and will drain all the Social Security trust funds by 2037.

You may recall during much of 2010, we projected Social Security would go into the red on Sept. 30, 2010… the end of the federal fiscal year. Of course, the reality is worse than even the CBO admits because Congress already spent all the “trust fund” money, leaving IOUs in its place.

[Ed. Note: One alternative source of retirement income -- what we’ve labeled “the ‘other’ government-backed retirement program” -- is still a viable choice. Lifetime Income Report editor Jim Nelson shares the details with you in this presentation.]


With stocks up a tad this morning the Dow is again knocking on the door of 12,000. The old gray lady got her foot through yesterday. But then she got kicked in the shins by a late sell-off just before the close. She beat a hasty retreat to 11,985.


First-time unemployment claims moved up big-time over the last week, from a revised 403,000 to 454,000. Incredibly, the Bureau of Labor Statistics blames this on… snow. Think they’re taking their cue from the Brits, who just blamed negative Q4 GDP on bloody foul weather? Nah.


Durable goods orders fell 2.5% in December, according to the Census Bureau, which -- for the record -- did not cite weather among the contributing factors.

The month-to-month number is extremely volatile, but the overall trend is heading down -- orders for everything from washing machines to cars to aircraft parts has fallen four out of the last five months.


Wheat prices have hit a 29-month high of $8.60 a bushel, amid the following reports of stockpiling…

  • Algeria bought 800,000 tons yesterday from an undisclosed seller

  • Jordan bought 15,000 tons last week from the United States

  • Saudi Arabia plans to double its reserves, to cover a year’s worth of demand.
Given the WikiLeaks revolution in Tunisia last week, you think autocrats across the region are getting nervous?



It was one thing for an American-backed strongman of 30 years standing to be chased out of a tiny holdout like Tunisia.

But now they’re rioting in Yemen… where an American-backed strongman of 30 years standing is helping the CIA pursue terrorism suspects. And in Egypt… where an American-backed strongman of 30 years standing rules over one-third of all Arabs. The Egyptian stock market fell 10% today.

Everywhere the story’s the same… years of corruption and repression finally boiling over because of rising food prices. Thus, “panic buying” of grains, says the Financial Times. “Governments are reacting to growing social unrest about rising domestic prices.”

“Across the Middle East, we are waiting to see the downfall of America's friends,” writes veteran Middle East correspondent Robert Fisk of the London Independent. “Could it be that we are going to see a new Arab world which is not controlled by the West?”

And what would that do to oil prices? So far, the revolts are confined to Arab states that don’t have much oil. This morning, crude clings to $87 a barrel. Tomorrow? Who knows? If you haven’t considered Byron King’s “New War” scenario in a while, you might want to give it a look now.


The currency market is in a lather this morning after S&P downgraded Japan’s credit rating from AA to AA-minus… for reasons that should surprise no one: big deficits and an aging population.

“Japan’s deficit has been huge for years now,” says EverBank’s Chuck Butler, “so why is it important for S&P to downgrade them now? OK, my conspiracy blood is really boiling over right now, so I’m going to throw this out there and see if it sticks.

“S&P is just getting tuned up for a run at the U.S.’ credit rating. Now that would take some intestinal fortitude. I’m pushing the envelope here, thinking that S&P has that kind of intestinal fortitude, but I’m willing to take that chance.”

In the meantime, the yen has lost nearly 1% against the dollar, currently trading at 82.9.


Foreclosure property for sale: Price slashed from $175,000 to $109,000.



The snakes come free.


The most recent owners, the Sessions family, walked away from the five-bedroom, two-bath home in Rexburg, Idaho, bankrupted and unable to control the infestation of harmless-but-annoying garter snakes -- in the ceilings, the walls, the crawl space, pretty much everywhere.

The irony is what motivated them to buy the house in the first place: "We were told that the previous owners in there didn't want to... pay their mortgage, so they made up a snake story," Ben Sessions told the local paper.

Then spring came and the snakes came out of hibernation. "I went online to find out what was going on,” says Amber Sessions. “I typed in ‘Idaho snake house,' and there was a Channel 6 news report of the previous people that lived there... and it was our house.”

“It's been a horrible experience,” says Todd Davis, the real estate agent hired by Chase to find a new buyer. Um, yeah.



“Too funny!” a reader writes of the guy who wrote in yesterday telling us to “keep politics out” of The 5 and stick to “coldhearted research.”

“Leaving politics out of economics would be like trying to drive a car with no steering wheel, or making an omelet without eggs.”


“Ignore the nutball who wants you to cull your political observations from your economic ones,” another reader implores. “They’re so intertwined and interconnected, it’s essentially a nonsensical request.

“I don’t agree with some of your political views, but I’d much rather have your version of the unvarnished truth -- including the occasional political rant -- than to have you try to adhere to such a silly editorial standard. You guys do a great job!"

The 5: That's the funny part... to which political views are you referring? We can point to editions in which we are accused of being too far to the "liberal," using the right's worst insult, and others in which we're accused of being "right-wingers", the equivalent on the left. Which is it?

Both parties use what Karl Rove proudly called "wedge issues" to force you to decide what side of the aisle you're on. Both parties believe government is the "answer" to the "problems" they decide to face. Neither party will own up to how impossibly expensive it is to run a centralized government and economy. Is this a political view?

We don't like to be forced to pay nearly half our income for horribly inefficient and misdirected government bureaucracies. Is that a political view?

We don't like the fact we're automatically a party to the high-stakes game being played by Treasury and the Fed by virtue of having been born into the downside of an asset bubble pumped up by the same players... is that a political view?


“Unfortunately, Washington has a huge impact on our daily lives and our investments," concurs a third. "Do not take the politics out of your newsletters!

“Thanks for all your thought-provoking investment advice, especially for us small business owners.”


“The reader who objected to you inserting your 'politics' into The 5 is perhaps understandably confused," writes another reader. "You aren't inserting your politics into The 5, you're inserting your economics, which is absolutely relevant and what gives the various Agora newsletters their value.

“What I interpret as your fundamental Austrian economic analysis is generally confused with conservative/Republican/etc. politics because it resembles the sounds those derelicts make when their mouths are moving (i.e., lying) as they continually vote to expand the state.

“And you're correct in that when the government is so thoroughly inserted into every facet of our economic lives one ignores them at your own risk.

“I'd refer him/her to Laissez Faire Books for remedial instruction. Just finished Financial Reckoning Day, by the way -- that would be a good start for anyone.”

The 5: Thank you for the referral.


“Reading The 5 keeps me informed about what is really going on in the world. Politics and the flow of money are inseparable, in my opinion. Events that affect either seem to make their way into your newsletters along with advisories about the significance of those events relative to the flow of money.

“Therefore, I am seldom surprised by 'news' of what is going on around the globe that concerns things that affect my portfolio or my and my family's overall wealth and welfare. I almost always already know more about it from The 5 than the published, superficial, politically correct and otherwise slanted efforts of the media.

"Hang in.”

The 5: Hangin'.


“As an answer to the guy that doesn't like hearing about politics,” writes our final contributor, “I would like to point out that it is really an added benefit to your service.

“Yes, you have the guys that hop all over the planet collecting air miles on what seems like a daily basis to get the inside goodies on those companies that seem to profit mightily on a routine basis. Yes you have the Reserve membership (which I am glad to have signed up for) that gives you a lifetime of the best data I've seen out there for a one-time fee.

“But on top of all that, there is one invaluable service that is tossed in for free -- perhaps not the most valuable service compared with all the rest -- but nonetheless worth quite a lot to me.

“In the daily 5 Min. Forecast and The Daily Reckoning, I have a beautiful - if tongue-in-cheek -- synopsis of anything important that is going on in the political/financial world without the need to personally get that slimy, dirty, creepy feeling that comes with actually having to listen to things like the current president speaking in a State of the Union address or having to listen to the talking heads on the mainstream financial media.

“While I do send my condolences to the poor editors that do have to listen to all that junk every day, I happily read their synopsis and thank them for saving me a 30-minute shower at the end of the day.”

The 5: Thank you. In our efforts to spare you a shower, we maintain an onsite decontamination chamber.


“I have had enough of your negative attitude toward the president,” writes the lone dissenter, at the tail end of a list of other thing he doesn’t like about us. “It seems to me that things are improving, although not at the rate desired -- so do you think it might be reasonable to address some of the positives and where we can gain financially from them?”

The 5: We actually have nothing against this president. At least, we don't have any more against this one than the last. In many ways, they're indiscernible. But you might be onto something. Maybe we could tap our golden rolodex of money managers to organize private placements in some of the president’s favorite initiatives that aim to get the economy “back on track.”

Judging by the Lenny Skutnik list of the president’s invited guests at the State of the Union address, this fund would invest in, say, roofing companies that retool into solar panel factories… and organic ice cream parlors.

Yes! Ingenious! Thank you!

Cheers,
Addison Wiggin
The 5 Min. Forecast

P.S.: On a slightly different note: “He's the best,” writes a satisfied reader of Byron King’s premium advisory Energy & Scarcity Investor. "I'm extremely happy. The range of gains is between 50-90% in less than six months.

“Worth the subscription -- of course -- and then some!” writes another, who lays out his positions…

“70,000 shares of [company X]… up $175,000
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“Happy -- and how!”

Right now, new subscribers to Energy & Scarcity Investor get the skinny on a “dark horse” in the rare earths sector that could beat all the familiar names into production… within months, or even weeks.

By his reckoning, it could be a nine-bagger… for reasons he makes abundantly clear here.


More Reason To Buy Gold/Silver: CBO Baseline Shows Staggering Debt

Posted: 27 Jan 2011 08:37 AM PST

The Congressional Budget Office (CBO) today released a ten-year budget baseline showing $7 trillion in deficits over the next decade. Yet because Congress requires the CBO to include all sorts of unrealistic assumptions (that all tax cuts will expire, that the AMT will never again be patched, that discretionary spending will barely move for a decade), some adjustments must be made.

This more realistic "current-policy" budget baseline reveals a ten-year deficit of $13 trillion. The annual budget deficit never falls below $1 trillion, and reaches $1.9 trillion by 2021. At that point, the $25 trillion debt would exceed the size of the entire economy – and even that assumes a return to peace and prosperity.

These deficits are driven by spending. Even if all the 2001 and 2003 tax cuts are made permanent, tax revenues (historically 18.0 percent of GDP) would climb to 18.4 percent by 2021. Yet federal spending (historically 20.3 percent of GDP) is projected soar to 26.4 percent by 2021. By that point, 100 percent of rising long-term deficits will result from above-average spending. There is no long-term revenue decline.
More Here..


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Gold Gouged

Posted: 27 Jan 2011 08:27 AM PST

Hickey and Walters (Bespoke) submit:

With a decline of over 7% so far this month, gold is starting off the year on a bad note. As shown in the chart below, today's sell-off has taken the metal to its lowest level since October 1st and broken what little support that was left between here and the 200-day moving average.


Complete Story »


Stocks Gain Against Gold, And That's Good News

Posted: 27 Jan 2011 08:24 AM PST

Calafia Beach Pundit submits:


The above chart plots the daily ratio of the S&P 500 index to the spot gold price. Stocks have been doing pretty well in nominal terms, with the S&P now up 92% from its Mar. '09 low. But against gold, stocks are up only 36% from last year's low. The thing that caught my eye is that since the end of last November, stocks are up 10% while gold is down 5%. Gold is down almost 8% (almost $110/oz) since its early December high. Stocks may be on the verge of a significant upswing against gold, after losing 87% of their value from the highs of 2000 through Mar. '09, as shown in the next chart.


Taking a very long-term perspective and ignoring the impact of dividends, stock prices have only just kept pace with gold prices over the past 83 years. This fact lends credence to those who advocate a gold standard, since it shows that gold indeed holds its value against other real assets over long periods, though of course there have been huge swings from time to time. But if the best that gold can do over time is to match the increase in stock prices, while delivering enormous extra volatility along the way, then gold is not a particularly attractive asset from an investment perspective, especially since it pays not a penny of income and in fact costs money to store. And it's particularly unattractive today, unless you are convinced that the Fed is on the verge of committing a major monetary mistake and/or the U.S. is going to default on its debt obligations.

Complete Story »


Gold Daily and Silver Weekly Charts

Posted: 27 Jan 2011 08:09 AM PST


This posting includes an audio/video/photo media file: Download Now

Goodnight Amazon: World's Most Overhyped Retailer Misses Top Line

Posted: 27 Jan 2011 08:07 AM PST


All one can say is oops. That margin compression sure does suck:

  • Q4 EPS USD 0.91 vs. Exp. USD 0.88
  • Q4 net sales USD 12.95bln vs. Exp. USD 13.03bln
  • Net sales are expected to be between $9.1 billion and $9.9 billion, or to grow between 28% and 39% compared with first quarter 2010
  • Operating income is expected to be between $260 million and $385 million

We have yet to see snow being blamed for the After Hour stock collapse

And a whole lot of momentum chasers got wiped out all over again. From Dow Jones earlier:

Amazon appears to have pre-earnings bullish bias. About 62,000 calls traded on online retailer Amazon.com, double its average daily volume against 40,000 puts near midday heading into its earnings after the closing bell, according to Trade Alert. "We are seeing a modest bid up in call premium and a reduction in the premium in puts," said Steve Place, a founder of investingwithoptions.com. "That indicates to us that the majority of call options were bought today and the majority of puts were sold. That's pretty bullish on today's morning price action." The busiest contract is the weekly $190 strike calls which expire this Friday with volume of 5,070 contracts, Trade Alert data show. Amazon options this morning are pricing in about a 6.4 percent post earnings move in the stock price based on the front month average of the $180 and $185 straddles, Place said. He notes the close-to- close movement historically for Amazon earnings is not that big but the maximum movement for the trading day is quite large.

Full release:

Amazon.com, Inc. (NASDAQ:AMZN) today announced financial results for its fourth quarter ended December 31, 2010.

Operating cash flow increased 6% to $3.50 billion for the trailing twelve months, compared with $3.29billion for the trailing twelve months ended December 31, 2009. Free cash flow decreased 14% to $2.52 billion for the trailing twelve months, compared with $2.92 billion for the trailing twelve months ended December 31, 2009.

Common shares outstanding plus shares underlying stock-based awards totaled 465 million on December 31, 2010, compared with 461 million a year ago.

Net sales increased 36% to $12.95 billion in the fourth quarter, compared with $9.52 billion in fourth quarter 2009. Excluding the $139 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales would have grown 37% compared with fourth quarter 2009.

Operating income was $474 million in the fourth quarter, compared with $476 million in fourth quarter 2009. The unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter on operating income was $18 million.

Net income increased 8% to $416 million in the fourth quarter, or $0.91 per diluted share, compared with net income of $384 million, or $0.85 per diluted share, in fourth quarter 2009.

"Thanks to our customers, we achieved two big milestones," said Jeff Bezos, founder and CEO of Amazon.com. "We had our first $10 billion quarter, and after selling millions of third-generation Kindles with the new Pearl e-ink display during the quarter, Kindle books have now overtaken paperback books as the most popular format on Amazon.com. Last July we announced that Kindle books had passed hardcovers and predicted that Kindle would surpass paperbacks in the second quarter of this year, so this milestone has come even sooner than we expected - and it's on top of continued growth in paperback sales."

Full Year 2010

Net sales increased 40% to $34.20 billion, compared with $24.51 billion in 2009. The unfavorable impact from year-over-year changes in foreign exchange rates throughout the year on net sales was $86 million.

Operating income increased 25% to $1.41 billion, compared with $1.13 billion in 2009. The unfavorable impact from year-over-year changes in foreign exchange rates throughout the year on operating income was $28 million. In 2009, operating income was negatively impacted by a $51 million legal settlement.

Net income increased 28% to $1.15 billion in 2010, or $2.53 per diluted share, compared with net income of $902 million, or $2.04 per diluted share, in 2009.

Highlights

 

  • Amazon.com is now selling more Kindle books than paperback books. Since the beginning of the year, for every 100 paperback books Amazon has sold, the Company has sold 115 Kindle books. Additionally, during this same time period the Company has sold three times as many Kindle books as hardcover books. This is across Amazon.com's entire U.S. book business and includes sales of books where there is no Kindle edition. Free Kindle books are excluded and if included would make the numbers even higher.
  • The Company sold millions of third-generation Kindle devices with the new advanced paper-like Pearl e-ink display in the fourth quarter and the third-generation Kindle eclipsed "Harry Potter and the Deathly Hallows" as the bestselling product in Amazon's history.
  • The U.S. Kindle Store now has more than 810,000 books including New Releases and 107 of 112 New York Times Bestsellers. Over 670,000 of these books are $9.99 or less, including 74 New York Times Bestsellers. Millions of free, out-of-copyright, pre-1923 books are also available to read on Kindle.
  • Amazon added to its growing list of "Buy Once, Read Everywhere" Kindle apps, launching a Kindle app for Windows Phone 7. In addition, the Kindle for Android app was updated to enable users to buy, read and sync over 100 Kindle newspapers and magazines. All Kindle apps let customers "Buy Once, Read Everywhere"--on Kindle, Kindle 3G, Kindle DX, iPad, iPod touch, iPhone, Mac, PC, BlackBerry and Android-based devices. All Kindle apps are free and incorporate Amazon's Whispersync technology, which allows readers to seamlessly switch between devices. With Kindle Worry-Free Archive, books purchased from the Kindle Store are automatically backed up online in the Kindle library on Amazon where they can be re-downloaded wirelessly for free, anytime.
  • The Company announced Price Check for iPhone, a new price comparison app that provides shoppers an easy way to compare in-store prices with the low prices from Amazon.com and other online merchants. Shoppers can use the app to scan a barcode, snap a picture, or say or type a product name to instantly see online prices for that item. Over the Black Friday-Cyber Monday weekend, mobile shoppers used Price Check to look up prices over a million times. In December, shoppers used the app more than two million times to check prices.
  • North America segment sales, representing the Company's U.S. and Canadian sites, were $7.21 billion, up 45% from fourth quarter 2009.
  • International segment sales, representing the Company's U.K., German, Japanese, French, Chinese and Italian sites, were $5.74 billion, up 26% from fourth quarter 2009. Excluding the unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, sales grew 29%.
  • Worldwide Media sales grew 12% to $5.23 billion. Excluding the unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, sales grew 13%.
  • Worldwide Electronics & Other General Merchandise sales grew 60% to $7.39 billion. Excluding the unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, sales grew 62%.
  • The Company launched Amazon.it, an Italian-language website offering customers a vast selection of books, DVDs, video games, music and consumer electronics at everyday low prices. Amazon.it's convenient services include Amazon Prime, the membership program with unlimited free guaranteed 2-3 day delivery at an annual fee of 9.99 Euros. The first product sold on Amazon.it was a Canon Pixma printer to a new Prime customer in Turino, Italy.
  • Amazon Web Services (AWS) announced lowered usage pricing on existing Premium Support offerings by 50% and added two new support plans to meet the needs of developers and enterprises of all sizes and technical ability. In addition to the existing Silver and Gold support plans, AWS now offers a Bronze support plan for $49 per month and a Platinum support plan that provides 15 minute response times and dedicated Technical Account Managers.
  • AWS achieved Level 1 Payment Card Industry (PCI) compliance, continuing its commitment to providing the security certifications developers and enterprises care about. Merchants and other service providers can now run their applications on AWS PCI-compliant technology infrastructure to store, process and transmit credit card information in the cloud.
  • AWS launched Elastic Beanstalk, an easy way for developers to quickly deploy applications to AWS and manage applications in the AWS cloud. Elastic Beanstalk automatically scales up and down as needed so developers don't need to worry about configuring their infrastructure requirements in AWS. Unlike existing application containers or "platform as a service" offerings that force developers to accept infrastructure decisions pre-determined by the vendor, Elastic Beanstalk allows developers to "open the hood" to tinker with the AWS resources powering their applications. AWS customers can now choose to have as much automation or as much control as they wish.

Financial Guidance

The following forward-looking statements reflect Amazon.com's expectations as of January 27, 2011. Our results are inherently unpredictable and may be materially affected by many factors, such as fluctuations in foreign exchange rates, changes in global economic conditions and consumer spending, world events, the rate of growth of the Internet and online commerce and the various factors detailed below.

First Quarter 2011 Guidance

 

  • Net sales are expected to be between $9.1 billion and $9.9 billion, or to grow between 28% and 39% compared with first quarter 2010.
  • Operating income is expected to be between $260 million and $385 million, or between 34% decline and 2% decline compared with first quarter 2010.
  • This guidance includes approximately $140 million for stock-based compensation and amortization of intangible assets, and it assumes, among other things, that no additional business acquisitions or investments are concluded and that there are no further revisions to stock-based compensation estimates.

A conference call will be webcast live today at 2 p.m. PT/5 p.m. ET, and will be available for at least three months at www.amazon.com/ir. This call will contain forward-looking statements and other material information regarding the Company's financial and operating results.

These forward-looking statements are inherently difficult to predict. Actual results could differ materially for a variety of reasons, including, in addition to the factors discussed above, the amount that Amazon.com invests in new business opportunities and the timing of those investments, the mix of products sold to customers, the mix of net sales derived from products as compared with services, the extent to which we owe income taxes, competition, management of growth, potential fluctuations in operating results, international growth and expansion, the outcomes of legal proceedings and claims, fulfillment center optimization, risks of inventory management, seasonality, the degree to which the Company enters into, maintains and develops commercial agreements, acquisitions and strategic transactions, and risks of fulfillment throughput and productivity. Other risks and uncertainties include, among others, risks related to new products, services and technologies, system interruptions, government regulation and taxation, payments and fraud. In addition, the current global economic climate amplifies many of these risks. More information about factors that potentially could affect Amazon.com's financial results is included in Amazon.com's filings with the Securities and Exchange Commission ("SEC"), including its most recent Annual Report on Form 10-K and subsequent filings.

Our investor relations website is www.amazon.com/ir and we encourage investors to use it as a way of easily finding information about us. We promptly make available on this website, free of charge, the reports that we file or furnish with the SEC, corporate governance information (including our Code of Business Conduct and Ethics), and select press releases and social media postings.

 

Mythbusting Gold's Volatility

Posted: 27 Jan 2011 08:04 AM PST

Frank Holmes submits:

Gold is a volatile asset class. This is why we tell investors to put no more than 5-10 percent of their portfolio in gold, and split that among the bullion itself and those companies tasked with exploring for and producing gold.

However, when compared to other commodities last year, gold looks relatively calm. This chart from the World Gold Council (WGC) shows the annualized daily volatility for selected commodities such as copper, silver, tin and others.


Complete Story »


In The News Today

Posted: 27 Jan 2011 07:52 AM PST

Dear CIGAs,

Gold does not make a long term top by slowly rounding over.

When gold does reach full valuation it will set your hair on fire as your eyeballs spin trying to keep up with the chart. What you are watching is the recent establishment converts hitting the road.

How many bone jarring reactions have we witnessed since $248?

Watch the Angels for guidance. Treat them as you would Fibonacci retracement lines.

Trader Dan's Commentary

Here's another great reason to dump all of your gold and buy more paper… especially US bonds. No need to trouble ourselves with this pesky detail, just print more money! After all, that is all that is required nowadays to get the economy improving.

CBO: Social Security to Run $45 Billion Deficit in 2011
Thursday, January 27, 2011
By Matt Cover

(CNSNews.com) – The Congressional Budget Office (CBO) reports that Social Security will effectively run a $45-billion deficit in 2011 and continue to run deficits totaling $547 billion over the coming decade.

The admission comes in the CBO's semi-annual economic review that projects federal spending, debt, and economic growth. In the report, the CBO also examines the impact of projected economic performance on the trust fund that nominally funds Social Security.

"Excluding interest, surpluses for Social Security become deficits of $45 billion in 2011 and $547 billion over the 2012–2021 period," the CBO reported.

This means that in order to pay benefits Social Security will need $45 billion more than it will collect in payroll taxes this year, and $547 billion more over the next decade.

The "interest" the CBO mentions is the interest that the federal government owes to the Social Security trust fund because the trust fund is legally obligated to take Treasury bonds – federal government debt – in exchange for the cash revenues raised by Social Security payroll taxes.

More…

Jim Sinclair's Commentary

It looks like the rubber has met the road in Congressman Paul's activities.

Audit the Fed Reintroduced

Washington, DC – Congressman Ron Paul (TX-14) today introduced HR 459, The Audit the Fed Bill to the 112th Congress.

This legislation is very similar to HR 1207 from the 111th Congress and calls for a full and complete audit of the Federal Reserve by the Government Accountability Office, to be reported to Congress by the end of 2012.

HR 1207 garnered broad bi-partisan support with 320 cosponsors in the 111th Congress, and was attached (but removed in conference) as an amendment to the Dodd-Frank Financial Reform Bill.

In response to unprecedented public interest in the activities of the Federal Reserve, it hired a full time lobbyist for the first time in history during the 111th Congress.

"I was very pleased that so many of my colleagues were willing to stand up for transparency and accountability in government by cosponsoring HR 1207 in the last Congress.  I am optimistic about our prospects for a full and complete audit in the 112th Congress," stated Congressman Paul.

HR 459 has 56 co-sponsors at time of introduction.

More…

DoGS FiGHT aT DaVoS

Posted: 27 Jan 2011 07:36 AM PST


J

 

Sark

 

DOGS FIGHT AT DAVOS

REUTERS--Jamie Dimon, credited with having steered JP Morgan through financial turmoil in 2007-08, had earlier in the day lashed out at persistent bank bashing nearly three years after the global credit crisis began, saying it was "unproductive and unfair".

But when he rose at a later session of the World Economic Forum to ask Sarkozy to get the G20 to avoid overregulation of banks, the French president launched into a broadside accusing financiers of behaviour that he said had caused the crisis. "The world has paid with tens of millions of unemployed, who were in no way to blame and who paid for everything," Sarkozy said to Dimon. "It caused a lot of anger."

The French leader also renewed his call for a financial transaction tax to fund development but acknowledged that many G20 countries opposed such a levy. He suggested a small pioneer group of states might go ahead with a tiny levy or some other form of innovative financing to lead the way.

Dimon praised governments for intervening to save the financial system in 2008. But he said the G20 group of major economies, which Sarkozy chairs this year, should take a deep breath before imposing more regulation. "Too much is too much," he said. The outspoken Dimon had earlier told a separate panel not all lenders made the same mistakes in the run-up to the crisis. "Not all banks are the same and I just think that this constant refrain 'bankers, bankers, bankers' is just unproductive and unfair. People should just stop doing that." He echoed comments by Barclays CEO Bob Diamond, who told a UK parliamentary committee this month that "the period of remorse and apologies for banks" needed to be over.

MARKET OR MADHOUSE"

Sarkozy was having none of it. "The world was stupefied to see one of five biggest U.S. banks collapse like a house of cards," he told a plenary session of the Davos Forum. "We saw that for the last 10 years, major institutions in which we thought we could trust had done things which had nothing to do with simple common sense. That's what happened."

The United States government spent hundred of billions of dollars of public money to bail out financial institutions, after the dramatic failure of Lehman Brothers in 2008, through the controversial Troubled Asset Relief Program (TARP). "Not all banks needed that TARP. Not all banks would have failed," Dimon said at the earlier session. "A lot of banks were stabilising the problem -- JP Morgan bought Bear Stearns because the U.S. asked us to." However, Federal Reserve Chairman Ben Bernanke told a U.S. investigative panel last year that the credit crisis surpassed the Great Depression of the 1930s in severity and put 12 of the 13 most important U.S. financial firms at risk of failure. "If you look at the firms that came under pressure in that period ... only one ... was not at serious risk of failure," he said in comments disclosed earlier on Thursday. "Even Goldman Sachs, we thought there was a real chance that they would go under," he said.

Dimon said his biggest current concern was that "bad policy" could make things worse as the banking industry was on the mend.

Sarkozy said bankers were wrong to resist tough rules. "There is an ocean between flexibility and the scandal we saw," he said. "So if people present me as obsessed with regulation, it's because there is a need for regulation. "I don't contest the principle of securitisation, but when one offshore country guaranteed 700 times its GDP, are we in the market economy or in a madhouse"

 

Dog

WB7: At least Sarko's making the right sound bytes. Much better than what we hear from our own leader dog back in the USSA. Remember the "savy businessmen" quote?

Bam

Meanwhile I suppose it would be unfair to consider whether Mess. Euro Bail had anything to do with the fine situation we now find ourselves in.

DV

Is the Selling Over for Gold?

Posted: 27 Jan 2011 07:34 AM PST

Jim Farrish submits:

Are gold prices ready to resume the run higher? It has had an auspicious start to 2011 and the negative reports relative to the metal have been on the rise. The gold bugs are jumping up and down saying "buy, buy, buy!" And the other side is calling for the price to fall to $1050 per ounce. Who is right in the quest for profits in gold?

The reality is that they both may be right. We have seen a short term pullback of nearly $100 per ounce for gold and it currently hit a key support level and held. Before we look at what opportunities are in gold, let’s look at what is happening to influence the price of gold. Risk in Europe, relative to sovereign debt, is alive and well, despite what you hear in the press. There is the free money program from the US Federal Reserve that was reinforced in yesterday’s FOMC meeting, the fact that US/China yuan arguments and trade are still on the front burner impacting trade relations, and the real threat of inflation in China and Australia. These, and more, are fuel for the argument that gold is heading higher. The average estimates are at the $1650 level by year end. Gold closed at $1343 as of this posting.


Complete Story »


Gold and Silver Resource Shares, Before You Shoot Your Next Arrow

Posted: 27 Jan 2011 07:14 AM PST

David Galland, Managing Director, Casey Research writes: While I have read certain works on the life and ponderings of Buddha, I claim no deep knowledge of his philosophy. Note I didn’t use the word “religion,” because Buddha himself claimed no supernatural powers and even begged his followers not to deify him after his death. Hardly had he drawn his last breath, however, when the deification began – though most Buddhists won’t claim it as such.


The Republican Deficit

Posted: 27 Jan 2011 07:13 AM PST


If you want to delve into the case against the future of US Treasury bonds in all its glory, take a look at the November/December issue of Foreign Affairs, the establishment bimonthly journal read by academics, intelligence agencies, and politicians alike, which I am sure you all have sitting on your nightstands. In a well-researched and thought out article penned by Roger C. Altman and Richard N. Haass, the road to ruin ahead of us is clearly laid out.

The US has no history of excessive debt, except during WWII, when it briefly exceeded 100% of GDP. That abruptly changed in 2001, when George W. Bush took office, despite his loss of the popular vote. In short order, the new president implemented massive tax cuts, provided expanded Medicare benefits for seniors, and launched two wars, causing budgets deficits to explode at the fastest rate in history. To accomplish this, strict “pay as you go” rules enforced by the previous Clinton administration were scrapped. The net net was to double the national debt to $10.5 trillion in a mere eight years.

Another $2.5 trillion in Keynesian reflationary deficit spending by president Obama since then has taken matters from bad to worse. The Congressional Budget Office is now forecasting that, with the current spending trajectory and the new tax compromise, total debt will reach $23 trillion by 2020, or some 160% of today’s GDP, 1.6 times the WWII peak.

By then, the Treasury will have to pay a staggering $5 trillion a year just to roll over maturing debt. What’s more, these figures greatly understate the severity of the problem. They do not include another $9 trillion in debts guaranteed by the federal government, such as bonds issued by home mortgage providers, Fannie Mae and Freddie Mac. State and local governments owe another $3 trillion. Double interest rates, a certainty if the current commodity price inflation continues, and our debt service burden doubles as well.

It is unlikely that the warring parties in Congress will kiss and make up anytime soon. It is therefore likely that the capital markets will emerge as the sole source of any fiscal discipline, with the return of the “bond vigilantes.” They have already made their predatory presence known in the profligate nations of Europe, and they are expected to arrive here imminently. Such forces have not been at play in Washington since the early 1980’s, when bond yields reached 13%, and homeowners paid 18% for mortgages. Since foreign investors hold 50% of our debt, policy responses will not be dictated by the US, but by the Mandarins in Beijing and Tokyo. They could enforce a cut back in defense spending from the current annual $700 billion. They might even demand a retreat from our $150 billion a year commitments in Iraq and Afghanistan.

Personally, I think the US will never recover from the debt explosions engineered by Bush and by “deficits don’t count” vice president Chaney. The outcome has been permanently lowered standards of living for middle class Americans and reduced influence on the global stage. But I’m not going to get mad, I’m going to get even. I am going to make a killing profiting from the coming collapse of the US Treasury market through buying the leveraged short Treasury bond ETF, the (TBT). Sure the 40% gain since august has been nice, but it is only the appetizer. My recently joined “Macro Millionaires” have been able to book a quick 20% profit. The main course has yet to come. I am sticking to my long term forecast for this fund of $200, and that is despite a hefty and rising cost of carry of nearly 1% a month.

Of the current $13 trillion the US government owes the world, roughly 70% was run up by Republican administrations. Do you believe that the Democrats are the big spenders? Think again. The numbers from the Treasury Department tell a completely different story.

Ronald Reagan engineered the first deficit surge, taking the country’s IOU’s from $1 trillion to $4 trillion through a massive expansion of military spending and big tax cuts. This gap was primarily financed with borrowing from then wealthy Japan. That debt has never been paid off, just rolled over, and still sits with us today.

Bill Clinton presided over a mere $1 trillion in growth of the debt over eight years, enforcing strict “pay as you go” that tied any new spending to new revenue sources. George W. Bush was the mother of all big spenders, taking the debt from $5 trillion to $10.5 trillion. Don’t blame this on our wars. The overwhelming portion of this profligate expansion came from two whopping great tax cuts that were primarily borrowed from the Chinese. President Obama has since taken it up $3.5 trillion to $14 trillion.

I bet that if someone conducted a poll asking which party was primarily responsible for running up such gargantuan numbers as these, 90% would answer that it is all the fault of Democrats. This kind of erroneous perceptions is what billions of dollars’ worth of negative advertising and fake research by politically funded “research” organizations buys you. While corporate America bitterly complains about American taxes “rates” that are the highest in the world, how many of you know that 30% of the Fortune 500 pay no taxes at all, and are a big cause of our deficit problems? I bet very few. To see how quickly our situation is worsening, please click here for a real time national debt clock at http://www.brillig.com/debt_clock/ .

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.

Egyptian unrest may set off vicious economic cycle

Posted: 27 Jan 2011 07:10 AM PST

by Tarek El-Tablawy
Jan. 27th 2011 (The Associated Press) — Fueled by fury over financial deprivation, the unrest roiling Egypt threatens to undermine the country's economic growth and further weaken the government.

The third straight day of protests sent the stock market plummeting Thursday, rattled investors and clouding what the government has portrayed as its crowing legacy: rising GDP and a surging private sector led by a construction boom and vibrant, seemingly recession-proof banks.

… The 10.5 percent plunge in the market left the market's year-to-date losses at over 20 percent and traders warned that economic damage could widen if huge protests materialize Friday, as threatened by the opposition.

… The sustainability of most of the government's key foreign revenue sources – tourism, the Suez Canal, and foreign investment – hinges on investors' perception of stability in this nation of 80 million, the Arab world's most populous.

… The government faced an uphill economic battle even before the protests. Subsidies are expected to consume about 100 billion pounds ($17.4 billion) of the country's budget this year, and any attempts at cutting these benefits are dangerous.

The problem becomes more dire if the tensions persist or shift to Red Sea coastal hotspots where tens of thousands of tourists flock to escape frigid winters.

[source]

ALSO…

Will Gold, Silver and Oil Prices Soar on Social Unrest In The Middle East?
by Jeb Handwerger
Jan. 27, 2011 (MarketOracle) — An unexpected specter is haunting the streets throughout the capitals of North Africa and the Middle East. Although revolution has been quelled for many years, dollar devaluation has caused prices of basic goods to soar in emerging economies like these. Young people are unemployed and face little opportunities in autocratic societies. Tens of thousands of young, leaderless Arabs are rioting in the streets demanding an end to pro-Western leaders. Egypt's stock market has been shut down as reports are showing that the rioting will intensify, and many people and businesses are fleeing the country.

unrest

This hunger for change is sweeping across the Arab world and has already begun with the ousting of the president in Tunisia. Today, older protesters are joining the youth in Egypt and will face tear gas, bullets, and beatings as the riots intensify. Many fear that the old pro-Western despots will fall and new radical anti-Western governments will take control.

… Readers should be aware this could well be the surprise "swan" of 2011; it could be what galvanizes the charts of yellow and black gold. Fear, crisis, and the inevitable flow of capital out of such turbulence compel money to flee to the stability of precious metals.

… Consider that Tunisia is in danger of being overthrown. Egypt is ablaze with hate for the ailing President Mubarek; his son, Gamal, who is supposed to be his designated successor, fled Cairo to England with his wife and daughter on Tuesday. Lebanon has been taken over by Hezbollah, which is directly armed and financed by Iran. Yemen, Morocco, Algeria, Libya, and Jordan are all facing similar protests sparked by difficult economic times. Emerging economies in the Middle East are having to deal with massive unemployment and soaring costs.

… Could revolution in North Africa and the Middle East be the spark in precious metals and for oil's next leg higher?

[source]

Will Gold, Silver and Oil Prices Soar on Social Unrest In The Middle East?

Posted: 27 Jan 2011 07:06 AM PST

An unexpected specter is haunting the streets throughout the capitals of North Africa and the Middle East. Although revolution has been quelled for many years, dollar devaluation has caused prices of basic goods to soar in emerging economies like these. Young people are unemployed and face little opportunities in autocratic societies. Tens of thousands of young, leaderless Arabs are rioting in the streets demanding an end to pro-Western leaders. Egypt’s stock market (EGPT) has been shut down as reports are showing that the rioting will intensify, and many people and businesses are fleeing the country.


Is the Selling Over In Gold?

Posted: 27 Jan 2011 07:02 AM PST

Are gold prices ready to resume the run higher? It has had an auspicious start to 2011 and the negative reports relative to the metal have been on the rise. The gold bugs are jumping up and down saying buy, buy, buy! And the other side is calling for the price to fall to $1050 per ounce. Who is right in the quest for profits in gold?


Four Reasons Why The Government Is Destroying The Dollar

Posted: 27 Jan 2011 06:45 AM PST

In this article we will take a holistic approach to how individual short term, medium and long term pressures all come together to leave the government with effectively no choice but to create a high rate of inflation. Read More...



Trading Analysis The General Public Does Not Look At

Posted: 27 Jan 2011 05:44 AM PST

By Chris Vermeulen, TheGoldAndOilGuy

Yesterday I pointing out how any weakness would most likely get bought back up into the close ahead of Obama speaking and we did get that. I also figured today the market would hold up or close positive also (post Obama) so the general public thinks and feels good about the USA and the financial markets.

Watch the Video Version of this report: http://www.thetechnicaltraders.com/ETF-trading-videos/TTTJ25/TTTJ25.html

Well today the market just happened to gap above yesterday's key resistance level ans we all know that once we are above resistance be becomes support. After the gap up this morning the SP500 pulled back to this new support level which happens to be Friday's, Mondays and Yesterdays high then it bounced, actually rallied up on solid volume almost like someone was making a point that this market is going up today and not to mess with it…

Personally I don't get worked up over market manipulation because of two reasons:

1. There is Nothing you can do about it
2. If you see it and understand the idea behind it, then you can make really good money day trading it.

Chart of SP500 10 minute chart

As for our dollar position I still like the trade but I will admit that its really starting to drag out (wear us out of the position so we give up on it). Keep in mind that waiting for a trade to breakout and hopefully go in your direction is part of the excitement of trading… The suspense sure keeps are emotion flying high, which is why it is important to only trade position sizes which you can stomach during volatile times. Also the reason we scaled in at first key support and added more on the deeper pullback.

Posted below and in the member's area is the chart:

Gold and silver have bounced a little and are trading back at resistance where they were in my pre-market video this morning.

Now, take a look at the different indexes below and you will see how the dow of only 30 stocks shows bullishness, while the key indexes for trend and strength are under performing…

As I mentioned a few weeks back, actually just before Christmas.. I figured the market would start to top out the second half of January. It looks as though that is unfolding but remember topping is a process and it become VERY difficult to trade and time and this is why I am taking my time here…Tops and bottoms are designed to suck traders into the wrong side one final time just before price reverses.

On another note it looks like metals are losing some ground here and may go lower… I'm figuring the dollar should bottom in the next couple days at most. Again tops and bottoms are a process and they always take much longer than we anticipate. If the market does not shake you out, it will wear you out..

You can get my trading videos, analysis and trade alerts by subscribing to my newsletter: http://www.thegoldandoilguy.com/trade-money-emotions.php

Chris Vermeulen

The Troubling Doubling of Money Supply

Posted: 27 Jan 2011 05:41 AM PST

The Daily Reckoning

James Turk of GoldMoney.com says that silver is in backwardation, meaning that, as I understand it, the spot price is higher than the price of the commodity future contract, when the reverse is usually the case, or the reverse is the usual case, I am not sure which.

I am pretty confused because I don't remember and I am too lazy to look it up again, which is because it would be pointless since I have proved that I don't remember it when I look it up, and so I would be wasting my time looking it again up since I have, obviously, determined that it had no immediate use for me in my quest for fast-yet-immense wealth without risk or working.

So, while I don't understand the mechanics of the thing, I am nevertheless impressed with the backwardation of silver futures because it is not just unusual, and it is not for the next month's future, or just for a silver future contract somewhere in the next calendar quarter, but it is in backwardation for a whole year out! A whole year! Wow!

Normally, there are people wanting to know, "What can I do to keep from being completely destroyed by the Federal Reserve creating so much money, which this backwardation thing is probably a part of?"

I always advise people to follow the Dollar-Cost-Averaging method of investing, wherein one merely buys the same dollar amount of silver each month, with the enviable but boring result that it is almost always superior to any other method of investing over the long-term, assuming you are with the trend or, as George Soros is famed for having said, "Identify the trend whose premise is false, and bet against it."

Dollar-cost-averaging is not, alas, something for those whose greed for mountains of undeserved wealth wants – Nay needs! Nay demands! – something with a lot more "kick."

However, taking on a philosophical tone, there are times when, as the saying goes, one "backs up the truck" to take on a load of an investment, or "bets the farm" on an investment, and this may be one of those times because, as Mr. Turk explains, the last time this happened, silver exploded upward by 40 percent in a few weeks!

And even a guy like me, dreaming of the shameless gluttony and self-indulgence made possible by vast wealth, is satisfied with a 40% move in just a few lousy weeks!

And this is the kind of thing that one would expect when the money supply is going up, which is the subject of Michael Pollaro in his "The Contrarian Take" column in Forbes, and which had the headline "Monetary Watch January 2011: Money supply firing on all cylinders?"

First, let me make sure that you know that I am a guy who is absolutely sure of two things: one, that the Austrian Business Cycle Theory is the Only True Economic Theory (OTET), and two, that We're Freaking Doomed (WFD), meaning that if you are not buying gold and silver with a frantic, monomaniacal intensity, then there is something Very, Very Wrong (VVW) with you.

As such, I was instantly enamored when he opens with, "Our monthly Monetary Watch, an Austrian take on where we are on the monetary inflation front and what's next."

Naturally, I hoped that he would ask an opening "teaser" question, like, "Is The Fabulous Mogambo (TFM) right when he says we're freaking doomed?"

Instead, he uses another headline, which you know is a headline because he starts off with "Headline Monetary Aggregates, Where We Are."

To this, I extemporaneously made a joke by saying, "We're right here! Hahaha!"

Well, nobody laughed at my joke, which, upon reflection, I admit is pretty lame, but I was distracted by still being disappointed that Mr. Pollaro didn't mention me or my crackpot opinion.

Anyway, I'm sorry that I didn't put more effort into my joke-making, because what followed is scary enough that it needed a joke to lighten the mood!

He says, "The US money supply aggregates based on the Austrian definition of the money supply, what Austrians call the True Money Supply or TMS, continued their recent surge, in December posting an annualized rate of growth of 38.9% on narrow TMS1 and 24.6% on broad TMS2. That brought the annualized three-month rate of growth on TMS1 and TMS2 to 22.3% and 18.1%, respectively, 8.6 bps and 2.7 bps higher than those posted in the prior month."

Inflation in the money supply of double-digits means at least double-digit inflation in prices!! By the use of the two exclamation points to punctuate that last sentence, you are alerted to the fact that I am so frightened that I am locked in the Mogambo Big Bunkeroo (MBB), waiting for the explosion of price inflation that will result from such outrageous expansion of the money supply.

While I make a quick check to see if I have enough supplies and ammo to last until the bankrupted, starving, desperate people whose money has no purchasing power left have all killed each other and it is safe to come out again into a Brave New World where we can begin again with a gold-standard money, please read ahead to the next part of Mr. Pollaro's horrifying news.

He writes, "Turning to our longer-term twelve-month rate of change metrics – more indicative of the underlying trends – and focusing on our preferred TMS2 measure, we find that TMS2 saw another healthy increase, in December growing at an annualized rate of 9.9%. Not only was this a tick up from November's 9.8%, but we think close enough to 10% to mark December as the 23rd time in the last 24 months that TMS2 posted a twelve-month rate of growth in the double digits."

This kind of double-digit growth in the money supply has been going on for two years? Two years! Two Freaking Years (TFY)! Double-digit growth in the money supply every year for Two Freaking Years (TFY)!

As to what this portends, all I see is terrifying inflationary horror and catastrophe, but Mr. Pollaro is too refined to, like me, run down the street in an adult diaper and a tinfoil hat, screaming his guts out, "We're freaking doomed, you morons!"

Instead, he keeps it on a strictly professional, technical level, and writes, "For new readers of the Monetary Watch, the last time TMS2 saw this kind of string was during the run up to the now infamous housing boom turn credit implosion, a time during which TMS2 saw 36 consecutive months of double digit growth."

So while Mr. Pollaro is too polite and professional to resort to hysterics and name calling, I am not so disposed, and will tell you right to your face that if you are not buying gold and silver, especially since their prices have seen a little dip lately, then you are, indeed, an idiot.

For those who are not idiots, on the other hand, then buying gold and silver is, paradoxically, an idiot's delight, because, "Whee! This investing stuff is easy!"

The Mogambo Guru
for The Daily Reckoning

The Troubling Doubling of Money Supply originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

More articles from The Daily Reckoning….

Time to Buy Gold Stocks…Again

Posted: 27 Jan 2011 05:38 AM PST

The Daily Reckoning

It's time to buy gold stocks. Top-down "macro" analysis indicates that the bull market in gold stocks still has a long way to go. And bottom-up analysis tells me that gold stocks are cheap.

Buying opportunities in this asset class will be rare, simply because so many institutional investor portfolios remain hugely underweight gold. These investors will keep looking to add exposure to gold because of the dismal state of the private credit markets, government debts and central banks. Western central banks are trashing their own currencies at unprecedented rates, while Eastern central banks are slowly tightening policy and accumulating gold bullion.

If current trends in government spending and central banking continue, gold could soar to multiples of its current price. If, under these conditions, central banks continue to inflate, then a hyperinflationary destruction of the monetary system is almost certain. But rather than a total wipeout of the system, I expect we'll eventually see the end (not a reversal) of quantitative easing programs and a re-pegging of the dollar to gold at much higher gold prices.

But that won't happen in a day. Inflationary forces need to gather some momentum first.

What might that process look like? Well, let's say that the Fed doubles the size of its balance sheet yet again, all while the market's expectation of future inflation steadily rises. The selling pressure on Treasuries would steadily grow, undermining the value of the Treasuries already sitting on the Fed's balance sheet. On a mark-to-market basis, the equity on the Fed's balance sheet would become negative – by several hundreds of billions of dollars.

Are we to expect, at that point, that the Fed would start to unwind its Treasury portfolio, selling it back into the hands of the public at much lower prices? If so, such selling of Treasuries (a reversal of QE) would lock in hundreds of billions of losses, requiring taxpayers to recapitalize the Fed (although not if Congressman Ron Paul has enough political influence).

Plus, from a technical perspective, the act of dumping Treasuries into an already panicked market would at least temporarily drive prices down (and yields up) even further. Finally, in such an environment a few years out, the $16-18 trillion in US national debt (at that point), which has a short duration, would have to be refinanced at much higher rates. That would put the US government budget in a position similar to that facing the Greek government in 2010: it would have to choose between:

1)    Defaulting/restructuring;
2)    Totally inflating the value of the debt away or;
3)    Crushing the private sector economy by sucking incredible amounts of taxes and fees out of it, simply to pay interest on the national debt.

Now can you imagine how, in the coming years, gold and gold stocks could launch into hyperbolic rallies? Inflation – as long as the bond market tolerates it – remains the most politically popular way of dealing with unaffordable government debts.

The market's reaction to radical central bank policies is something we don't see discussed very often. Yet this single factor – the reaction to QE – will be the key driver of financial markets in coming years.

Paper currencies rely on confidence, and central bankers only maintain confidence by offering to pay a real rate of interest on deposits. With interest rates currently near zero, the only reason to expect confidence to remain high would be if holders of that currency expected future prices to remain tame.

Only after a widespread repudiation of government paper would central banks re-peg their currencies to gold. They wouldn't do this because they want to. Rather, they would re-peg currencies to gold simply to restore confidence in paper money. Most central bankers like to inflate as much as they deem necessary to fill the "output gaps" in their ivory tower models. The notion that monetizing the federal deficit (QE) can lower the US unemployment rate is so ridiculous that only an academic could dream it up; it demonstrates ignorance about how the US economy functions.

This is a constantly evolving process. But for right now, I see the most likely macro scenario as follows: a steady rally in gold, a sideways stock market (some sectors up, some down) and falling Treasury bonds (rising yields), as more bond investors look ahead to a future of endless US budget deficits and decide to hit the Fed's "QE2" bid.

The Fed's balance sheet will probably double in size again over the next few years, filling up with even more Treasuries. The central banks in China, India and elsewhere are woefully short of gold – and stuffed to the brim with less desirable US dollar assets – so they should continue to trade paper for gold and other real assets at a steady pace.

The current ten-year bull market in gold is very rational; it's a reaction to the explosion in the US money supply plus the explosion in US dollar assets overseas (which are a result of seemingly endless US trade deficits). More than an inflation hedge, gold is a hedge against chaos in the monetary system; people flee to gold when confidence in paper money crashes.

Today's global monetary system remains chaotic, so demand for gold stocks will remain strong…

Twice in the recent past I advised the subscribers of the Strategic Short Report to buy calls on the Market Vectors Gold Miners ETF (GDX)…and I did not neglect to issue profitable "sell" recommendations. Based on the published recommendations the first GDX option trade – from Nov. 2008 to Feb. 2009 – gained about 330%. The second option trade – from April 2009 to Nov. 2009 – gained about 65%. I think it's time to attempt a "hat trick." I suggest buying long-dated call options on GDX.

Gold stocks may not be dirt-cheap like they were in late 2008, but they remain relatively cheap. The nearby chart shows the ratio of the HUI index (a basket of 16 un-hedged gold stocks) to the price of gold. Other than the exceptional low of late 2008, the HUI/gold ratio is as low as it's been since 2003. Furthermore, Gold stocks are as cheap (relative to cash profit margins) as they have been since they bottomed in 2001.

HUI-to-Gold Ratio

Given these factors, along with the continuing chaos in the sovereign debt markets around the world, I would not be surprised to see the gold price rise into new record. Accordingly, I would not be surprised to see the HUI Index double during the next couple of years.

Regards,

Dan Amoss
for The Daily Reckoning

Time to Buy Gold Stocks…Again originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

More articles from The Daily Reckoning….

Fraud Suit Against JP Morgan Displays Bankster ‘Culture’

Posted: 27 Jan 2011 05:36 AM PST

By Jeff Nielson, Bullion Bulls Canada

If I were to try covering every fraud-based law suit against Wall Street bankers, I would need to be writing more than a commentary a day. However, occasionally one of these actions is so emblematic of the crime-culture of these banks that it becomes useful and notable to cover one of these "dog bites man" stories.

In the matter at hand, we have one group of predatory bankers (those of Bear Stearns) lying, cheating, and stealing from its own clients. We have a second group of bankers (those of JP Morgan) who cannibalized Bear Stearns – so that they could lay claim to the profits from that lying, cheating and stealing.

As with the most of the recent law suits alleging fraud against Wall Street, this suit begins with Bear Stearns fraudulently selling "toxic" mortgage-backed securities to its clients (after getting these banker scams rubber-stamped by their accomplices at the ratings agencies). And as is also generally the case, there is not the tiniest sign of ethics/integrity/morals with these banksters. Rather, all that the facts illustrate is that the (former) Bear Stearns bankers (now JP Morgan bankers) who ripped-off their clients demonstrated the clear intent to cheat their clients and commit further crimes – at every opportunity.

An article on the egregious acts of fraud and blatant theft by these Bear Stearns bankers in The Atlantic lays out the chronology:

- Sold Ambac (and other clients) fraudulent mortgage-backed securities

- Falsified "loan performance" data it supplied to the ratings agencies, to hide the fact that these scam-products immediately began plummeting toward worthlessness

- Stole incoming disbursements which it knew legally belonged to their clients

- After selling clients like Ambac fraudulent securities (which would lead to massive losses) and stealing countless $millions in revenues which belonged to the client, they then "shorted" their own client – based upon their own "insider" knowledge of how they had raped that client (adding "conflict of interest" to all their other sins)

The actions of JP Morgan in defending the bankster operation which they purchased are equally revealing. On the one hand, JP Morgan has refused to acknowledge any liability from these obvious crimes, and has done everything possible to prevent Ambac from being compensated for the acts committed against it. On the other hand, it has (successfully) covered-up this law suit for more than two years – arguing that if the facts came out that they could "damage the reputations of senior bank executives".

Only a Wall Street bankster could say (without any shame) out of one side of his mouth that they had done no wrong, while out of the other side of his mouth whining that if anyone found out what they had done that it would "damage their reputations". Only a Wall Street banker would defend selling what Bear Stearns called a "sack of shit" to its own client (eerily similar to my own regular characterization of these securities as "financial feces").

This also illustrates what appears to be another pattern of bankster behavior: cheating one of your own clients to create massive losses, and then "shorting" against that client – to literally "add insult to injury".

As we saw in "The Goldman Sachs/AIG Saga", Goldman Sachs didn't show the slightest hesitation to engage in a very similar scam with AIG – one of its largest business partners, who trusted Goldman Sachs to such an extent that the two had recently pondered a merger. As reported by Gretchen Morgenson of The New York Times, originally Goldman Sachs merely used the insurance risk which it managed to off-load onto AIG's balance sheet as a tool to ratchet-up its own leverage even higher. However, as the housing-bubble they created started to turn sour, Goldman saw a "profit opportunity".

More articles from Bullion Bulls Canada….

Nine Reasons Why You Cant Resist The Charm of Gold

Posted: 27 Jan 2011 05:31 AM PST

Commodity Online
Published on: January 25, 2011 at 11:05
By Andrew Mickey

The "Gold is a Bubble" crowd has been reawakened. CNN warned earlier this week: Gold is a bubble, resist its charms.

Gold's six percent fall in the last six weeks and the Amex Gold Bugs Index (HUI) nearly 20% decline have signaled the gold correction is here.

The correction has emboldened the anti-gold crowd more than they have been since the 2008 credit crunch.

The correction is has been a tough one so far. But it hasn't shown itself to be anything more than just a correction. And if history is any example, it will last about two more months and gold will be returning to new highs by the end of 2011.

Despite the needed correction, gold's future is as bright as ever. Contrary to rising opinion, gold is not in a bubble…yet. Here are nine reasons why.

1. Still Waiting for the Blow-Off Top
The top of every bubble has been marked by a massive, parabolic surge in prices.

The NASDAQ rose from 1500 to more than 5,000 between October 1998 and March 200. That was an 18 month increase of 233%.

The last gold bubble ended in three years of significant and accelerating increases in annual average gold prices. Gold went up 30.81% in 1978. It rose 58.72% in 1979. And "the top" was marked by a parabolic 99.74% increase in 1978.

Gold prices have risen at an annual average rate of 18% in this current bull market. In the last three years gold has risen at a 16% annual rate.

Even best-case scenario intended to skew the numbers to the most extreme fails to match previous bubble tops. Gold rose at annual average rate of 29.8% from its 2008 lows to its 2010 all-time high.

These increases are indicative of a bull market, but pale in comparison to past bubbles.

2. Gold Hasn't Gone Mainstream…Yet
Bubbles suck a lot of investors in at the top. Panic buyers, fearful of missing out on an opportunity to get rich quick, rush in at the end in droves.

For example, in 1970, investors had $48 billion in stock mutual funds. By the top of the stock bubble in 2000, investors had more than $7 trillion in stock funds. In 2000 investors plowed $309 billion of new capital into stock funds. That's five times more than all of the money invested in funds in 1970.
Stock fever was well-dispersed too at the top too. The New York Stock Exchange found 7.5 million Americans own stock in 1954. The number of stock investors rose 10-fold to 78 million in 1999.

Currently, gold and gold stock investors are still very much the minority.

3. The "We Buy Gold" Advertising Fallacy
One of the often cited signals of a gold market top is all of the "we buy gold" companies which buy jewelry from people.

The argument is completely misguided. These are service companies which buy gold at discount (ranging from 20% to 40%) and then have it refined.

A higher gold price makes the business more profitable, will attract more customers, and allow for greater advertising budgets, but it's not a signal of the top. A better signal would be seeing these companies failing as the masses refuse to sell their gold because "it's going to make them rich."

4. Gold Pays No Dividend
It's true, gold doesn't pay a dividend. It has no earnings. It's not an investment. There is no way to value it using traditional measures of stocks and other financial assets.

Gold's benefits comes during periods when real dividends and income-producing assets' yields are so low, gold is a much better alternative.
These periods where gold outperforms income-producing assets is when real interest rates (interest minus inflation) are negative.

Consider this, a long-term U.S. Treasury bond currently pays about 4% per year. Inflation, as tracked by rising cost of living and excluding housing price declines which have kept official inflation numbers down, is greater than 5%.

As a result, the real rate of interest is a negative 1%. In real terms, it costs 1% a year to hold the long-term Treasury bond even though it yields 4%.

This is why investors turn to gold when interest rates are negative and gold prices are driven higher by negative real interest rates.

Gold pays no nominal dividend or income. But it does retain its purchasing power while other income-producing assets decline.

5. Interest Rate Increases Will Not Send Gold Prices Tumbling
The current gold correction has been exacerbated by liquidity fears and traders' risk reduction resulting from expected hikes in short-term interest rates in China, India, and other countries.

Many pundits have already started confusing small hikes in short-term rates as the catalyst to pop the "gold bubble."

This makes sense on paper, but is historically incorrect. Interest rate increases determined by the market and not resulting from arbitrarily imposed short-term rates central banks have historically been an indicator of rising inflation.

Rising interest rates are bad for stocks, housing, and bonds, but have coincided with increases in the prices of gold.

6. Customer Service and Innovation have Nothing to Do with Sentiment
In 11 Signs that Gold is in a Bubble That is Going to Burst" the author notes, "For the first time ever, gold ATM machines are dispensing bars of bullion. The first ones opened up in Abu Dhabi, Munich, and Madrid. Next in line are Boca Raton and Las Vegas in the US. What are you doing to do with all that gold? Bury it in your backyard? Have no fear."

Service innovation from businesses which earn wider profit margins as gold prices rise and demand for gold increases are hardly a signal investor sentiment is too high.

Whether a bullion buyer picks up gold at a store, online, or at a gold-dispensing ATM, in no way signals sentiment is too high. In a way, these innovations are actually helping turn new investors onto gold by making it easier to buy gold.

7. The Closed-End Fund Indicator Well Within Historical Norms
One of the best indicators of true investor sentiment (which is driven by their investment dollars rather than surveys) is closed end funds (CEF). Since CEFs trade at a discount or premium to their underlying Net Asset Value (NAV), they serve as a reliable indicator of extreme optimum and pessimism.
For example, at the height of the China bubble in 2007, investors were clamoring to get Chinese "A-Shares." These shares were only traded in China and most foreign investors were barred from owning them directly.

Investors could get direct access to A-Shares by buying the Morgan Stanley China A-Share Fund (NYSE:CAF). At the height of the China bubble, the A Share Fund was trading at a 40% premium to its NAV. A-Share demand and optimism were so high, investors were willing to pay $1.40 for each dollar of A-Shares. It was clearly an extreme high.

There are two closed end funds which own physical silver and gold. Both of them show optimism is hardly at an extreme high.

The current premium on the Central Fund of Canada (NYSE:CEF) is a mere 3.09%. Its five-year average premium is 9.0%.

The current premium on the Sprott Physical Silver Trust (NASDAQ:PSLV) is a bit higher at 14.8%. Although relatively high, that's still below the new fund's all-time high premium of more than 17%.

When the gold bubble reaches its peak, there will likely be a very large gap between the price of physical gold and paper gold as it's traded on the major exchanges. As a result, the premiums on the closed end funds which own physical gold and silver reflect that difference through some very large premiums.

8. Gold Stocks Show Gold is a "Hot Money" Trade and Investor Conviction is Low
A surprising anomaly in the gold market signals the top in gold is still a long ways away.

The price of gold has increased 22% in the past twelve months. The Amex Gold Bugs Index (HUI) meanwhile has only increased 27%.

Normally, the HUI would significantly outpace the price of gold, but gold stocks have failed to really outpace gold as they have and will again as gold prices rise.

The chart below shows how investors still lack the conviction that higher gold prices are here to stay as gold stocks are still significantly lagging the price of gold:

When we do reach the top in the gold market, valuations for gold companies will be significantly higher than they are now.

At the top, gold mining shares won't be based on the current price of gold. They'll be based on how much higher gold prices can go. Remember price-to-eyeballs and other new valuation metrics for dot-coms? The same thing will happen to gold stocks at the top of the bubble.

9. The "How To" Market Still Lags
All investment manias have attracted the majority of investors at the top. And when these new speculators move in, they want to learn how to do it. A willing and ready publishing community has been there to sell the information at the worst possible time.

For example, the top selling non-fiction books in 1999 included:
#8: Wall Street Journal Guide to Understanding Money and Investing
#9: Investing for Dummies
#11: How to Get Started in Electronic Day Trading

Those are very high positions for a segment normally dominated by high-profile biographies and self-help books. They also show how the top of the 90s was led by inexperienced day traders and first-time investors.

At the height of the gold bubble in the late 1970s, the #3 best-selling non-fiction book was Howard Ruff's How to Prosper During the Coming Bad Years.

The book warned of social chaos, end of the family, and hyperinflation. It recommended "protecting" yourself by hoarding gold, silver, and dried food. The "safe" investments performed terribly for the next two decades.

In 2010, no investment-themed books made even made it in the Top 10 of best-sellers. The masses still don't want much to do with gold and learning about how to "get rich quick off of it."

There are so many fallacious arguments cited by the gold is a bubble crowd. But long time investors have seen all this before.

A bull market rises. Investors jump on board. It corrects and the weak hands walk away. It sets new highs and attracts still more investors. It corrects and the weak hands walk away. The process repeats until euphoric highs attract everyone in.

That's when conviction is strong, everyone is betting on how much money they'll make, and no one sees a bubble forming, they just a great opportunity for quick riches.

There are a lot of signs when a bubble is peaking, but none of them are appearing right now.

In fact, by the end of year, this correction will be likely viewed as a great time to start reloading on high quality gold and silver stocks.

Read more….
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