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Saturday, February 19, 2011

Gold World News Flash

by Addison Wiggin - February 18, 201

  • S&P up 100%, fastest doubling since 1936... The 5 tells you what The Wall Street Journal won't
  • How the president gets away with saying, "We will not be adding more to the national debt"
  • Two things you haven't been told about the protests in Wisconsin
  • Silver smashes $32, as mints begin rationing supply
  • Readers weigh in on whether "capitalism" has destroyed the middle class

We've been remiss. We made passing mention of a milestone yesterday, but failed to give it its due.

As of this week, the S&P 500 has doubled from its March 2009 low, the infamous 666.
The Wall Street Journal was quick to note that it took place in just 707 days -- the fastest doubling of the S&P since 1936. Back then, it was a mere 501 days.

The Dow has a few hundred more points to go before it reaches the same milestone… but it's climbed in less than two years from a low of 6,547 to 12,318 today:

That, indeed, looks similar to a chart of the Dow from September 1934-October 1936. In just over two years, the Dow doubled from 87 to 174:

What the Journal failed to note was what happened after that 100% climb in 1936. Let's widen the scope a bit.

Ugh… After reaching that double in October 1936, the Dow topped out in March 1937… pulled back… came within about 5% of that top again in August 1937… and then plunged by March 1938 back to where it was three years before.

This was the infamous "Depression within the Depression." As went the stock market, so went the economy. Whatever gains had been goosed by New Deal spending evaporated.

By 1939, Treasury Secretary Henry Morgenthau conceded to Congress: "We are spending more money than we have ever spent before, and it does not work... After eight years of this administration, we have just as much unemployment as when we started... and an enormous debt, to boot."

We're not saying history is destined to repeat itself. But the parallels are pretty obvious, and ominous. And there's a modern-day twist.

"We will not be adding more to the national debt," declared President Obama on Tuesday, speaking of his proposed 2012 budget, and its projections over the next 10 years.

"It's loose rhetoric," counters Robert Bixby, our Tab-drinking acquaintance from the Concord Coalition and I.O.U.S.A. fame. "It's literally not true."

See, the president is relying on the notion that spending would come into balance with revenues by 2017 -- something he and his aides call "primary balance." But their idea of spending excludes something very important -- interest on the national debt.

That's not insignificant. It was 4.6% of federal spending in fiscal 2010. But in the fantasy world of "primary balance," it doesn't count.

In the real world… and we're using the White House's own figures here… we'd still add $627 billion to the national debt in 2017, all in interest expense. By 2018, the annual cost of interest on the debt would exceed that of Medicare. And from 2017-2021, interest payments would total $4.5 trillion.

Which would balloon the national debt to $26.3 trillion. (As of this morning, it's $14.1 trillion.)

Indeed, interest payments on the national debt will quadruple over the next decade… once again, that's going by the White House's own projections. It would amount to $2,500 for every man, woman, and child… per year.

And that's assuming interest rates don't rise dramatically. This most hilarious part of the White House projections is this: Rates on 10-year Treasury paper are supposed to climb from 3% this year to 3.6% next year… reaching 5.3% by 2017.

Um… Somebody should have picked up the phone to Tim Geithner before putting this out. Or maybe glanced up at CNBC. 10-year Treasuries have been around 3.6% all this week.

If the Chinese -- who alone hold nearly 10% of all U.S. Treasury debt -- decide the United States has become a bigger risk, for which they want higher rates to compensate, all bets are off.

If they realize the White House is so clueless as to assert today's interest rates are 600 basis points lower than they actually are… they'll demand those higher rates immediately.

Of course, denial about a dire fiscal situation can take many forms. At the Wisconsin statehouse, it looks like this.

You've seen the pictures. You know that the new Republican governor wants to strip the public employee unions of their collective bargaining authority. And you know the result: Madison public schools are closed for the third straight day because so many teachers called out sick. Milwaukee joined them today.

Now for a couple of things you might not know. First, sympathy for the protesters outside the public employee unions is decidedly lacking… at least if the call-ins to Wisconsin Public Radio today are any indication.

"Get out of your Dane County mind-set!" one caller screamed. Dane County is home to the state capital and the University of Wisconsin's main campus. Callers were also upset with the legislature's Democratic minority. It remains holed up at a hotel in Rockford, Ill. -- outside the reach of the state troopers.

No quorum, no vote on the governor's plan.

Something else you may not know: Somewhere along the line, someone made some horrible decisions running Wisconsin's pension funds. According to David Cay Johnston of Tax.com, 15% of employee contributions get eaten up in fees to Wall Street.

Maybe the unions should redirect their ire? About 1,000 miles to the east?

The S&P 500 is adding to its 100% gain from the March 2009 low… if only a bit. It's up a point, to 1,341. The Dow is up too.

Traders are shrugging off news that China is once again raising its banks' reserve requirements in a feeble attempt to curb inflation.

Silver has smashed through the $32 barrier to reach another post-1980 high. The spot price as we write is $32.67.

The Royal Canadian Mint is starting to ration sales of Silver Maple Leafs. The Austrian Mint is doing likewise with its Silver Philharmonics. No such move yet by the U.S. Mint… which hasn't updated its sales figures since we last reported them on Wednesday. The February total still appears unlikely to eclipse January's record.

Compared to silver, gold looks like a laggard -- up just $5, to $1,390. And that trend is likely to continue -- for reasons we make clear in this report for Outstanding Investments.

"Many thanks to readers who sent emails this week," adds Outstanding Investments editor Byron King, "congratulating me on the news that the Hulbert Financial Digest ranked Outstanding Investments as its No. 1-performing investment newsletter over the past 10 years.

"That's No. 1 out of 99 newsletters that Hulbert tracks. Hulbert calculated that in the first decade of the millennium, OI delivered an annualized return of 21.7%. The other 98 newsletters were... well, let's not discuss the competition except to say that they didn't deliver 21.7%.

"So what's the 'secret sauce,' the editorial theme for OI? Hey, it's not a state secret or anything. I sure bang the drum with every note I send you. 'Real' assets -- precious metals, energy, hard and soft commodities -- are getting more and more scarce. In other words, the low-hanging fruit of this world is gone. If you understand that, you're halfway there."

Even better, we offer two other services that aim to profit from the same trend. Byron's premium service Energy & Scarcity Investor recommended three rare earth plays on Sept. 3. He's already recommended selling two for gains of 109% and 177%. The third is up 147% and counting. Another "technology metal" play is up 217%. And there's an offshore oil play up well over 480% (16% just yesterday).

We don't want to overlook Alan Knuckman's Resource Trader Alert… where just today readers closed out a soybean meal play for 95% gains. That's in addition to gains in the last six months including wheat for 217%, gold for 221% and corn for 273%.

Next week, we'll offer access to all three of these services as a "package deal" for a remarkably low one-time fee. We call it the Resource Reserve -- everything you need to profit from "real" assets. We haven't opened up membership in four years.

Only 200 slots will be available, because this package deal also includes admission to the annual Agora Financial Investment Symposium in Vancouver.

We expect these new Resource Reserve slots to go immediately when we open access to the public on Wednesday. But if you'd like dibs, we'll put you on a priority list that gives you the chance to sign up a day early. There's no obligation… Just drop us your email address here and you'll get an early invite on Tuesday.

"Why don't you just come out and admit," a reader demands, "there isn't one American in 1,000 who knows what inflation is and that the CPI is yet another big fraud? He goes on to define inflation: 'Inflation is an increase in the supply of money and credit in an economy relative to the amount of goods and services produced.'

"The SYMPTOM of inflation is rising prices, not inflation itself. The U.S. money supply has doubled, and probably tripled, since 2000, and Obama, but everything you buy today isn't 2-3 times more expensive now than in 2000.

"The downward pressure on prices, due to our crippled economy, has mitigated somewhat the huge INCREASE in commodity costs occurring at the same time. Profit margins of producers are cut to the bone; staff do not get wage increases they otherwise would get; layoffs of superfluous staff abound; and as you said, people are eating hamburgers, rather than steaks.

"Sorry this email is so long. I should write a book. Only no one reads books anymore. Many of them can't read at all!"

The 5: Nothing to "admit" on our part… but we concede that preaching to the choir can feel good now and then, doesn't it?

"I think it's incorrect," a reader asserts, responding to the suggestion yesterday that capitalism is destroying the middle class and must be "controlled."

"Capitalism is what was behind our country's growth from the Revolutionary War up until our victory in World War II. The advent of, and the ever increasing, socialist programs our government now hands out, is destroying capitalism, and is responsible for the decline of our country's middle class."

"I could write a book on what the government of our country has done to damage capitalism in our country, but there are plenty of them available to read as it is. I read Financial Reckoning Day in 2005, long before I became a member of Agora Financial Reserve, and I would suggest that plus Empire of Debt, Economics in One Lesson, The Big Short and The Global Debt Trap as must-reads to truly get a glimpse of what has happened to our country, who is responsible and what we can look forward to."

The 5: The "problem," if there is one, is that we don't practice the type of capitalism that delivered prosperity to the nation. We practice a degenerate form of social welfare and call it capitalism, whereby half the country expects to live off the fruits of the other half's labor. And given their penchant for voting, that's not likely to turn around anytime soon.

In an email exchange yesterday, Bill Bonner, my esteemed co-author in Financial Reckoning Day and Empire of Debt, continued his tirade against "zombification":

"Harvard was pretending to educate," he writes, referring to the fact that 90%-plus of Harvard's students graduated with honors back in 2002. "Troops were pretending to protect civilization in Afghanistan... QE2 pretends to be real money... the SEC pretends to protect the little guy...all zombies... sell-outs to the system... the degenerate social welfare capitalism of the 21st century."

[Ed. Note: You can get any of the above-mentioned books for 20% off at Laissez Faire Books. Just use the coupon code E401M206.]

"I'd look at it another way," writes another reader on the subject. "There will always be the very rich and powerful and there will always be the very poor -- whilst capitalism was allowed to thrive unfettered by the meddling and corrupting political and financial elite, it created a middle class.

"It is the lack of checks on those elite that is destroying the middle classes now, not capitalism, so let's be careful before we decide who the mobs should target -- capitalism or the Ben Bernankes of this world -- after all, the penalty according to the Founding Fathers for debasing the coinage was, I believe, execution."

The 5: We suspect some classical liberals thought the same way you did in France in 1789. We also suspect most of them didn't live much beyond 1792. Mobs acquire a mind of their own.

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. "Nicaragua suffers from its past," writes Chris Mayer to his Capital & Crisis subscribers from here at Rancho Santana. "'Nicaragua ha sufrido mucho,' as the saying goes ('Nicaragua has suffered a lot').

"The Sandinistas ran the country in the 1980s. They had some bad ideas about how things should work, and Nicaragua devolved into the usual state of communist enterprises.

"One of the books I packed along for this trip is titled My Car in Managua, a lighthearted look at living in post-revolutionary Nicaragua in the 1980s. Author Forrest Colburn, who was a frequent visitor and lived in Nicaragua for a year, tells many engaging vignettes about what it was like.

"For example, the Sandinistas nationalized the country's largest grocery chain. Without market pricing and incentives driving it, the stores suffered. There were often shortages of basics like milk, eggs, rice, beans and the like.

"The stores also fumbled around badly when it came to making choices about what they did carry. Colburn writes how a store could routinely be out of cheese, but have an aisle's worth of cheese graters. Or how they might be out of toilet paper and toothpaste, but carry plenty of imported fruit preserves and jams -- in a country that produces an abundance of tropical fruit.

"Other businesses struggled too. McDonald's had a restaurant in Managua. The manager there had to improvise. When he couldn't get potatoes for fries, he sold fried cassava. When he ran out of lettuce, he used cabbage. When there was no American cheese, he'd use some other kind of cheese. This upset McDonald's, which prides itself on the uniformity of its product, no matter where in the world you find it.

"Colburn says the phrase 'no hay' became a kind of national refrain. It means, 'there isn't any.' Frequently, there wasn't much of anything."

Colburn tells a local joke. A poor Nicaraguan dies and goes before St. Peter, who tells the poor Nicaraguan that he will have to go to hell. But he gets to choose whether he wants to go to capitalist hell or communist hell.

"What's the difference?" the poor Nicaraguan asks.

"In both, they drop you in a vat, feed your manure and bang you over the head with a shovel," St. Peter tells him.

"So which one should I choose?"

"I'd choose communist hell," St. Peter advises him. "Sometimes they lose the shovels or run out of manure."

We still have room for Reserve members for our next Chill Weekend in June. For the dates and other essential info, check out this invite.

P.P.S. U.S. markets are closed Monday for Presidents' Day. We'll be back in the saddle in Baltimore on Tuesday.


COT Gold, Silver and US Dollar Index Report - February 18, 2011

Posted: 18 Feb 2011 07:32 AM PST


The Food Crisis is a Dollar Crisis

Posted: 18 Feb 2011 07:30 AM PST

At this week's hearing on Capitol Hill, Fed Chairman Ben Bernanke demonstrated a lack of understanding about what causes inflation. His comments reflected a belief that GDP growth causes inflation.

But true economic growth is production-driven, and adds to the supply of goods and services in the economy. True economic growth is not inflationary. Rather, inflation is driven by runaway government deficits and bloated central bank balance sheets. And right now, we have plenty of both. So we have every reason to expect the CPI, even with all of its window-dressing shenanigans, to soar past 2% in short order.

I'm surprised at how complacent the stock market remains in the face of obvious pressure building on the CPI. If the Fed doesn't react to a rising CPI by tightening policy, Treasury yields will keep soaring, and inflationary psychology will take root among most producers. If the Fed does react by ending Quantitative Easing and raising short-term rates, it doesn't require much imagination to guess what would happen to a stock market that's running entirely on fuel from the Fed. Either of these potential scenarios is bad for stocks. The only scenario that argues for further rallies in stocks is if – miraculously – even with unprecedented money printing and deficits worldwide, the CPI doesn't continue rising.

A rising CPI will give more ammunition to the growing chorus of Fed critics in Congress. At this week's hearing, when questioned about the building pressure on consumer prices, Bernanke answered that it would be easy to stop this trend by reversing his policies. But you know he's terrified at the prospect of tightening. He's an academic with his head in the sand.

When asked about the impact of QE2 on global food prices, Bernanke responded that the destabilizing spikes are due to weather and rapid growth in demand for grains in emerging markets. What a lame excuse! As an admirer of Milton Friedman, he must know that "inflation is always and everywhere a monetary phenomenon." Inflation isn't a "weather phenomenon."

Without forever-growing money supplies, price spikes in one set of goods, like food, would be offset by price declines in more discretionary goods. But in today's world, demand isn't limited to what one can produce and save; it's boosted further by what one can get from government handouts and what one can borrow at the Fed window at 0%.

Yet after all the experiences of recent years (including the early 2008 experience in oil and grains), Bernanke is still oblivious to the consequences of debasing the world's reserve currency. In his view, if the world doesn't conform to his personal Phillips Curve and output gap models, there must be something wrong with the world, not his models.

Bernanke has the intellect to understand the negative consequences of the Fed's radical policies, but he simply chooses to ignore them or rationalize them away. By pushing on the monetary accelerator last fall (rather than wait for another "deflation scare"), Bernanke is going to undermine public support for the Fed. As a result, Bernanke gambled that he could spark a stock market rally. He indeed sparked a rally, starting last August – one that looks very long in the tooth.

But the fact remains that there is no direct "transmission mechanism" from the Fed's balance sheet to the stock market. Speculators have to have a very specific, benign perspective on Fed policy in order for Fed policy to impact stocks. Today's misplaced faith in the omniscience of the Fed will soon fade, and when it does, the market will return to intrinsic value very rapidly. The day trading robots and speculators counting on a "Bernanke put" will all look to sell at the same time, and patient investors won't look to buy until prices fall much closer to intrinsic value. Using the most robust, back-tested historical valuation models, the best estimates of fair value for the S&P 500 that I've seen is somewhere in the range of 800-1,000 – 25% to 40% below current levels.

At times like these, it is often constructive to contemplate probable outcomes – to thoughtfully consider the likely winners and losers that soaring food prices will create. The shares of Ag equipment guys and fertilizer companies have been soaring. For example, the shares of Deere and Caterpillar have both more than tripled since Chairmen Ben announced his very first QE program on March 18, 2009. Fertilizer company stocks like Potash and Mosaic have also been on a tear. All these companies are on the receiving side of rising food prices – more or less.

But what about those companies who are on the paying side? Food producers and processors of all types are struggling to accommodate soaring food costs into their business models…and their share prices are showing the strain. Pilgrim's Pride, Tyson Foods, Sanderson Farms, Kellogg, General Mills and Safeway have all turned in conspicuously poor stock market performances during the last several months.

I recently issued a bearish call on another likely victim of rising food prices. This company is subject to many of the same food price stresses that have been buffeting the companies cited above. Yet, for reasons that are not completely intuitive, the shares of this particular company continue to trend higher. Nevertheless, I suspect rising food costs will put the breaks on this uptrend and cause the stock to reverse course.

This company is facing serious fundamental stresses that will cause similar problems for individuals as well. Inflation is here, folks…whether we like it or not. No use in complaining. Better to prepare.

Regards,

Dan Amoss
for The Daily Reckoning

The Food Crisis is a Dollar Crisis originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.


On That $100 Billion Eurodollar Barbell Trade

Posted: 18 Feb 2011 07:30 AM PST


Something interesting happened earlier today in the much underappreciated eurodollar market. As the Bloomberg chart below shows, just before noon, someone aggressively sold 100,000 contracts of the March 90 day Eurodollar future. Why is this notable? Because at a contract size of $1MM per, this is effectively a $100 billion notional bet that the eurodollar rate will decline over the next month. What does this mean in simple terms is that since the eurodollar price is determined as the difference for par in 3 month Libor, someone just put a very sizable bet (probably one of the biggest single Euro$ blocks traded in recent months) that Libor is due for a jump. Now Libor, traditional economists will say, is a function of monetary policy and a reflection of the short-end of the curve (remember the now forgotten TED Spread?) which is driven almost exclusively by the Fed Funds rate. It is also driven by exogenous risks to the credit system such as what happened when Lehman blew up and Libor hit the stratosphere. In other words someone just put down up to $100 million in capital at risk ($82.5 million to be specific) that over the next month (contract expiration assuming no roll, is March 14, 2011) we will see one of two things: a bullish economic development: a rate hike (or expectations thereof) in the US, or to a lesser extent the ECB, or a very bearish one, such as a bank collapse, along the lines of what the recently disclosed surge in MLF borrowings may be predicting - recall what happened to Libor when Lehman fell... In other words your traditional barbell trade. Either way, should this single trade be imitated in the next week, one can bet that the Eurodollar trade will suddenly become far more popular.

Note the 100k block at 11:59 am Eastern.


Short Squeeze in Silver Could be "The Big One"

Posted: 18 Feb 2011 07:12 AM PST

"Man stabbed in robbery of $750,000 in silver bars. Silver spreads tighten more...only a hair from backwardation. SLV adds another big chunk of silver...and much more. " Yesterday in Gold and Silver Gold rose a few dollars during most of the Far East trading day on Thursday...but gradually lost most of what little gain there was by the London a.m. gold fix at 10:30 a.m. GMT. From that interim low, the gold price never looked back...and climbed slowly to its high of the day...which was around 3:30 p.m. in electronic trading in New York. The low of the day was around $1,374 spot, which occurred shortly after Far East trading began...and the New York high around 3:30 p.m. Eastern was $1,386.20 spot. The star of the day was silver. The price didn't do much in Far East and early London trading...and was actually down about a dime by 12:30 p.m. in London...when the price finally began to turn upwards. The price rose slowly at first, but at 11:15 a.m. E...


Inflation Scorecard: Gold Bounces Back

Posted: 18 Feb 2011 07:11 AM PST

Hard Assets Investor submits:

By Brad Zigler

Bullion squared off against the world's reserve currencies this week and took the round. The yen suffered most, losing 2.3 percent to gold. The euro fell 2.0 percent, while sterling slipped 1.1 percent. The Swiss franc inched 0.7 percent lower.

On the dollar front, for the week ending Thursday:

  • Morning gold fixes in London averaged $1,368 and finished 1.4 percent higher at $1,377; Comex spot settled at $1,385, 1.7 percent higher on the week; average

Complete Story »


The Like-Minded Mechanics of the Economic Machine

Posted: 18 Feb 2011 07:11 AM PST

Bill Bonner View the original article. February 18, 2011 10:38 AM The World According to The Daily Reckoning… First, a quick look at the news… Dow up 29 points… Gold added $10. Stocks are up about 100% from their March '09 lows… Guess we were wrong. We thought stocks were too dangerous… We've been out of them since the late '90s. Wait…you say stocks have gone nowhere since the late '90s? Investors have made nothing. Well, that makes us feel better about missing this rally. Hey, what's this? Oil is up too – it traded at more than $100 a barrel yesterday. And look at the other commodities: "Wholesale prices hit two year high," reports The Wall Street Journal. Looks like everything is a good investment. If only we had a Wall Street bank! We could borrow from the Fed at zero…and buy anything. Whatever we bought, it would go up. Especially if it were gold. Is this evidence of a robust, growing economy? Or, is something else go...


Takeover Talk with Michael Fowler

Posted: 18 Feb 2011 07:02 AM PST

Source: Brian Sylvester of The Gold Report 02/18/2011 Michael Fowler is a senior mining analyst with Loewen, Ondaatje, McCutcheon in Toronto and he was more than willing to speculate on potential takeovers in this exclusive interview with The Gold Report. "All of these gold producers are going to be active in the mergers and acquisitions (M&A) market. They are going to acquire because there's a huge amount of cash on their balance sheets," he says. Michael also talks about some undervalued names in his coverage universe, including one junior he thinks could climb 210% before year-end. The Gold Report: Michael, please tell us a little bit about Loewen, Ondaatje, McCutcheon (LOM). Michael Fowler: LOM Ltd. is the oldest independent research boutique on Bay Street. It's been around for 40 years or so. What we are today is an institutional broker that focuses on small- to mid-cap mining issues. We also do high tech and biotech. TGR: There is certainly a lot of room for gr...


Can the Middle East “Revolutions” Affect the Gold Price ?

Posted: 18 Feb 2011 07:00 AM PST


Stock Selloffs Ignite Dollar Rallies

Posted: 18 Feb 2011 06:59 AM PST

Adam Hamilton February 18, 2011 2593 Words The inevitable periodic selloffs in the general stock markets indiscriminately hammer all stocks lower. But they pose a special magnified risk to commodities stocks. In addition to weighing on this sector directly, stock selloffs ignite fast US dollar rallies. This rapidly drives dollar-denominated commodities prices lower, amplifying the selling pressure faced by commodities stocks. The threat of a stock-market selloff is particularly relevant today. The flagship S&P 500 stock index (SPX) is extremely overbought technically, and sentiment is wildly complacent and bullish. Key indicators reflecting traders’ collective psychology are pegged near dangerous levels from wh...


Gold Thoughts

Posted: 18 Feb 2011 06:54 AM PST

Silver coins were created to fill a void left by Gold coins. Imagine a world with only one issue of currency, a $1,390 bill. How well might that work at the local food store? What if one only needed a carton of milk? Read More...



Look! Gold and Silver Company Warrants Dramatically Outperform Gold Bullion and Gold

Posted: 18 Feb 2011 06:41 AM PST

An Inside Look at the World of Gold & Silver Company Warrants * MunKNEE.com Editor-in-Chief Lorimer Wilson Holding a Gold Bar The world of warrants is the best kept investment secret around. No one seems to realize that long-term (LT) gold and silver warrants were up 140% and 92%, respectively, in 2009 and 2010*in U. S. dollar terms. Investment and financial writers go on and on about gold being such a great investment these days but gold was up “only” 24% and 30%, respectively, during the same time frame. Isn’t it time investors, analysts and commentators conveyed the truth, the whole truth and nothing but the truth when it comes to investing in gold bullion and gold-related securities? This article will do just that!*Words: 1164 So*says*Lorimer Wilson*(www.FinancialArticleSummariesToday.com)*and editor of www.munKNEE.com.*Please note that this paragraph must be included in any article reposting with*a link* to the article source to avoid copyright infringement.*...


Egypt says Iranian warships can use Suez; Libyan protesters take control; and will Obama’s budget bring the global class war to America?

Posted: 18 Feb 2011 06:30 AM PST

Stacy Summary:  The empire is in total meltdown.  And the ‘class’ war is between the oligarch and the plundered. Al-arabiya:  Source says Egypt grants permission to Iranian warships to pass through Suez Canal (I wonder if their ‘source’ is ‘Curveball?’) Libyan protesters take control; unrest spreads to Djibouti and Senegal (there are reports that two [...]


Rising Food Prices Through the Scope of Quantitative Easing

Posted: 18 Feb 2011 06:30 AM PST

If only the world's poor, starving masses understood the benefits of Quantitative Easing, they probably would not be rioting in the streets over rising food prices. We simply need to educate these people. Sure, the prices of wheat and corn are soaring, but so are the profits at Goldman Sachs.

These poor people just need to understand that debasing the world's reserve currency serves a greater good. It's not just about whether they can eat; it's also about whether we Americans can weasel out of our massive debts.

The momentary food problems of the poor people over there –wherever they are – are a small price to pay for our resurgent economic activity over here. And remember, if we don't make lots of money over here, we can't send any handouts over there.

Such is the logic that seems to inspire Chairman Bernanke's QE campaigns.

During this week's Congressional hearings, the Chairman abided no connection whatsoever between Quantitative Easing and soaring food prices. Blame the weather, Bernanke suggested, or credit the economic recovery…or both.

Bernanke's remarks before Congress echoed his defense of QE2 two weeks ago at the National Press Club in Washington. "Clearly what's happening [to food prices] is not a dollar effect, it's a growth effect," Mr. Bernanke explained.

During that high-profile Q&A session, Bernanke completely rejected any connection between his dollar-debasing policies and the subsequent "re-pricing" of foodstuffs and other commodities. "It is entirely unfair to attribute excess demand pressures [in the emerging markets] to US monetary policy," he insisted. "In some cases, some of the emerging markets are facing inflationary pressure because their own economies are growing faster than their own capacity." Furthermore, the Chairman pointed out, "As people's diets become more sophisticated, their demand for food and energy grows."

Translation: It's their problem; don't blame me.

To be fair, Bernanke is at least half right; it is their problem…and it is a serious one. As to where the blame should fall, that's open to dispute. Bernanke has already presented his defense, pro se, before the court of public opinion. On the other hand, the nifty little chart below testifies persuasively for the prosecution.

The Rogers Agricultural Commodities Index in the context of QE

Agricultural commodity prices, as represented by the Rogers Agricultural Commodity ETF, seem to catch a stronger tailwind with each successive "QE" announcement.

Bernanke initially entered the bond-market-manipulation business back in March of 2009. The stock market was on its back, economic conditions were deflationary and fear was palpable. He announced that the Fed would buy $750 billion of mortgage-backed bonds, $100 billion of Fannie Mae and Freddie Mac securities, and $300 billion of long-term Treasury securities.

A handful of academics and a few fringy financial writers criticized this Zimbabwe-esque rescue effort. But most folks were happy to know that the Chairman was "doing something." At the time, the something that he was doing seemed to most folks to be a necessary one-off. So they did not trouble themselves with the potential inflationary implications of this rescue effort.

Since Bernanke's initial QE campaign seemed to go off without a hitch, he decided that more must be better. Thus, the initial QE campaign begat QE-lite in August of last year, which then begat QE2 in November.

With every step down this slippery slope toward dollar debasement, the commodity markets reacted ever more violently.

Eric Fry
for The Daily Reckoning

Rising Food Prices Through the Scope of Quantitative Easing originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.


Why I love Gold... And You Should Be Buying TOO!!!

Posted: 18 Feb 2011 06:26 AM PST

Why I love Gold... And You Should Be Buying TOO!!!

Investors have dozens of reasons for loving Gold. Some love it because it's a great inflation hedge. Others love it because it can't be devalued. Others love it because it's a storehouse of wealth.

Personally I like Gold for all of these reasons too. But my favorite reason for liking Gold is because it calls "BS" on this stupid stock market rally.

Indeed, while stocks have hit new highs for the rally begun March 2009, Gold has a way of showing the world that most of these gains are in fact illusory: the product of easy money and US Dollar devaluation.

Here's stocks priced in US Dollars:

zh 2-17-1

Here's US stocks priced in Gold:

zh 2-17-2

Not quite as impressive is it? In fact, based on this chart, stocks haven't increased your purchasing power since April 2010… interestingly enough the time at which the Fed's QE1 program ended.

In other words, Gold has proved, beyond a shadow of a doubt, that the Fed's QE lite and QE 2 programs haven't done ANYTHING for real household wealth. Stocks, when priced in a currency that can't be devalued, have accomplished NOTHING since April 2010.

The picture is even worse when you look at stocks priced in Gold since the Tech Bubble:

zh 2-17-3

Ouch.

That's an 81% drop in value since 2000. So not only have stocks done NOTHING in nominal terms since the Tech bubble, but they've actually LOST 81% in purchasing power since the last decade.

How can you not like Gold? It's the one stop refutation of everything Bernanke and the others central banking folks claim. It stops CNBC's nonsense dead in its tracks. It calls BS on all the stock bulls' claims that stocks are actually MAKING money..

AND it increases your real wealth.

However, even Gold ability as an inflation hedge pales in comparison to the three inflation hedges I'm releasing in my upcoming The Inflationary Storm Pt 2 Special Report.

As you know, I've already detailed three incredible inflation hedges to subscribers of my Private Wealth Advisory newsletter in The Inflationary Storm Pt 1. To date, those three investments have BLOWN AWAY Gold and Silver, rallying 9%. 19%, and 32% while Gold is up 1% and Silver has rallied roughly 10%.

However, I expect my next three inflation hedges (the ones from The Inflationary Storm Pt 2) will perform EVEN better than the first three.

For instance, one of them alone has proven to be THE top performing
inflation hedge for the last 50 years.

That's right, this inflation hedge has outperformed Gold, Silver, stocks, real estate, AND bonds, since the mid-50s!!!

This company owns one of the largest resources of this inflation hedge in the world. According to historic patterns, it should show us a return of between 9% and 14% per year even BEFORE you account for the coming inflationary disaster.

So you can imagine the results we'll be seeing when the entire financial system erupts with inflation in the coming months.  After all, food prices are already at record highs. Cotton is up 44%  so far in 2011. And even the Fed's phony measures show that vegetable prices are up 13%!

I will be revealing this inflation hedge as well as two others including their names, symbols, and how to buy them in my NEW Special Report, The Inflationary Storm Pt 2 next Wednesday.

I will only be making 250 copies of this report available to the public. These three investments are all EXTREMELY undervalued and I don't need thousands of investors blowing them up and ruining the value for the rest of us.

So I'm only making 250 copies of this report available. And I'm giving my readers the opportunity to reserve this report NOW ahead of time.

However, the way things are going, we'll be sold out before the end of the weekend. So if you want to reserve one, you need to move NOW!!!

To reserve a copy of The Inflationary Storm Pt 2, including the names, symbols, and how to buy these three INCREDIBLE inflation hedges today…

Click Here Now!!!

Good Investing!
Graham Summers

PS. I almost forgot to mention, every subscription to Private Wealth Advisory comes with THREE special reports.

Three of these are devoted to preparing you for the return of systemic risk to the financial system. Together I call them the Phoenix Investor Personal Protection Kit. However, individually, they're titled Protect Your Family, Protect Your Savings, and Protect Your Portfolio.

All told, these reports contain over 50 pages of detailed information on how to protect these three areas of your life from another "2008-type event."

On top of this, you also get my Inflationary Storm Report. Its 18-pages  are devoted to showing, in painstaking detail how inflation will soon erupt  in the US... and which three investments stand to profit from it the most.

So that's an additional 70 PAGES of hard-hitting content ON TOP of your annual subscription... all for the price of $180.

And these reports are yours to keep... even if you choose to cancel your subscription during the first 30 days.

To get your copies today...

Click Here Now!!!

PPS. If you're getting worried about the future of the stock market and have yet to take steps to prepare for the Second Round of the Financial Crisis… I highly suggest you download my FREE Special Report specifying exactly how to prepare for what's to come.

I call it The Financial Crisis "Round Two" Survival Kit. And its 17 pages contain a wealth of information about portfolio protection, which investments to own and how to take out Catastrophe Insurance on the stock market (this "insurance" paid out triple digit gains in the Autumn of 2008).

Again, this is all 100% FREE. To pick up your copy today, go to http://www.gainspainscapital.com and click on FREE REPORTS.


Guest Post: Beyond The False Dawn: Global Crisis 2020-2022

Posted: 18 Feb 2011 06:19 AM PST


From Charles Hugh Smith from Of Two Minds

Beyond the False Dawn: Global Crisis 2020-2022   

Four long-wave cycles will likely intersect around 2020-2022.

Longtime correspondent Ken R. asked me to elaborate on my recent reference to the "real crisis being pushed forward to 2020" ( A 5-Year Scenario: 2011-2016 February 15, 2011). The long answer would fill entire volumes, so I'll attempt a shorthand version.

Let's start with the chart I prepared for the cover of my 2008 book Weblogs & New Media: Marketing in Crisis. (You can read the first chapter on the Marketing in Crisis webpage.)

It seems clear to me that four Grand Cycles will intersect around 2020-2022:

 1. Peak oil, or the depletion cycle/end-game of the global economy's complete dependence on inexpensive, readily available petroleum/fossil fuels.

2. The cycle of credit expansion and contraction (approximately 60-70 years), which is now beginning the transition from unsustainable credit expansion (bubble) to renunciation of debt (credit collapse) and global depression.

3. The generational cycle (4 generations or approximately 80 years) of American history which leads to nation-changing social, political and economic upheaval. (The American Revolution: 1781 +80 years = Civil War, 1861 +80 years = 1941, World War II + 80 years = 2021)

4. The 100+ year cycle of price inflation and stagnation of wages' purchasing-power which began around 1901 is now reaching the final stage of widespread turmoil, shortages, famine, war, conflict and crisis.

While industrial society, the Central State and global neoliberal capitalism could probably suppress or adjust to any one of these cyclical climaxes, it seems unlikely the Status Quo will be successful in suppressing/adjusting to all four at once.

There is nothing magical about 2020 or about each crisis.

The book The Fourth Turning describes the 4-generation. 80-year cycle of political and social crisis in the U.S., and it makes sense even if you don't believe in cycles: after 80 years have passed, few humans are left who can recall the previous crisis. That loss of experiential capital, if you will, sets up the next crisis, which isn't a repeat performance of the last one but a variation on the general theme that unfolds in a unique historical setting.

That historical setting is defined by massive ecological overshoot as laid out in Overshoot: The Ecological Basis of Revolutionary Change.

This overshoot--humanity as a species expanding to fill every ecological niche when food and energy supplies are rising--leads to roughly 100-year cycles of rising prices for what I call the FEW essentials (food, energy, water) and resulting political instability--not to mention plagues, war, etc. as the over-abundant humans scramble to secure what's left of dwindling resources. This is ably described in The Great Wave: Price Revolutions and the Rhythm of History.

The credit/debt/speculative bubble that is slowly reaching its endgame has been addressed by The (Mis)behavior of Markets and Financial Armageddon: Protecting Your Future from Four Impending Catastrophes.

The end of cheap, abundant oil is covered in The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century, Beyond Oil: The View from Hubbert's Peak and The Long Descent: A User's Guide to the End of the Industrial Age, to name but three of many books on the subject.

I could have added a fifth crisis, that of demographics, as the financial promises made to the planet's ageing populace will be broken by the sheer number of the elderly: The Coming Generational Storm: What You Need to Know about America's Economic Future.

My own attempted synthesis of the coming intersection is of course Survival+: Structuring Prosperity for Yourself and the Nation.

If you have any doubts remaining about the credit/debt bubble, I invite you to study 10 Economic Charts That Will Blow Your Mind (The Economic Collapse).

I've marked up one chart to show how far we've progressed in the speculative debt cycle:

Here's where we are in a nutshell. Borrowing money creates a virtuous cycle when money is cheap and easy to borrow, as the money flows into consumption and investments which feed that consumption.

Eventually, however, organic demand (that is, people actually needing things and services) is met. But as Marx noted, everyone and his brother/sister ramped up production to meet the seemingly limitless demand, so now there is massive excess capacity/overproduction.

Oops! It turns out the market isn't very good at assessing "steady state" levels of debt, consumption, production or speculation. So everyone overborrowed and over-speculated in both productive capacity and unproductive financial gambling.

Two bad things happen in this financial overshoot. One is that all that debt must be serviced, i.e. the interest and some modest attempt to pay down principal must be paid. In the virtuous upcycle, rising profits and asset prices make borrowing more to pay the seemingly trivial interest easy--no burden at all.

But once the overcapacity, over-leveraged, over-indebted cycle breaks, then assets and profits both plummet, leaving the borrowers unable to leverage more debt to pay the interest on their current debt.

As income streams and assets both decline, the interest suddenly gains the force of gravity: what was once lighter than air is leaden and increasingly burdensome.

The Grand Partnership of the Central State and the Financial Plutocracy (parasitic global cartel Capitalism writ large) have suppressed this natural implosion of speculative debt by printing and distributing trillions of dollars in "free" money. The only way to make servicing a trillion dollars bearable is to lower the interest rate to zero. At zero, even you and I can borrow a trillion dollars, and once again we can easily borrow enough to service our mountain of existing debt.

As a special bonus to the Plutocracy, the "free money" enables them to ramp up their favorite pastime, carefree financial speculations based on fraud, collusion and misrepresentation of risk. As any profits will be theirs to keep (private) while any losses (and all the risk) willbe backstopped by their partner, the Central State and its tax-donkeys, the taxpayers, it's a return to fun days at the races for the Financial Elites.

But a funny fork in the road appears after a massive dose of free money: the free money flows into speculative bets on actual tangible resources, creating massive inflation and newly reflated asset bubbles.

As a result, the system is now facing the same old problem--asset bubbles held aloft by "free money" and rampant financial fraud--and a new problem: inflation in resources that sustain the real economy.

The Central State/Financial Elites are thus faced with an impossible choice: if they let the speculative free money flow, then their populations starve as prices of tangible goods such as food and energy skyrocket. Recall that the masses aren't provided with a trillion dollars at zero interest; that privilege is reserved for the Financial Elites who fund the Central State politicos.

The capitalist answer to this vast financial overshoot is simple: interest rates will rise once the unlimited free money stops flowing. Once interest rates rise, then the debt--which has now doubled or tripled in the frenzied flow of free money-- quickly becomes burdensome in the extreme.

In other words, the status quo is now addicted to unlimited flows of free money. If the flow continues, then inflation will destabilize it; if it's cut off, then rising interest payments will destabilize it.

That's why it's easy to predict a financial collapse in the next few years. But there are still enough resources around to restabilize things after the impending financial liquidation; societies and economies have a way of finding a new equilibrium, a process described in The Onset of Catabolic Collapse (The Archdruid Report)

It’s not quite as straightforward as it sounds, because each burst of catabolism on the way down does lower maintenance costs significantly, and can also free up resources for other uses. The usual result is the stairstep sequence of decline that’s traced by the history of so many declining civilizations—half a century of crisis and disintegration, say, followed by several decades of relative stability and partial recovery, and then a return to crisis; rinse and repeat, and you’ve got the process that turned the Forum of imperial Rome into an early medieval sheep pasture.

But a financial re-set won't address any of the other looming crises. As I have often proposed, energy will remain too cheap for alternatives to make financial sense until it doesn't, and then it will be too late.

Such thoughts do leak out of the status quo every now and again, but they are generally viewed as some sort of parlor game: ooh, how deliciously awful it will all be! THE GLOBAL ECONOMY WON'T RECOVER, NOW OR EVER.

Here is an excellent summary of energy realities: A physicist models the city:

West illustrates the problem by translating human life into watts. “A human being at rest runs on 90 watts,” he says. “That’s how much power you need just to lie down. And if you’re a hunter-gatherer and you live in the Amazon, you’ll need about 250 watts. That’s how much energy it takes to run about and find food. So how much energy does our lifestyle [in America] require? Well, when you add up all our calories and then you add up the energy needed to run the computer and the air-conditioner, you get an incredibly large number, somewhere around 11,000 watts. Now you can ask yourself: What kind of animal requires 11,000 watts to live? And what you find is that we have created a lifestyle where we need more watts than a blue whale. We require more energy than the biggest animal that has ever existed. That is why our lifestyle is unsustainable. We can’t have seven billion blue whales on this planet. It’s not even clear that we can afford to have 300 million blue whales.”

I highly recommend this excellent analysis of energy consumption and production which was forwarded to me by knowledgeable correspondent Nathan P.

The author analyzes his own annual energy use and leads us to the conclusion that our 10,000 watts a day lifestyles must be trimmed to around 2,000 watts a day to be sustainable with current technologies.

He then goes on to extrapolate how many windmills, solar arrays and nuclear power plants we as a species will have to install over the next 20 years to replace current consumption of fossil fuels.

As I recall, it will require one new nuclear power plant a week for the next 20 years, plus thousands of new solar and wind arrays.

A significant amount of this planetary project is possible, but not likely, for the reason noted above: energy will remain too cheap for alternatives to make financial sense until it doesn't, and then it will be too late.

I am not a doom and gloomer, however, because history offers us abundant examples of civilizations which prospered on 2,000 watts a day or less, long before civilization became dependent on fossil fuels.

There will be a massive transformation of the status quo, however, and the outcome is in our collective hands.


Defensive Notes on the Margin

Posted: 18 Feb 2011 05:44 AM PST

The Daily Reckoning

Investors sharing our view that financial assets in general are fundamentally overvalued in real, purchasing-power terms naturally seek to preserve wealth in alternative assets, including commodities. However, while commodities may indeed be more fairly valued, that does not mean that they can decouple entirely from developments in financial markets. Should equity markets suffer a major correction, commodity prices are also likely to fall, in particular those for industrial commodities. But even non-industrial commodities can be subject to speculation from time to time and there is some evidence that this is the case at present. Defensive investors should take note.

In recent editions of the Amphora Report we have discussed why we have become defensive with respect to equity markets and also certain industrial commodities. In brief, the key reasons are the following:

  • Rising commodity prices are not only creating rampant price inflation in many countries around the world; they are also severely compressing corporate profit margins;
  • Many emerging markets are now raising interest rates to slow their economies and control inflation;
  • The stock markets of the most dynamic economies, including those of China, India and Brazil, peaked several months ago and have performed poorly year to date;
  • Governments in developed economies are seeking ways to reduce deficits. While entirely necessary, this is negative for corporate profits during the current cycle;
  • As discussed above, bond yields have risen substantially in the developed economies, implying a tightening of credit conditions;
  • Developed-world stock market valuations have reached levels normally associated with major asset bubbles.

The continuing rally in developed-world equities thus appears something of a puzzle. But rather than providing an indication of economic strength, perhaps rising valuations merely reflect fiat currencies that are weakening in real, purchasing-power terms. Indeed, in a world in which currencies are not reliable stores of value, it is distracting, perhaps even dangerously misleading, to think in absolute terms, as if any base currency is an objective frame of reference. Rather, we prefer to think in relative terms.  Yes, the US stock market might be "overvalued", but what do we mean by this? Overvalued versus what exactly? Versus the dollar, which represents a claim on a shrinking portion of an expanding money supply, printed at will by a pathological central bank in pursuit of higher inflation? Versus Treasury bonds, which are growing exponentially in supply as the US government continues to run massive deficits in a counterproductive attempt to create jobs amidst huge structural economic headwinds?

The challenge in claiming that something is over- or undervalued is that it must be demonstrated to be over- or undervalued versus something else. Traditionally, this has been a base currency, such as the US dollar. But if the dollar is being devalued, we need to find an alternative. This is where commodities can play a role. They cannot be printed, devalued or defaulted on by governments. As such, in a world of fiat currency instability, we believe that commodities provide a superior benchmark for comparing relative asset values. We can't help but chuckle when some equity or bond analyst argues that commodities are "speculative" in that they don't represent claims on future cash flows and, as such, cannot be properly valued.

Perhaps that is true in nominal terms. But in real terms, commodities can be compared to currencies and financial assets, which naturally carry some combination of devaluation and default risk. As those risks necessarily grow as monetary and fiscal policies become more unsustainable, so does the relative attractiveness of commodities. (As an aside, we continue to take comfort in that so many otherwise smart people still don't understand this point. How can commodities possibly be in a bubble if investors in aggregate prefer holding financial assets notwithstanding the sound of printing presses whirring in the background?)

That said, this does not imply that there is zero speculation taking place in commodities markets. But please, show us a market in which there is no speculation! For an investor concerned about chronic fiat currency debasement and rising government deficits, is it really a speculative act to reduce exposure to currency and bond market risk by holding some commodities instead? Hardly. Regardless, investors should always be wary of markets in which speculation appears excessive. Within commodities markets, there are various ways to try and estimate the degree of speculation taking place.

One popular way is to compare the positions of commercial versus non-commercial trading accounts on the major commodities exchanges. Commercial accounts are those that trade on behalf of an entity which has a natural exposure to the underlying, deliverable commodity by virtue of its business. Think of a farmer, for example, who might systematically sell various agricultural futures on an ongoing basis to lock in a sale price in advance, thereby holding profit margins more stable over time; or a mine owner selling various metals futures for the same reason. On the other side, think of the miller or the meatpacker seeking to lock-in purchase prices for their grain and livestock, respectively; or an automobile or appliances manufacturer requiring substantial metal inputs, etc. Futures contracts enable both producers and consumers of a given commodity to manage the price risk inherent in their businesses.

Speculators, however, are those who have no commercial need to either purchase or sell a given commodity. Rather, they are seeking to profit from price fluctuations, be they up or down. Speculators may have a bad name but, in fact, they perform an essential function, which is providing liquidity for the commercial buyers and sellers. In much the same way that a bank matches depositors (lenders) with borrowers, thereby providing a liquid market in money, so speculators can be understood to help match buyers and sellers of various commodities. Sometimes the speculators make money; sometimes they lose. But regardless, they create a larger, more liquid market for all.

While this distinction between commercials and non-commercials is nice in theory, in practice it is actually quite difficult to make. One reason for this is that commercials can speculate. A farmer might believe, for whatever reason, that grain prices are likely to rise over the coming year and, as such, rather than lock in a sales price for his crop at today's futures prices, he can leave his production unhedged, holding out for a higher sales price come harvest time. A similar decision could be made by the miller who, believing for whatever reason that grain prices are going to fall, leaves his grain input costs unhedged. Producers and consumers of all manner of commodities have tremendous flexibility, in practice, to determine just how much of their production or consumption costs to either hedge or leave unhedged. There is thus great potential for commercial speculation which cannot be measured by a facile distinction between commercial and noncommercial accounts.

There is another way, however, to try and estimate the degree to which certain commodity price increases are being driven by speculation rather than commercial supply and demand. This is to look at the "cost" of speculating, as measured by the amount of margin (collateral) that the speculator must put up on the exchange in order to open a position in a given commodity futures contract. The less it costs to speculate, so the thinking goes, the more potential for speculation.

In the table below, we list the initial margin requirements for a selection of major commodities and also the current notional contract value for each. We then calculate the margin required, in percent, to hold a speculative position in each commodity.

Taking a look at the far might column, it would appear that, at present, with the lowest percentage margin requirement, gold is perhaps the commodity most open to speculation and natural gas the least. But this approach is incomplete in that it does not take into account the volatilities (risk) of the respective commodities.

Some commodities are much more volatile than others. In the table below, rather than simply divide spot contract values by initial margin requirements, we calculate the annualized volatility of the commodity as a measure of risk. We then divide this measure of risk by the margin requirement. This risk-adjusted margin (RAM) calculation gives a more complete picture of the "cost" of speculating in a given commodity. The higher the RAM, the higher the "cost".

There are several observations we can make here. First, gold has by far the highest RAM at present, implying that speculators are unlikely to find gold particularly attractive. Second, among agricultural commodities, cotton, corn and wheat have quite low RAMs, potentially inviting speculative attention. Finally, of the metals, copper has the lowest RAM. It may be pure coincidence that these commodities with low RAMs are amongst the top performers over the past few months; but then again, it may reflect a potentially dangerous degree of speculation having entered into these markets.

Investors sharing our view that financial assets are fundamentally overvalued in real, purchasing power terms should continue to hold a diversified exposure to commodities as an alternative to a more traditional portfolio of stocks and bonds. Defensive investors, however, concerned that equities and risky assets in general are at risk of a major correction, should now consider underweighting industrial commodities, which tend to be highly correlated to equity markets.

Non-industrial commodities, such as agricultural products, are normally uncorrelated to equity markets and are likely to remain so. However, defensive investors may now also want to consider underweighting even those non-industrial commodities which, according to the calculations above, are possibly attracting significant speculative interest. As copper is both an industrial commodity and one with a low RAM at present, it would appear to be particularly vulnerable. Gold, however, is not only essentially uncorrelated to equity markets but, importantly, appears unattractive to speculators from a RAM perspective at this time. Those claiming there is rampant speculation in gold at present should consider this important fact.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

Defensive Notes on the Margin originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.

More articles from The Daily Reckoning….



Middle East Tensions Ratchet Up the Oil Price

Posted: 18 Feb 2011 05:44 AM PST

The Daily Reckoning

Yesterday's trading stayed on theme with what I wrote in the Pfennig, with the currency markets running a bit scared about the unrest in the Middle East. The dollar continued to fall versus most of the major currencies with the commodity-based currencies of South Africa, Australia and New Zealand posting the largest gains. We have got a lot to cover today, so let's get right to it.

The currency markets continued to be focused on events in the Middle East, as Iranian state-run television said that the nation will send two warships through the Suez Canal to bolster its Syrian ally. The price of crude oil moved to a 30-month high overnight as at least four protesters were killed in Bahrain as tanks entered the capital. According to a news story in the UK Telegraph this morning, "the situation is fraught with risk since a Sunni monarchy rules a Shia majority with mixed Iranian ancestry." Sounds a lot like the situation in Iraq! So the killings in Bahrain are concerning not because it is a major Middle East power, but because they could easily trigger intervention by Saudi Arabia. Events in the Middle East will continue to hold the attention of the currency markets over the next few weeks, and any escalation of conflict would likely push the price of oil even higher. The opposite is also true, as a calming of tensions would allow oil prices to settle back down.

So what does all of this mean for the currencies? Well the conflict has rallied the traditional safe haven currency of the Swiss franc (CHF), which is up about 2% versus the US dollar over the past week. And the increase in the price of oil has pushed the Norwegian krone (NOK) and British pound higher (GBP). Finally, the crisis has rallied the price of gold, bringing up the value of the South African rand (ZAR) and Australian dollar (AUD). Gold rose to a one month high as the mid east concerns combined with inflation concerns to propel the price of the shiny metal toward $1,400. Surprisingly, the US dollar was not sought out as a safe haven, and has been drifting lower over the past week. It feels as if investors are concerned with the Middle East, but aren't fully convinced the tensions will escalate into a full-blown war.

Traders here in the US had a lot to focus on other than the Middle East yesterday, as we got a plethora of data releases. CPI came in a bit higher than economists had expected (Chuck has more on this later) and the weekly jobs data showed a fairly large jump in the number of people filing for unemployment. Continuing claims for unemployment also increased and is ticking back up toward the 4 million number, which the administration definitely wants to avoid. The employment information was followed a little later with the release of the Leading Indicators, which stayed positive (but just barely!) at 0.1%. Finally, the data was rounded out with the MBA Mortgage Foreclosure and Mortgage Delinquencies numbers, which both showed that the housing market is still not out of the woods. Mortgage delinquencies were reported at 8.22%, which is an improvement, but still too high to support any sort of rebound. The foreclosure numbers weren't as pretty, as they ticked back up to 4.63%, matching the all time high hit in March of 2010. Many felt the number of foreclosures here in the US had peaked, but this latest data indicates this may not be the case. The double whammy of the sluggish housing market and stubbornly high unemployment numbers will continue to hang over the US recovery prospects; and when you add higher consumer prices into that mix, you are risking stagflation.

As I indicated earlier, Chuck sent me his thoughts on the US CPI numbers:

US consumer prices increased by 0.4% in January, beating market expectations for a 0.3% increase, and the annual inflation rate rose to 1.6%… And that's using the government's numbers, folks. Yes, this indicates that by using the government's numbers we have a mild rate of inflation in the US economy… But, if we step back, and don't use the government's numbers… Well… Our friend over at Shadow Stats, John Williams prefers to not use the government's numbers and prefers to use the pre-1990 way of calculating inflation… You know, before the infamous Boston Commission made their recommendations to Big Al Greenspan, and the president at that time, who's name I will not mention, to "substitute" and use "weighting" in their calculations of inflation, which would then allow the CABAL (Fed) to keep rates low, or even lower them, in order to facilitate housing for the masses…

Oh… BTW… John Williams has US inflation running at nearly 6%. Now… That feels more like it, eh?

The commodities have certainly been rallying, and they carried the commodity-based currencies with them. The Canadian dollar (CAD) reached its strongest level in two years versus the US dollar as crude oil neared a 2-year high, but the gains were tempered by the poor economic data released in the US. Higher oil prices have also been good news for the Norwegian krone (NOK), which had been slipping versus the US dollar after GDP growth in Norway slowed. Data from both Norway and Sweden, two of our faves, disappointed the markets and showed that Swedish consumer prices fell, while the nation's unemployment rate was greater than estimated. But the underlying economic numbers in both of these Nordic powerhouses are still better than most others in the G10, so missing a couple of expectations isn't going to have a long term negative impact.

Norway in particular has been in the news, as their Central Bank Governor Øystein Olsen said he wouldn't set policy according to the value of the krone. "We don't want to take the responsibility for the currency level nor the overall competitiveness of the manufacturing industry," Olsen said yesterday in an interview in Oslo. This was a change in direction for Olsen, who had previously said he would keep a closer eye on asset price bubbles when setting policy. He now is solely concentrating on keeping inflation at bay, which is exactly what a good central banker should do! This news should be good for the Norwegian krone, as inflation is definitely moving higher, and will likely force another rate increase by the Norges bank in mid-2011. The Norwegian krone continues to be one of my favorite currencies as Norway has it all going in the right direction: Incredibly solid economic fundamentals, an economy which is growing, a central bank which has pledged to keep inflation at bay, and oil exports.

Our SVP and General Counsel at EverBank, is a regular reader of the Pfennig as he is a fan of the currency markets (and I'm sure he also wants to keep an eye on what Chuck is saying!). He occasionally sends me and Chuck articles, and one he sent earlier this week spoke about a currency that I rarely talk about: the Indian Rupee (INR). The rupee is heading for the best week in 2 months as higher yields and solid economic growth has sparked overseas interest. The Indian government forecast that the economy will expand 8.6% in the year ending March 31, the fastest pace since 2008. But the article sent by our top lawyer pointed to two critical factors that could decide the rupee's near-term fortunes against the US dollar.

Inflation is a concern globally, and food inflation is a major concern in India, which has a history of supply shortfalls. India could combat inflation with higher rates, but these higher interest rates will invariably attract foreign investors who will pump more capital into the Indian economy stoking further inflation. It is a vicious cycle that is being repeated in a number of developing countries, including Brazil.

The second risk facing India is its growing current-account deficit. India, like the US, is a net importer and reliant on foreign capital. While higher rates are currently easing the burden of funding this deficit, global markets can be fickle, and India definitely needs to bring the current account deficit, which stands at 3.5% of GDP, down. India is constantly compared to China, as both have put together an impressive record of economic growth. But China has the advantage of being a net exporter, and is therefore in a much better position than its smaller counterpart. India is a popular investment with WorldMarket investors due to their strong growth rate and high interest rates, but as with any currency investment, there are always associated risks.

And finally, something Chuck spotted on the news wires early this morning (yes, even when he doesn't write the Pfennig he is still up early and looking at the markets!):

Chris, I saw this tidbit this morning and my conspiracy blood started boiling!! "The Federal Reserve ordered the 19 largest US banks to test their capital levels against a scenario of renewed recession with unemployment rising above 11 percent, said two people with knowledge of the review." What does this tell us? Well, if you have conspiracy blood like me, it tells you that The Fed/CABAL "is scared"… Now… If that's how they feel… Why not tell us, instead of in their minute meetings, or press conference, or testimony before lawmakers? OK, this could be nothing more than a tempest in a teacup… Or…

To recap: Middle East tensions sent the price of oil higher and investors took safe haven in the Swiss franc. Gold is also seen as a safe haven, protection against both global uncertainty and inflation! US inflation ratcheted higher, and housing and employment are still drags on the US economy. Norway is set to post nice gains, and a couple of concerns were raised regarding India.

Chris Gaffney
for The Daily Reckoning

Middle East Tensions Ratchet Up the Oil Price originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.

More articles from The Daily Reckoning….



Gold: Book Profits As Volume Disintegrates

Posted: 18 Feb 2011 05:44 AM PST

Super Force Signals A Leading Market Timing Service We Take Every Trade Ourselves! Email: [EMAIL="trading@superforcesignals.com"]trading@superforcesignals.com[/EMAIL] [EMAIL="trading@superforce60.com"]trading@superforce60.com[/EMAIL] Weekly Market Update Excerpt Feb 18, 2011 "Throw the old rule book away. Metals are going much higher. I have said for weeks that this Gold correction is a gift. Use the gift while it's yours. We are on the verge of seeing all time highs and you will likely never see these prices again." – Morris Hubbartt. Feb 18, 2011. UUP (US Dollar Proxy) Chart US Dollar Analysis: [LIST] [*]I just issued a sell signal on UUP on Feb 16. That saw readers book a nice short term gain. [/LIST] [LIST] [*]Longer term, the US dollar is in major trouble, and I want to give you a one-time lengthly explanation of why that is, so here we go: [/LIST] [LIST] [*]First off, all US citizens should be concerned about the actions of the Federal Reserve. ...


Plenty of silver, Jeffrey? Tell it to the mints

Posted: 18 Feb 2011 05:37 AM PST

Silver Rises to 30-Year High as Mints Start to Ration Coins

By Jack Farchy
Financial Times, London
Thursday, February 17, 2011

http://www.ft.com/cms/s/0/7f316ac4-3acc-11e0-9c1a-00144feabdc0.html

Silver jumped to a 30-year high amid record levels of investor buying that has drained mints of silver coins.

The price of the precious metal hit $31.37 a troy ounce on Thursday, up 16 per cent since mid-January and the highest since March 1980. The world's leading mints have reported record sales of silver coins in January and some, including the Royal Canadian Mint and Austrian Mint, have had to ration sales.

"We have sold everything we can produce in silver and have demand for at least twice that volume," said David Madge, head of bullion sales at the Royal Canadian Mint, which produces the silver Maple Leaf coin. Silver coin sales at the US Mint and the Austrian Mint also hit record levels in January.

The surge of buying has both boosted silver prices and helped push the market into "backwardation" -- an unusual condition in which forward prices are lower than prices for immediate delivery. While investors are buying, miners have been selling their future silver production to lock in gains, which has depressed long-dated futures prices.

... Dispatch continues below ...


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Prophecy Resource Spins Off Platinum/Palladium Venture:
World-Class PGM Deposit in Yukon

Company Press Release, January 18, 2011

VANCOUVER, British Columbia -- Prophecy Resource Corp. (TSX-V:PCY)and Pacific Coast Nickel Corp. announce that they have agreed that PCNC will acquire Prophecy's Nickel PGM projects by issuing common shares to Prophecy.

PCNC will acquire the Wellgreen PGM Ni-Cu and Lynn Lake nickel projects in the Yukon Territory and Manitoba respectively by issuing up to 550 million common shares of PCNC to Prophecy. PCNC has 55.7 million shares outstanding.

Following the transaction:

-- Prophecy will own approximately 90 percent of PCNC.

-- PCNC will consolidate its share capital on a 10 old for one new basis.

-- Prophecy will change its name to Prophecy Coal Corp. and PCNC will be renamed Prophecy Platinum Corp.

-- Prophecy intends to distribute half of its PCNC shares to shareholders pro-rata in accordance with their holdings.

Based on the closing price of the common shares of PCNC on January 17, $0.195 per share, the gross value of the transaction is $107,250,000.

For the complete announcement, please visit:

http://prophecyresource.com/news_2011_jan18.php


Dealers said smaller investors saw silver as a cheaper alternative to gold with greater potential for gains as they look to preserve their wealth against rising inflation and currency weakness.

The Austrian Mint sold 1.53 million ounces of its silver Philharmonic coin in January, more than double the level a year earlier, according to Andrea Lang, marketing director.

"We could have sold more," she said, adding that the mint would boost production to 2.2 million ounces in February and March.

The US Mint sold 6.4 million ounces of silver American Eagle coins in January, 50 per cent more than the previous record month, and have already sold 1.7 million ounces so far in February.

Silver prices have outpaced gold in recent months as the improving economic picture has caused investment demand for gold to wane but has boosted silver's industrial demand -- which, in spite of rising investor flows, still accounts for 80 per cent of total silver consumption.

Both metals were buoyed on Thursday by renewed concerns over political stability in the Middle East. Gold gained 0.6 per cent to $1,382.90 a troy ounce, the highest in a month, but off the all-time peak of $1,430.95 touched in December.

* * *

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Sona Drills 85.4g Gold/Ton Over 4 Metres at Elizabeth Gold Deposit, Extending the Mineralization of the Southwest Vein on the Property

Company Press Release, October 27, 2010

VANCOUVER, British Columbia -- Sona Resources Corp. reports on five drillling holes in the third round of assay results from the recently completed drill program at its 100 percent-owned Elizabeth Gold Deposit Property in the Lillooet Mining District of southern British Columbia. Highlights from the diamond drilling include:

-- Hole E10-66 intersected 17.4g gold/ton over 1.54 metres.

-- Hole E10-67 intersected 96.4g gold/ton over 2.5 metres, including one assay interval of 383g of gold/ton over 0.5 metres.

-- Hole E10-69 intersected 85.4g gold/ton over 4.03 metres, including one assay interval of 230g gold/ton over 1 metre.

Four drill holes, E10-66 to E10-69, targeted the southwestern end of the Southwest Vein, and three of the holes have expanded the mineralized zone in that direction. The Southwest Vein gold mineralization has now been intersected over a strike length of 325 metres, with the deepest hole drilled less than 200 metres from surface.

"The assay results from the Southwest Zone quartz vein continue to be extremely positive," says John P. Thompson, Sona's president and CEO. "We are expanding the Southwest Vein, and this high-grade gold mineralization remains wide open down dip and along strike to the southwest."

For the company's full press release, please visit:

http://sonaresources.com/_resources/news/SONA_NR19_2010.pdf


Silver Exploding - Gold Silver Ratio Nears 30-Year Lows

Posted: 18 Feb 2011 05:33 AM PST

HOUSTON -- A few quick notes on this getaway Friday before the 3-day President's Day weekend in the U.S.: The gold/silver ratio (GSR) dips to a 42-handle this Friday morning (currently 42.39 as we write at 12:30 ET). That is the lowest the ratio has been since April 19, 2006 when silver was being bid up ahead of the launch of the U.S. silver ETF SLV. The GSR then traded as low as 42.23 intra-day and closed at 43.64. The GSR is very close (within 20 basis points) to multi-decade lows with silver currently in the $32.50s. The graph below is a monthly chart as of yesterday's close. ...


What Economics is Not

Posted: 18 Feb 2011 05:31 AM PST

It is starting again. It is a phenomenon that occurs more regularly now, especially with daily talk of massive imbalances right along with a massive boost in activity.  More and more people are scratching their heads wondering what gives. Once again, economics has become a debating society. There are Keynesians, Austrians, the Classic folks, and those who will use ridiculous rationale and textbook, but not applicable accounting definitions to try to assert that we’re really getting rich every time the government borrows another dollar. It is no wonder people are confused. Like so many other areas of our society, particularly morality, the definitions have been skewed, the lines, blurred, and the waters made muddy.


Calculating the Misery of Inflation

Posted: 18 Feb 2011 05:28 AM PST

By The Mogambo Guru

I was, unfortunately, sober enough to realize that I needed to get a lot drunker if I was going to withstand the horror of reading of even more economic fallout of the Federal Reserve's disastrous decisions to create So Freaking Much Money (SFMM).

In particular, Michael Pento, in an essay in the Euro Pacific's Weekly Digest newsletter, writes, "For the year 2010, the trade gap surged 43%, which was the biggest jump in a decade, as our government's efforts to reignite consumer borrowing and spending led to a record number of imported consumer goods."

I wince and moan, devastated by the very concept of a trade gap jumping by almost half in One Freaking Year (OFY), a situation where we bought more from foreigners than we sold to foreigners, thus many of the Fed's trillions of new dollars flowed out of the US and into the world economy where it would produce its inflationary havoc, QED.

Mr. Pento is also one of the few to notice that "the Misery Index hit a 26 year high for 2010. The index – which is simply the addition of the unemployment and inflation rate – reached 11.29."

And how bad is this? Well, he says, "You have to go all the way back to 1984 to eclipse such a level of pain. Only back then, inflation was calculated without the 'benefit' of the manipulations of the Boskin Commission. Therefore, the Misery Index should be, in reality, much higher than 11.29 and is probably closer to the pain we felt under Jimmy Carter."

Well, as a guy who thinks that inflation in important prices (food, energy, etc.) is running at least 7%, and as a guy who has seen John Williams at shadowstats.com showing pretty convincingly that unemployment is really running at over 22%, this means that the Misery Index at 29 has NEVER been this high!

As bad as this is, this is, actually, the good news! The bad news is that the Misery Index will continue higher and higher because the Federal Reserve continues creating more and more money, and today's record-setting Misery Index of 29 will one day be considered "the good old days" when the news is filled with catastrophic inflation, widespread bankruptcies and economic collapse.

At that dismal future time, your growing sense of horror will only momentarily be diverted by an amusing sidebar, perhaps a story titled "Mogambo Him Go, Say Fed No Mo'", a human-interest saga of how a guy calling himself The Mogambo is calling for his army of Junior Mogambo Rangers (JMRs) across the country to lean out of their windows and say, "I'm as mad as hell with the inflations and horrors of the Federal Reserve and I am not going to take it anymore!" in their demand that the Federal Reserve be dissolved and the country put back on a gold standard as literally required in the Constitution of the United States so that this monetary and fiscal madness would stop, and with a gold standard, never again would we have to face such appalling, catastrophic consequences of absurd levels of monstrous, monetary irresponsibility and sheer stupidity.

Of course, the Main Stream Media will latch, like vicious, mindless, blood-sucking lamprey eels, onto the fact that my "popular uprising" is just a glaring rip-off of Peter Finch's famous scene in the movie Network, and which proves how I have no talent or creativity of any kind, which in turn shows how stupid I am, despite how I got very, very lucky when I bought all that gold and silver before the full impact of the inflationary horror unleashed by the Federal Reserve creating all that excess money started hitting everyone, but they won't mention that, by then, I am So Freaking Rich (SFR) that the only I reason I don't buy the whole Main Stream Media and fire them all is that I am too rich, too lazy, and/or too drunk, and/or too distracted, and/or too whacked-out to do it, or to even give a crap one way or the other.

Mr. Pento is apparently unimpressed with my Fearless Mogambo Forecast (FMF) of what the future holds, or that whole swaths of the economy will tremble at my whim, but agrees that "America's citizenry are experiencing rising food and commodity prices, rising interest rates, falling home prices and stagnate wages and job growth."

I was going to say that Mr. Pento, again, does not mention how buying gold, silver and oil is a perfect thing to do when the Federal Reserve is creating So Freaking Much Money (SFMM) that it guarantees ruinous inflation in prices so that most everyone will be bankrupt and eating weeds and bugs to stay alive because they can't afford food.

Then I realized he actually DID say the same thing when he said, "But so far Mr. Bernanke has only managed to bail out his buddies on Wall Street and in Washington. Maybe he just doesn't realize that he is in the process of wiping out the middle class by destroying the value of our currency and rendering those without financial means, helpless to guard themselves against inflation."

I smiled with satisfaction that when he went on to disparage Bernanke's legendary acing of the SAT by saying, "Too bad questions regarding the benefits of a sound currency weren't on his SAT exam."

And again I smiled that Mr. Bernanke's dismal, utter failure and ridiculous incompetence shines a revealing light on Princeton, where he was, unbelievably, the head of the economics department.

And a third time I smile because the entire historical record of the last 4,500 years is the same story, over and over, of idiot governments spending themselves into bankruptcy, and how gold and silver prove to be The Best Investment Ever (TBIE).

And a fourth time I smile because one cannot help but smile when saying, "Whee! This investing stuff is easy!"

The Mogambo Guru
for The Daily Reckoning

Calculating the Misery of Inflation originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.



Stock Market Selloffs Ignite U.S. Dollar Rallies

Posted: 18 Feb 2011 05:24 AM PST

The inevitable periodic selloffs in the general stock markets indiscriminately hammer all stocks lower.  But they pose a special magnified risk to commodities stocks.  In addition to weighing on this sector directly, stock selloffs ignite fast US dollar rallies.  This rapidly drives dollar-denominated commodities prices lower, amplifying the selling pressure faced by commodities stocks.


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