saveyourassetsfirst3 |
- The SP 500 could bottom at 1096-1100, here is why
- Monday Options Brief: SDS, RIMM, KWK & XLB
- Market Offers an Amazing Opportunity for Long-Term Investors
- Why 2011 Is Not '2008'
- Expect Intervention to Fail; Gold Holds Gains in Ocean of Devastating Red
- JP Morgan = $2500 Gold by Years end
- Gold Nearing 5,000…Why?
- Gold and Silver Higher As ECB Intervenes in Markets …
- $1,700 Gold
- Top trader Brandt: "The market never lets suckers off the hook easily..."
- Two of Europe's largest banks are on the "brink of disaster"
- Porter Stansberry: Why stocks are plummeting now
- And it broke 1,700
- US downgrade sends gold price rocketing higher
- Market Upheaval (Updated)
- Links 8/8/11
- Gold Hits $1714, ECB is "Last Line" of Eurozone Defense, US Debt Plan "Falls Short"
- Gold & Silver Market Morning, August 8, 2011
- The Stock Market and the Dollar: There Are Only Three Possibilities
- Gold to shine on 40th anniversay of Nixon Shock
- Le yuan atteint un nouveau plus haut historique face au dollar
- Silver Market Update
- Junior Gold & Silver Shares Can Perform When Other Equities Do Not?
- Debt Limit Ceiling: Bandaids, Blather and Bullion
- Gold Market Update
- Saved by a Trillion-Dollar Coin?
- Marshall Auerback: A Beer(s) Hall Putsch From the Rentiers?
- ECB Seeks to Avert What Has Already Happened; Raspberries and Gold
- U.S. gold strikes record above $1,700 on S&P downgrade
- Total Revolt
| The SP 500 could bottom at 1096-1100, here is why Posted: 08 Aug 2011 06:41 AM PDT David Banister- www.MarketTrendForecast.com On Friday night, as most now know… Standard and Poor's downgraded the US Debt rating to aa+ from AAA. I would suspect that the bigger players already knew this a few days prior and were short the market with that information. My pure speculation here is that within the first hour that some of these same participants will have covered their shorts and probably be looking to buy some calls or get long certain stocks if there is short term panic and we reach oversold short term extremes. Clearly though the patterns suggest we are in a bear cycle as evidenced by the 1233 break last week, but there will be tons of trading opportunities with violent rallies along the way as well, trying to time those will be the hard part. One of the downsides to owning shares in companies in the public markets is that panic and hysteria can very quickly mis-price a security that represents shares in a company to well below where it would be valued as a private ongoing business. This however also represents opportunity for those with the right time horizon and the stomach to accumulate when there is a mis-pricing of those securities. I can already find many samples of small cap firms where they are not trading dramatically above cash per share and certainly below total fair value per share given their assets. I will be looking at some point to scale into a few of these companies given that they are trading below a fair private value in the public markets. With that said, where does the broader market go on Monday? Nobody knows, and certainly the sentiment gauges as of last Wednesday had turned historically very bearish prior to the Thursday and Friday drops. Note below we have an increase as of last Wednesday of Bears by 18% to historically extremely high levels. Bulls were down to 27%, which is historically about 12 points below the average. Source: American Association of Individual Investor's August 3rd survey: Many traders who were formerly clinging bullish were caught in a stop loss and margin call induced liquidation late in the week. I would guess that hangers on will be equally caught on Monday this week in margin calls and possible stop loss sweeps. The smart thing to do is not panic and make sure you understand the valuation of the business you own shares in if you have stocks, and decide how crazy the market participants may get in their voting near term. When the SP 500 fell below my 1233 line in the sand, it pretty much confirmed a new Bear Market for me, even with the 1168 pivot on Friday. The last very outside shot for Bulls intermediately was for 1168 to hold and run, but we may or may not do that on Monday or this coming week. The Elliott Wave patterns are confirmed bearish with the 1233 break, and so other than some miraculous turnaround off the 1168 pivot that holds…we must remain cautious. I was looking for a trading range from 1176-1260/80 for a while as MOST LIKELY…. but all we can do is find out to what extent cool heads prevail or not this coming week and I'll update from there. Right now the weekly charts are super oversold like November of 2008. With that said, I make a case for a possible bottom around 1096 now on the SP 500 as possible worst case. In this history of the markets, we had a major bottom on the SP 500 in 1974 which was followed by a 25 year bull cycle to 1999. On March 9th 2009, we bottomed at 666 and re-traced a Fibonacci 61.8% of that entire 25 year bull cycle over 8-9 years in ABC Fashion, which would makes sense. Just prior to that I forecasted a major bottom on February 25th with an article, "Is the Market about to Bottom and Nobody Knows It?" You can Google it to find it. Now with hindsight, we see 1370 hit on the Bin Laden killing and that was a 78.6% retracement of the 07 highs to 09 lows. However, dialing back to the 1974 low, we rallied into 1977 in 3 wave fashion to the 1977 highs, went sideways awhile… we then had a major drop from 107 to about 87 on the Index over about 12 months… corrected a good 20%. Does history repeat in 2009-11? We rallied in 3 waves, we have gone sideways… and then we drop 20% or so? If so, that takes the SP 500 to about 1096… Another 104 points. At 1096 that would represent a 38% Fibonacci retracement of the Bull cycle from 666 to 1370. Food for thought… if you'd like to get more frequent forecast updates on the SP500, Gold, and Silver please look at www.MarketTrendForecast.com and take advantage of our 33% discount option. |
| Monday Options Brief: SDS, RIMM, KWK & XLB Posted: 08 Aug 2011 06:04 AM PDT By Andrew Wilkinson:
ProShares UltraShort S&P 500 ETF ( SDS) – Roughly 50% of the S&P 500 Index rally from August 2010 through early-May has evaporated, with the market meltdown accelerating on the heels of the downgrade of U.S. debt. The VIX spiked to flash-crash levels today, and exceeded 40.95 earlier in the session as U.S. equities tumbled lower. However, barring a repeat of the flash crash or some other unforeseen piece of negative news, it looks like options strategists are positioning for investor fears to ease in the near term. Heavy out-of-the-money call selling on the SDS, an ETF corresponding to twice the inverse of the daily performance of the S&P 500 Index, was likely initiated by traders selling the spike in volatility. Shares in the SDS shot up 7.9% this afternoon to $26.52, the highest since November 2010. Volatility sellers targeted the August $30 strike most aggressively, selling some 45,000 contracts at Complete Story » |
| Market Offers an Amazing Opportunity for Long-Term Investors Posted: 08 Aug 2011 05:56 AM PDT By Galileo Russell: About 2 months ago I wrote a piece titled "Why We Are Due For A Brutally Ugly." Since writing that piece the S&P (SPY) has slid more than 10%, the U.S.'s debt has been downgraded and gold (GLD) is up 11%. Overall the markets have gotten hammered these past days presenting long term investors with some opportunities that are just too good to pass up. Despite the overall U.S. Economy arguably being at its worst point in 70 years (time since last AA+ rating) corporate America has never looked better. From a basic earnings standpoint American companies are unbelievably cheap. Each day the market falls valuations start to look more and more attractive. Let's take Apple (AAPL) for example. In the last 5 days Apple is down almost 9% despite coming off of its best quarter ever. On July 20, Apple reported earnings of 7.79 vs analyst estimates of 5.83, Complete Story » |
| Posted: 08 Aug 2011 04:58 AM PDT With many investors now having descended back to full-fledged "panic mode", it is obviously the perfect time to explain why 2011 could never be another event like the Crash of '08. In distinguishing 2011 from 2008, many of the distinctions involve the degree of collapse which is possible/probable. Thus, I am not rejecting the suggestion that we are on the brink of another "crash", but rather pointing out that the nature of any such crash would be remarkably different. While most sectors of the economy (and most markets) are in worse shape than when the Crash of '08 commenced, there are a couple of sectors which are quite clearly much stronger than in 2008. When we explore this dichotomy, it will quickly become obvious why events could not repeat the scripted "crash" of 2008. Much less leverage in commodities: Though there are many significant differences between 2011 and 2008, I will argue that none are as significant as the dramatically different dynamics which exist in commodities markets today versus the Summer of 2008. In 2008, commodities markets were more leveraged (on the "long" side) than at any other time in the history of the global economy (and by a wide margin). Not only is this (arguably) the largest/strongest "bull market" for commodities in the history of the global economy, but it is the first commodities-boom since the explosion in the "hedge-fund" gamblers. These reckless speculators amplify volatility, risk, and leverage in any/every market they touch. It is important to understand that there was absolutely no reason for commodities markets to crash in 2008 (just as there is absolutely no reason today). There is no plausible economic scenario in the future where the world economy will have sufficient amounts of most commodities. We are headed unequivocally toward a future of chronic commodities shortages. The collapse of commodities in 2008 was nothing less than an "assassination" – an assassination which was only possible because of the unprecedented levels of leverage which existed in those markets. The obvious parallel is the silver market. By any "fundamental" basis, the price of silver should already be in excess of $100/oz today. Yet in May the anti-bullion cabal was able to manage a ruthless and signficant take-down of the silver market – despite the fact that inventories are exhausted, "market sentiment" has never been more bullish, and silver was still grossly under-priced at $50/oz. How was this possible? Via leverage. In the case of the silver market, the "excessive leverage" had to be "manufactured" (artificially) through the five, rapid-fire increases in "margin requirements" by the CME Group. Even though this leverage was totally artificial, the banksters were able to take-down the market of the world's most undervalued commodity by over 30% in a matter of days. In the summer of 2008, not only was all of the commodities leverage very, very "real", but it was at a level which dwarfed what existed in the silver market in May of this year. As a result, the Crash of '08 saw plunges in commodities prices which roughly ranged from 50% to 75%. More leverage means greater manipulation is possible. Period. In the summer of 2011, leverage in commodities markets is much, much lower than in the summer of 2008. For this we can thank the propaganda-machine and the banksters themselves. Ever since commodities began their inevitable bounce-back, beginning in 2009 we have had a farcical (and very public) "debate" about literally "inflation versus deflation". Since deflation is unequivocally bearish for all commodities (but not gold and silver as "money"), the relentless propaganda in never allowing this "debate" to die down for even a single minute has not only greatly reduced the ratio of "longs" versus "shorts" (compared to 2008), but those who are long are much more cautious than their 2008 peers. In 2008, we had a massive, uninterrupted "run" in commodities markets more than two years in duration. Since 2008, every time there is any sort of "spike" or "froth" in commodities markets, the deflation "Chicken Littles" start their shrieking and the banksters start another shorting "operation". The result is much, much less overall exposure. Less leverage means less "crash potential" – a lot less. |
| Expect Intervention to Fail; Gold Holds Gains in Ocean of Devastating Red Posted: 08 Aug 2011 04:04 AM PDT |
| JP Morgan = $2500 Gold by Years end Posted: 08 Aug 2011 03:33 AM PDT No this is not a sick fuckin joke. From ZH: We though we had seen it all... Then JPM's Colin Fenton came out with a prediction of gold hitting $2500 by year end. That's right: JP Morgan... $2500...."Gold and sugar have potential to run a lot higher. It has been clear for weeks that the prompt CMX gold price has been building in a rising probability of a reflaring of financial crisis, gaining by 9.7% since June 30 as the MSCI World Equity index dropped by 10.1%. The correlation in daily price changes between these two assets has dropped to –0.09 from +0.29 over the prior year. Gold's correlation against TIPS has doubled to 0.35 from 0.18. Against Italian and Spanish 5-year sovereign CDS prices, the gold correlation has moved to 0.27 and 0.32, from 0.07 and 0.04, respectively. Before the downgrade, our view was that cash gold could average $1800 per oz by year end. This view will likely now prove to be too conservative: spot gold could drive to $2500 per oz or higher, albeit on very high volatility." It is unclear if Blythe precleared this client note. But at this point it probably does not matter. Click here ...  |
| Posted: 08 Aug 2011 03:13 AM PDT |
| Gold and Silver Higher As ECB Intervenes in Markets … Posted: 08 Aug 2011 01:48 AM PDT |
| Posted: 08 Aug 2011 01:35 AM PDT WOW!! |
| Top trader Brandt: "The market never lets suckers off the hook easily..." Posted: 08 Aug 2011 01:16 AM PDT From Peter L. Brandt: You may think the stock market is oversold and due for a big bounce, and this is probably correct. But what if last week was only the middle of the sweet spot in the initial decline of a multi-year bear trend? One problem with being a short-term trader (especially a day trader) is that one comes to expect reversion to the mean on an ever and ever shorter-term time frame. Short-time-frame traders can lose grasp of what a "run-away train" market is like. Make no doubt about it – bear markets are vicious. They are relentless. They redefine the concept of "oversold." A warning to you short-term traders who persist on trying to catch the bounce – you will end up with bear-claw gashes all over your body. We are in a bear phase in the world's stock markets. This is not a correction. This is the genuine deal. Let me show novice day-trading geniuses what some bear markets in the past have looked like. The first chart is... Read full article (with charts)... More on stocks: Dr. Doom Marc Faber expects a huge rally in stocks A fact about today's selloff you won't hear on the nightly news Top market tracker Hulbert: Why the market could have further to fall |
| Two of Europe's largest banks are on the "brink of disaster" Posted: 08 Aug 2011 01:06 AM PDT From Zero Hedge: Over the past 48 hours, we had heard pervasive rumors that at least one, maybe more, banks in Europe are on the verge of collapse. Our thought was, naturally, Dexia, which is the modern equivalent of AIG... not to mention the bank most rescued by none other than the Federal Reserve. Well, we were wrong. And if the Daily Mail is correct, the two banks about to kick the bucket are French SocGen and Italy's UniCredit. While the fact that these two banks are in trouble has not been lost on the market, which has been sending their CDS to near record highs, the speculation that they are far closer to implosion likely means the equity value of the European banking sector is about to be decimated. As the News reports: "The merest hint a major bank might fall is likely to reignite panic tomorrow in... Read full article... More on the euro crisis: Eric Sprott: Why gold is soaring now Stealth bank runs are spreading across Europe right now Euro update: Italy and Spain are dangerously close to the "breaking point" |
| Porter Stansberry: Why stocks are plummeting now Posted: 08 Aug 2011 12:58 AM PDT From Porter Stansberry in The S&A Digest: What's the problem with the stock market? We think the Wall Street Journal said it best this morning, with a line that might have been pulled from any one of our reports over the last three years… The economies of Europe and the United States have arrived at the moment when they no longer have any conceivable hope of being able to pay for the huge public commitments they've amassed the past 40 years… Now… I have to give you a sincere warning. There's no good way to sugarcoat this stuff. Today's Digest will detail some of the fundamental, structural problems that led to Europe's current debt crisis and the stock market turmoil this week. I already know publishing this Digest will lead thousands of subscribers to cancel on Monday. Lots of you will say, "This is way over my head… I don't need to know this stuff. I don't care about Europe…" Many of you will wonder why you bother reading the Friday Digest at all… Believe me… I know no editor in his right mind would publish this stuff. But on Fridays, I write the Digest personally. I'm committed to doing my best to share the information I would want if our roles were reversed. That's going to be hard to do this week… The information you need to understand right now is pretty darn complex. Please bear with me… I'll try to make this as painless as possible. Let me start with a few basic numbers so that you will have the facts behind the scope of the debt problem in Europe… There are two sides to the European debt crisis "coin." First, there are the banks. In the 17-member euro zone, there are 7,856 regulated financial institutions. For a variety of reasons (which will become clear to you momentarily), it's critical these institutions not fail. Unfortunately, in many cases, the value of their assets has been seriously impaired by the U.S. real estate crisis and the subsequent European debt crisis. Even more troubling, unlike the biggest U.S. banks, many of the biggest European banks rely almost exclusively on extremely short-term financing. Looking at the 90 biggest banks in Europe (those covered under the latest stress test), we find they collectively face €5.4 trillion (yes, trillion) in principal loans coming due in the next 24 months. That equals 45% of Europe's entire GDP. These amounts are staggeringly large and are concentrated in the biggest banks. In Italy, for example, the two largest banks have debt maturities amounting to 9% of Italy's GDP in the next 24 months. (Longtime subscribers will surely know the names of these two banks… Here's a hint: One of them used to be called Kredit-Anstalt.) The only way these debts can be refinanced (aka "rolled over") is if private creditors believe the European Central Bank (ECB) will fully stand behind these bonds. If any one of these banks is allowed to fail – ` la Lehman Brothers – it will be a complete catastrophe. None of the major European banks will be able to refinance. They will all fail. All of them. The other side of the coin is the sovereign debt loads of the euro zone member states. Here again, we find large near-term maturities. For example, through July 2012, Italy faces sovereign maturity amounts equal to more than 20% of GDP – not including the 5%-10% of GDP annual deficit it's also expected to run. There is no doubt that without the euro – without the ECB – Italy's government would be unable to refinance these debts at an interest rate it could afford to pay. Even with the currently explicit backing of the ECB, Italian CDS (credit default swap) markets are pricing in a 25% chance of sovereign default within the next five years. Spain, France, Portugal, and Greece also have large near-term maturities over the next 12 months. If any one of these countries is allowed to default, they will all default. All of them. You might reasonably wonder… why in the world would these countries organize their financial affairs in this reckless way? It doesn't make any sense… until you begin to understand how the euro zone banking system actually works. It's a paper system that has no accountability attached. In the current system, countries are rewarded for taking on debt because there's never a clearing of the relative accounts. Here's the core problem: The ECB operates a cross-border payment system that never settles accounts – ever. As a result, there was never any real limit to credit creation in the various euro zone countries. Instead, debts were allowed to build between central banks without any limit. In such a system, he who borrows the most wins – at least until the entire system collapses. Let me give you more detail on this point, because it's really, really important… In 2010, depositors in Ireland worried their banks would fail because of all the bad real estate loans they held. Depositors took money from Irish banks and moved the capital into German banks. They withdrew roughly €50 billion from Ireland, or 52% of Ireland's GDP. That's a huge amount of capital. In a standalone country (like Mexico, for example) this amount of capital flight would have exhausted the country's foreign reserves, leading to bank failures and sovereign default. But that didn't happen in Ireland, because the ECB continued to provide fresh capital to Ireland's national bank at the same discount rate that was available to all national banks in Europe. In fact, rather than demanding gold or valuable securities in exchange for the euros that were deposited, all the German central bank (the Bundesbank) got was an I.O.U. from the Central Bank of Ireland. As a result, the Bundesbank is now the largest creditor to the system. It's currently owed €336 billion, which is a larger amount of money than all of the bailout packages combined. In this way, it's virtually impossible for any bank in the euro zone to default – as long, that is, as the Bundesbank is willing to accept those IOUs. This fundamental lack of accountability or restraint led to enormous increases in total debt, both on the public and private sides of the debt coin in Europe. Why make the hard decisions about who will get a loan if you can get access to more funding, no matter what happens? Rarely does the "free money" spigot stay open for long. Some of Europe's central banks are now facing huge losses. And the taxpayers of Germany – the ultimate owners of the Bundesbank – are refusing to continue with the system. They're not fools. Germany's head of state is now demanding both sovereign creditors and bank creditors accept some of the losses. That's why credit default swaps are now beginning to soar – because the market doesn't know how to price the risk of default. The bigger problem is if credit was priced with the possibility of default, few banks and few European countries would be left solvent. Here's one more surprising fact about the European crisis: Most of the problem could be avoided if there were real and meaningful cuts made to public sector employees' wages and benefits. Take Greece for example. Everyone believes Greeks don't pay taxes. The solution, according to the IMF, is to collect more taxes. But the truth is entirely different: Greeks were already paying more taxes as a percentage of GDP than either the U.S. or Japan. Even after the IMF package, the Greek deficit is projected to be €17 billion, or 7.6% of GDP. And that's the conundrum. Can you allow most of Europe to operate at a huge deficit, which ends up as losses at the Bundesbank… or do you demand discipline in the system and cause a catastrophic series of defaults? We continue to believe the ECB must, eventually, paper over these bad debts with an enormous bond-buying program that would dwarf the quantitative easing we've seen so far in the U.S. And we believe – as we've written for many months – the U.S. Federal Reserve will ultimately backstop the program to ensure it doesn't destroy the euro. But still… we wonder… how long will anyone, anywhere, accept the paper currencies of obviously bankrupt governments and their puppet banks? We don't know. And we're not optimistic. By the way… lest you think we just dreamed this up this week… here's what we wrote about the risks Italy (and the euro) posed to the global economy last July… Some market participants clearly hoped the $125 billion Fed-orchestrated bailout of Greece would be the end of Europe's sovereign debt worries. They say these small economies "don't matter." But we know otherwise… The Greek crisis (and the other European debt crises yet to come) is merely a precursor to the "real world" debt crisis of 2010-2012. (We say "real world" because a crisis among developed nations will dwarf the "emerging-market" debt default cycle of the late 1990s.) Likewise, both the emerging-market crises of the last decade, the Internet bubble that followed, and the real estate bubble after that were all merely stepping stones towards the ultimate collapse of the world's untenable, paper-backed monetary standard… Many of the world's developed economies have been fueling growth with foreign debts. This growth and the asset values created under the euro standard are unsustainable for the simple reason that debt service cannot be made and creditors are unwilling to extend these debts on reasonable terms. These problems have no simple answers. They will spread from creditor to creditor and intensify as the market realizes these defaults are unstoppable. The next major country likely to experience a credit crisis is Italy, which has enormous exposure through its banks to Eastern Europe and the rest of Europe's weak economies. Italy 's public debt totals €1.7 trillion – seven times the size of Greece. Italy is the world's third-largest sovereign borrower. It cannot be bailed out – it is simply too big. Meanwhile, it cannot possibly hope to pay back its debts as long as it remains in the euro. In fact, Italy has been in recession almost since the day it adopted the euro: Its economy has grown by a total of 0.54% over the last decade. The total public debt to GDP will soon surpass 120%. At that point, it will become progressively more difficult for Italy to extend its foreign debts because all of the foreign creditors will know these debts will never be repaid. A default and devaluation will be the only way to restart Italy's economy. – Stansberry's Investment Advisory, June 2010 Finally… what should you do about all these risks? Hold plenty of gold and silver bullion. Short financial stocks. Hold cash in sound currencies. Buy farmland. Buy energy – during the corrections. Don't believe a word anyone from the banks or the government says. Oh… and be sure to renew your newsletters, especially this one. Crux Note: For instant access to all of Porter's research – including his latest recommendations for protecting yourself from the "End of America" – click here. More from Porter Stansberry: Porter Stansberry: The crisis is officially here Porter Stansberry: The next stage of the crisis is starting now This could be the most important thing Porter Stansberry has ever written |
| Posted: 07 Aug 2011 11:25 PM PDT :biggrin: and ounce of platinum is always $21 dollars more. |
| US downgrade sends gold price rocketing higher Posted: 07 Aug 2011 11:15 PM PDT As expected, the gold price has surged in response to the weekend news that Standard and Poor's has downgraded the USA's credit rating from AAA to AA+, breaking through $1,700 per troy ... |
| Posted: 07 Aug 2011 10:03 PM PDT Since this will be trumped by the market opening in the US, I'll be brief. So far, this is playing out like I expected. Bad but not horrific. That does not mean we can't see a moderately bad day in the US slide into nasty end of session erosion and then cascade into Asia overnight. But as much as the markets were psychologically rattled by the wild card of the US downgrade, the bigger deal is whether the ECB will stem the tide of the liquidity crisis underway in Europe. Yes sports fans, we also have a solvency crisis in place like Greece, but the danger of a liquidity crisis that it will lead a big financial domino to fall over and do a Credit Anstalt to the European banking system. Richard Smith's top contender is Italy's Unicredit, which had the bad fortune to overpay to get into pretty much every bad housing market in its reach (save the UK and Spain). A top line overview: S&P future have ranged (at least when I was paying attention) from down 18 to down as much as 32.50, now at about 31.9. European market were down 2% ish on open, some traded up to positive territory or down less than a percent, they've now lost faith and are back to meaningfully negatives: FTSE down 1.87%, CAC 40 down 2.48%, Dax down 2.80%. The dollar was down a mere .3% on the DXY index in Asia, and the euro has weakened meaningfully since then, so I suspect it will be flattish or only slightly negative. Treasuries are moving back from losses overnight that still put them well above the levels of a week or so ago. The ten year yield is up only 10 basis points. Gold is up big, over 3%, and Brent is down 2.87%. The latest on the Euro interventions, courtesy Bloomberg:
The problem is we have no idea how much the ECB is prepared to commit or what its aims are (as in does it have an interest rate target it is trying to hit). It is worth remembering that the ECB has intervened aggressively and successfully in the past, when the euro fell to about 1.22 to the dollar and bond spreads were blowing out. The question remains whether they are prepared to maintain a large and persistent enough effort this time. Update 7:30 AM: Reader Tim Coldwell point to this reading from the ever useful Golem XIV. The bottom line is Euribor, the European answer to Libor, is locking up. If the ECB can't intervene forcefully enough to reverse that, you will start to see banks fall over pronto. From the post:
This goes back to multiple problems: the refusal to wipe out equity and force bondholders to take losses and partially convert to equity, and the obsession of the ECB (and the influential Bundesbank) with inflation, meaning they do not want the ECB balance sheet to get too large. Mind you, I am not saying there are pretty ways out of this mess. There are less bad ways, however and I'm not optimistic the ECB will resort to them.
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| Posted: 07 Aug 2011 09:59 PM PDT Spanish duchess gives away fortune in order to marry civil servant Guardian (hat tip Buzz Potamkin). Number of sheep thefts doubles in six months as meat prices soar Independent (hat tip Buzz Potamkin) Learning to Cope With a Mind's Taunting Voices New York Times (hat tip reader Valissa) Murdoch Hacked Us Too Frank Rich, New York Magazine. I'm late to this, but still worth reading. News Corp. Director Leading Hacking Inquiry Has Ties to Murdochs Bloomberg Belgium's Surpassingly Strange Political Stalemate: The Ticker Bloomberg Credibility, Chutzpah And Debt Paul Krugman, New York Times Second Recession in U.S. Could Be Worse Than First New York Times D'oh! And this is after newly released IRS data revealed that incomes fell 15% from 2007 to 2009. So how much worse does it get? Obama and S&P Vie for Credibility Wall Street Journal. As much as the Treasury/Administration pushback looks like sour grapes, this account from the WSJ winds up being more favorable to the Administration than I anticipated. It does appear that S&P had not only made up its mind, but was in a huge rush to make the release, despite the fact that after hours on Friday is the same thing as before market opening on Sunday or Monday. Geithner Will Stay for Now, the Treasury Department Says New York Times. Another negative indicator. The only good thing about this is that Timmie will undeniably own the entire crisis, Phases One and Two. Markets Fear Gridlock Without Aid Wall Street Journal. Are the true believers losing faith int the Bernanke Put and the PPT? Pilots Take to the Streets Wall Street Journal The Bear Necessities (of Silver Life) Screwtape Files (hat tip reader James P). They bury the lead, so skip to the end first and then backtrack if you wonder what this is about. What Happened to Obama? Drew Westen, New York Times. Many readers pointed to this piece, it seemed to strike a chord. I have to admit I turned off Obama's inaugural speech precisely because it had a very high noise to signal ratio, and what little signal there was not what needed to be said. But he is far too charitable in his interpretation as to why this Presidency has turned out the way it has. Antidote du jour (hat tip reader furzy mouse):
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| Gold Hits $1714, ECB is "Last Line" of Eurozone Defense, US Debt Plan "Falls Short" Posted: 07 Aug 2011 09:01 PM PDT |
| Gold & Silver Market Morning, August 8, 2011 Posted: 07 Aug 2011 09:00 PM PDT |
| The Stock Market and the Dollar: There Are Only Three Possibilities Posted: 07 Aug 2011 07:00 PM PDT Resource Insights |
| Gold to shine on 40th anniversay of Nixon Shock Posted: 07 Aug 2011 06:49 PM PDT As we approach the 40th anniversary of the Nixon Shock, which ended the convertibility of the US dollar into gold, the price of the metal continues to hit new highs. With S&P's downgrade of the US's credit rating on Friday, the long-term outlook for the dollar is pretty shaky – but prospects for gold continue to sparkle. On August 15 1971, President Richard Nixon ended the convertibility of dollars into gold as he attempted to battle soaring inflation and a deteriorating balance of payments... Read |
| Le yuan atteint un nouveau plus haut historique face au dollar Posted: 07 Aug 2011 06:42 PM PDT La Banque populaire de Chine (PBOC) a fixé lundi un cours-pivot historiquement élevé pour le yuan, qui a en conséquence battu un record face à un dollar pénalisé par l'abaissement de la note souveraine américaine. Les cambistes estiment que la devise chinoise peut encore aller plus haut, et attendent d'en savoir plus sur les mesures que prévoit la BCE pour atténuer la pression sur la zone euro. Le cours spot du yuan a touché un plus haut à 6,4268, plus élevé que son cours de clôture de vendredi (6,4404)... Lire |
| Posted: 07 Aug 2011 06:00 PM PDT |
| Junior Gold & Silver Shares Can Perform When Other Equities Do Not? Posted: 07 Aug 2011 05:40 PM PDT Gold Forecaster |
| Debt Limit Ceiling: Bandaids, Blather and Bullion Posted: 07 Aug 2011 05:38 PM PDT |
| Posted: 07 Aug 2011 05:27 PM PDT |
| Saved by a Trillion-Dollar Coin? Posted: 07 Aug 2011 05:08 PM PDT Robert P. Murphy |
| Marshall Auerback: A Beer(s) Hall Putsch From the Rentiers? Posted: 07 Aug 2011 04:32 PM PDT By Marshall Auerback, a hedge fund manager and portfolio strategist So the ratings agencies have reared their ugly heads again. David Beers, head of S&P's government debt rating unit, announced Friday night that S&P has downgraded the U.S. credit rating for the first time, from AAA to AA+. It's a sham: S&P's whole analytical framework reflects ignorance about modern money. If the US government, Treasury, and the Federal Reserve, capitulate to this outrageous act of economic extortion, it will effectively be sanctioning a beer hall putsch by the rentier class. Justifying its decision, Standard and Poor said "political brinkmanship" in the debate over the debt had made the U.S. government's ability to manage its finances "less stable, less effective and less predictable." It said the bipartisan agreement reached this week to find at least $2.1 trillion in budget savings "fell short" of what was necessary to tame the nation's debt over time and predicted that leaders would not be likely to achieve more savings in the future. Of course, the response from Treasury was equally inane: "A judgment flawed by a $2 trillion error speaks for itself," a Treasury spokesman said last Friday. $2 trillion, $4 trillion, who cares if the S&P is math-challenged? It's irrelevant! The notion that the US can arbitrarily summon up the ability to register $4 trillion in "savings" demanded by Standard & Poor as the price for upholding America's AAA rating is nonsensical, as it ignores the impact that the withdrawal of income will have on the overall economy and, by extension, the size of the government deficits that the ratings agencies regularly decry. Credit ratings are based on ability to pay and willingness to pay. A sovereign issuer of its currency, which issues debt in said currency – like the US – always has the ability to make US dollar payments. Whether it chooses to do so is another matter. But that's a matter of politics, not economics. The Obama Administration would have been on much stronger ground if they challenged the constitutionality of the debt ceiling because, if successful, it would have eliminated this threat to the US AAA credit rating once and for all in terms of precluding an UNWILLINGNESS to pay. You wouldn't have a bunch of extremists threatening a default on funds which were already appropriated and spent. The ballot box, not the debt ceiling is the way to solve this kind of dispute. There is, therefore, an opening for Moody's to gain a competitive advantage over S&P. Moody's can announce that whereas any issuer of its own currency can always make nominal payment on a timely basis, ability to pay is absolute and beyond question for the US government. Moody's could therefore put the US on notice with regard to willingness to pay and ignore the flawed economic reasoning which characterized the rest of S&P's rationale for the downgrade. To be fair to Mr. Beers, his agency did specifically cite the political brinkmanship of a number of US Congressmen, who seemed far too inclined to contemplate the option of default as a means of securing greater spending cuts on the part of the US government. But that wasn't the full story. S&P placed particular emphasis on the size of the cuts, implicitly suggesting that larger cuts would have superseded the political questions. That's intellectual dishonesty at its worst. Not that it matters here, but for the record, the S&P (along with Moody's and Fitch) covered themselves with glory during the housing bubble, rating toxic subprime junk as AAA rated paper. Not only were the agencies politically corrupted by virtue of their incestuous ties to Wall Street, but criminally incompetent as well. Yves Smith gives a perfect illustration of the latter:
And S&P continues to screw up MBS ratings in the wake of heightened scrutiny. Here are a few questions the S&P ought to have considered before it issued its debt downgrade: Businesses, however, are constrained by inadequate demand for their output, a phenomenon which would become even worse if the US were to follow the prescribed level of cuts advocated by S&P to retain its AAA rating with these economic blackmailers. That is a real cost (and it also drives those "horrible" government deficits higher, as tax revenues plunge and social welfare expenditures via the automatic stabilizers rise). Is government issuing so much debt that it is causing interest rates to skyrocket? Not in the slightest. Rates have actually gone NEGATIVE in term yields under 12 months over the past few weeks (so much for the notion that the end of QE2 would drive rates sky-high). We have a deflation problem, not inflation. And the political dysfunction that Mr. Beers describes could have easily been avoided through a number of options which would not have left the country in the hands of irrational deficit terrorists. As Joe Firestone notes:
Firestone is right: A sovereign government like the US only sells securities in order to drain excess reserves to hit its interest rate target. It could always choose to simply leave excess reserves in the banking system, in which case the overnight rate would fall toward whatever rate the central bank offers to pay commercial banks for excess overnight reserves. As far as the short term impact goes, yes, US bonds are down in response to the news of the downgrade. How long lasting is this likely to be? For historical comparison, consider the case of Japan (thanks to Bill Mitchell): In November 1998, the day after the Japanese Government announced a large-scale fiscal stimulus to its ailing economy, Moody's Investors Service began the first of a series of downgradings of the Japanese Government's yen-denominated bonds, by taking the Aaa (triple A) rating away. The next major Moody's downgrade occurred on September 8, 2000. Then, in December 2001, Moody's further downgraded the Japan Governments yen-denominated bond rating to Aa3 from Aa2. On May 31, 2002, Moody's Investors Service cut Japan's long-term credit rating by a further two grades to A2, or below that given to Botswana, Chile and Hungary. This at a time when the Japanese economy was then almost 1,000 times the size of Botswana's, had the world's largest foreign reserves, $446 billion; the world's largest domestic savings, $11.4 trillion; and about $1 trillion in overseas investments. In a statement at the time, Moody's said that its decision "reflects the conclusion that the Japanese government's current and anticipated economic policies will be insufficient to prevent continued deterioration in Japan's domestic debt position … Japan's general government indebtedness, however measured, will approach levels unprecedented in the postwar era in the developed world, and as such Japan will be entering 'uncharted territory'." "Uncharted territory" – well, the last time anybody looked, the Japanese government was still comfortably issuing 10 year government debt at around 1%. That Japan's debt is largely domestically held is irrelevant: the denomination of the debt, NOT the debt holder is the key consideration. There are only two sectors to issue bonds to, the domestic private and international. US and Japan are on opposite ends of the spectrum, with the US issuing a lot to the latter (though still more domestically in fact), and Japan issuing a lot to the former. The interesting thing is that this hasn't mattered at all in the determination of rates–the key difference affecting relative interest rates between the US/Japan and, say, the periphery countries of the euro zone, has been the nature of the monetary system–the US/Japan are currency issuers under flexible foreign exchange, whilst the member states of the European Monetary Union are not. As Professor Scott Fullwiler indicated to me in a recent email exchange, "For the former, rates follow monetary policy; for the latter, rates follow markets' perceptions of default risk. This is why for the former credit rating downgrades are complete monetary non-events, like QE. Note further that if the int'l sector were to stop buying US debt, this just means that the US trade balance improves and the breakdown of governmnet debt sales starts to look more like Japan's." To argue otherwise is to ignore the actual causation of the transaction, which is that China exports something to the US in exchange for dollars, and then that money goes into their checking account at the Federal Reserve. It's called a reserve account because it's the Federal Reserve, and they give it a fancy name. But in reality it is a checking account, just like you or I use. Now China has 3 choices with what they can do with the money in their checking account. They could spend it and buy real assets in the US, which would be great for our economy, or they can put it into another currency (say, euros), in which case the dollar declines, which enhances our export position, or they can put it in another account at the Federal Reserve called a Treasury security, which is nothing more than a savings account. In other words, the bond purchase, if it occurs, comes at the end of the transaction and actually 'funds' nothing. Economist Warren Mosler has noted on numerous occasions that China and others buy US Treasury securities primarily to support the dollar versus their own currencies, and thereby drive exports to the US, and not because they are looking for safe investments per se. That is, it's a consequence of their drive for 'competitiveness' and their desire to net save in US dollars. It takes two to tango. And with no Treasury securities China would be forced to buy state debt, corporate debt, euro debt (say, Greek bonds?), equities, etc. which is highly problematic for them for a variety of reasons. A final question for Mr. Beers: Is government spending so high that the dollar is crashing in international exchange markets? No. Certainly the dollar has its ups and downs — we've got a floating exchange rate and it is supposed to go up and down. So let's assume that our dollar falls because China no longer wishes to net save in greenbacks. In fact, this has been occurring over the past several months and the bond market has gone up during this period. If this were to go on long enough, the ultimate impact would be that our external balances improve significantly (as does the likely desire of foreigners to accumulate cheap US assets via FDI), because our exports increase, which means the current account deficit goes down and less bonds are available for China to 'fund' us". Now that's not the way I would go as a growth strategy, as it entails a "race to the bottom" as far as wages go. Moreover, if budget deficits are not allowed to grow large enough to enable private domestic agents reduce their overall debt levels, then the economy will remain mired in its stagnant state. With austerity being pursued everywhere it is a fool's hope to think that net exports are going to swing enough to save the day. But from a straight sectoral balances point of view, IF we did export more, these increased exports would mitigate the ability of countries like Japan or China to net save in our currency. By definition, this would also correspondingly reduce their holdings in US Treasuries. Floating rates float. This is not synonymous with economic and financial degeneracy, as our economic moralists, or the gold bugs seem to imply. Over the past 10 years, the Australian dollar has fluctuated between 50 cents to $1.08 against the greenback. The last time I looked Australia was still surviving and thriving. One can also consider the more extreme case of Russia in 1998, during which its entire financial system imploded and the ruble lost two thirds of its external value against the dollar. Yet the currency itself did not "evaporate" and the ruble remains Russia's currency unit of account today. And for those who argue that "markets rule", it's interesting to see the initial response: money flooding into the yen, despite the fact that Japan has a credit rating lower than the US (remember, neither Moody's, nor Fitch, followed the S&P downgrade) , in a country which has a public debt to GDP ratio twice that of the US (not that we think that's a horrible thing per se). As for the Swiss franc, the other beneficiary of this move, it is worth recalling that but for the Fed opening up dollar swap facilities with the SNB in 2009, the Swiss franc wouldn't be worth the value of a piece of toilet paper that you scrape off your shoe in Grand Central Station. It is questionable how much of the furor surrounding the downgrade is ideological and how much is really a misunderstanding (an "innocent fraud" in the words of John Kenneth Galbraith). Governments around the world have been led to believe that they need to issue bonds and collect taxes to finance government spending, and that good policies should be judged by their ability to enforce fiscal austerity. Mainstream economists and ratings agencies such as S&P have guided policymakers into imposing artificial constraints on fiscal policy and government finances, such as issuing bonds when running deficits, debt ceilings, forbidding the central bank to directly buy treasury debt, allowing the markets to set interest rates on government bonds, etc. While last Friday's downgrade per se probably won't do much, if anything, to interest rates, growth, and employment, ratings agencies like the S&P reinforce the current deflationary state of affairs because their perverse rating actions simply reinforce efforts for further substantial deficit reduction and a balanced budget amendment. Ironically, if the siren songs of "sound finance" are followed, we will get exactly the outcome now predicted by the likes of Michelle Bachmann: the US WILL become like Greece.
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| ECB Seeks to Avert What Has Already Happened; Raspberries and Gold Posted: 07 Aug 2011 04:26 PM PDT |
| U.S. gold strikes record above $1,700 on S&P downgrade Posted: 07 Aug 2011 03:31 PM PDT |
| Posted: 07 Aug 2011 03:04 PM PDT --Well, now we know what last Friday's big global sell-off was all about. Ratings agency Standard and Poor's has downgraded the credit rating of the United States government from AAA to AA+. Let the fear and dread begin. --What we don't know is whether financial markets are nearing a state of total revolt against the Money Power. The decision by the European Central Bank to make huge government bond purchases with money it doesn't have could cause a state of near panic. We'll get to that in just a moment. --But first, S&P becomes the first of the three major ratings agencies to tell the US government its credits aren't any good (or at least not at AS good). It probably won't be the last. The decision should not have surprised anyone in possession of conscious thought. We wrote as much a week before the downgrade in a note to Australian Wealth Gameplan readers (emphasis added is ours):
--Don't expect the downgrade to trigger a sell-off in US bonds. "There is no change in Japan's trust in U.S. bonds," a senior Japanese official told Reuters. The US Treasury market is the deepest and most liquid fixed income market in the world. Even if it's poisoned, investors will still drink from it. It's the only pool of capital large enough to accommodate a very large herd of terrified global investors. --Strangely, then, even though the US credit rating has been downgraded, expect to see investors flock to Treasury bonds and notes. They will sell "riskier assets" and buy liquid "safe" assets. Gold futures are up 2.5% as we write and just shy of US$1,700. --Are Australian stocks and the Australian dollar considered "safe" assets? They weren't in 2008. Will this time be different? Despite the China link, the capital markets are quite clear in their answer: this time isn't different. --We just had a brief chat with Slipstream Trader Murray Dawes. Murray's calls on the market have been spot on for the last two months. You can watch his latest free YouTube update here. Murray and your editor both agree that investor's are on the verge of losing total confidence in the powers that be to manage the financial crisis. That kind of emotional conclusion leads to huge down days in the market. -- By the way, S&P aid the long-term fiscal path of the US is a giant collision with reality that's bound to happen. The US Treasury Department disputed S&P's conclusions and said the ratings agency screwed up on its calculations by a few trillion bucks. But S&P fired back and replied that estimates of debt-to-GDP ratios were not the core motivator for its decision. So what was? S&P wrote:
--So there's "political risk" to investing in American bonds now. This goes hand-in-hand with the US dollar losing its status as the world's reserve currency. S&P realises that no one in Washington takes those developments seriously. Or, that the lack of agreement on what to do about America's debt problem means America is simply not as credit worthy as she once was. Who can really argue with that? --The downgrade must have come as bittersweet news to America's largest trading partner in crime, China. China owns $1.2 trillion worth of US bonds and notes. And China sits on $3.2 trillion in foreign-exchange reserves, many of which are in US dollars. The value of US credits and the stability of the dollar are the key issues in the world's most important economic relationship. --Like a loving but firm spouse, China has taken the news and issued some hard words for America. An editorial at state-media outlet Xinhua gives the following relationship advice to America's politicians:
--The trouble is, there is no stable and secure global reserve currency this morning, unless you count gold. The conventional wisdom is that the world could move from a dollar standard to a "something else" standard with very little disruption. But this week will be a good test of that wisdom. --For one, the US downgrade is going to heighten the risk for all other borrowers. It's a little like when everyone in a row of seats is asked to move one seat over. That doesn't mean other sovereigns will be downgraded. But it means large investors are going to be more sceptical about government, corporate, and municipal bonds. --The lack of confidence in fixed income investments ought to reward cash. But will it reward stocks? Probably not in the short term. Stocks are pricing in much lower growth. A hybrid strategy, which we're pursuing in Australian Wealth Gameplan, is to buy a handful of beaten-down blue chips that have high returns on capital and pay dividends. --Of course the hope here in Australia is that China will save your super. Australian Super director Ian Silk told the Age this weekend, "While the US represents around half of the global equity market, we have a substantial allocation in emerging markets including China, where we expect stronger growth and less volatility." --He also said not to panic. He's probably right about that. The time to panic was months ago, when everyone else was calm. We'd look to be buyers of both gold and value stocks, but only after this coming surge in anxiety and fear has crested. --High tide for global fear may be today. The European Central Bank has restarted its bond-buying program. It made the announcement late Sunday night in Europe, just in time for markets here to make sense of it. The ECB will buy bonds issue by Italy and Spain, Europe's third- and fourth-largest economies, respectively. --What does it mean? Well, the ECB is buying Spanish and Italian bonds because it appears no one else will, not even the Chinese. But the ECB doesn't actually have the money to meet the borrowing needs of Spain and Italy. It will have to conjure the money out of nowhere. Or it will have to borrow on the full faith and credit of the European Union. --That's a huge step. Up until now, the EU's member states have all used the same money to run their own fiscal policies. If this is a centralisation of European fiscal policy, it's kind of the natural fulfilment of the whole European experiment: everyone living at everyone else's expense with borrowed money. No one is responsible for anything but we're all responsible for everything. --Philosophically, that's absurd. Economically, it's insane. Chronologically, it may buy Europe a bit of time before the ultimate insolvency of the Welfare State becomes obvious to everyone. Practically, that means you still have time to do something about it. Regards, Dan Denning |
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