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Gold Seeker Closing Report: Gold and Silver Fall While Dollar Gains
Why Things Are Looking 'UUP' For The Dollar
iShares Hong Kong ETF Steady Despite Currency Peg Talk
Guest Post: FMV on Tinka
Spotlight On CurrencyShares Canadian Dollar Trust ETF
Endeavour Silver Intersects 448 gpt Silver and 14.0 gpt Gold Over a 4.6 Meter Width in the Daniela Vein at the Guanajuato Mine in Mexico
Weekly Market Outlook, And Comparing 1980s Valuations For Stocks
The Contrarian: Euro ETFs
The Gold and Silver Rally Is Set To Begin
Picking up the next Bargains in Gold and Silver
Gold is Forming a Bullish Consolidation
Gold Price to $2,200 by 2012
George Soros: “It Is Necessary to Think the Unthinkable”
Gold Moves Higher as Greece Crisis Moves up a Gear, Financials Get Pummelled
Is the Eurozone Crisis a British-American fantasy?
Dale Mah: Gold Companies to Watch from the Yukon to Colombia
$US!!
Government Makes Us Slaves
UK gold demand soaring
Central Banks Net Buyers of Gold for 1st Time in 20 Years
Links 9/19/11
Gold & Silver Market Morning, September 19, 2011
The Coming GOLD Breakout to 2100
Only a Fool Would Short Gold Now – Robin Griffiths
Richard Alford: The (Re)Education of Ben Bernanke and the FOMC
Gold Market Update
Permission to Default, Granted
Life in the Post-Lehman Economy
Has Hedging Killed The Goose - (Final Part)
China sets national gold standard: Xinhua

Gold Seeker Closing Report: Gold and Silver Fall While Dollar Gains

Posted: 19 Sep 2011 07:16 AM PDT

Gold climbed $14.74 to $1826.64 by a little before 4AM EST, but it then fell back off in New York and ended near its late session low of $1770.84 with a loss of 1.98%. Silver slumped to as low as $38.962 and ended with a loss of 3.69%.

Why Things Are Looking 'UUP' For The Dollar

Posted: 19 Sep 2011 06:02 AM PDT

By Investment U:

By Alexander Green

On July 28, I wrote a column recommending Market Vectors Double Short Euro ETN (NYSE: DRR) as a way to take advantage of growing problems in the Eurozone.

Since then, that ETF has jumped 7 percent. I see more upside in that fund.

However, today I'm going to recommend another way to take advantage of an oversold dollar: PowerShares DB US Dollar Index Bullish (NYSE: UUP). It's likely to rally in the months ahead.

Here's why…

Two weeks ago, I was in France and the U.K. on personal business. As anyone who travels to this part of the world knows, every time you change a Ben Franklin, you get back a couple of bills and a smattering of coins. The almighty dollar doesn't go far in this part of the world.

My cab ride from Heathrow to Notting Hill cost $120. A pizza and a coke was

Complete Story »

iShares Hong Kong ETF Steady Despite Currency Peg Talk

Posted: 19 Sep 2011 05:56 AM PDT

By Tom Lydon:

There isn't an exchange traded fund that lets investors go long on the Hong Kong dollar, although investors can tap an ETF for a stock play.

The iShares MSCI Hong Kong (EWH) was down fractionally on Friday.

Speculation of an end to the Hong Kong dollar's peg to the U.S. greenback is rampant this week on hedge fund manager Bill Ackman's bet on the currency.

Currently, the weakened U.S. economy has helped depreciate the U.S. dollar, along with the pegged Hong Kong dollar, writes Tom Orlik for The Wall Street Journal.

Consequently, Hong Kong has experienced growing inflation and a growing asset bubble as its economy continues to expand. The consumer price index jumped 7.9% in July while property prices continued to skyrocket.

Hong Kong, though, has held on to the status quo, finding financial stability and economic growth through the linked currencies. However, the stronger ties with China and

Complete Story »

Guest Post: FMV on Tinka

Posted: 19 Sep 2011 05:55 AM PDT

"Results on the first 4 holes are expected by end of the month. Of vital importance is that they are encountering the same sandstones that bore the silver in zone 1. However investors should still be cautioned that just because you encounter the same rock type in continued drilling this does not necessarily mean you will encounter same grades if any grade at all. However, when you have inferred ounces of 20 million, anytime you DO encounter the same metal bearing rock during continued drilling this is always viewed as a positive. "

Click here for entire report...

Spotlight On CurrencyShares Canadian Dollar Trust ETF

Posted: 19 Sep 2011 05:49 AM PDT

By Tom Lydon:

ETF Spotlight on CurrencyShares Canadian Dollar Trust (FXC), part of an ongoing series.

Assets: $1 billion.

Objective: The CurrencyShares Canadian Dollar Trust tries to track the price movement of the Canadian dollar against the U.S. dollar.

Holdings: The trust maintains a deposit account denominated in Canadian dollars.

What You Should Know:

Rydex|SGI is the sponsor of the ETF.
FXC has an expense ratio of 0.40%.
The fund is down 0.42% over the last month, down 0.47% over the past three months and up 1.63% year-to-date.
Any interest accrued in the deposit account will be used to pay trust expense, and any excess interest will be distributed to shareholders monthly. The fund has a 12-month yield of 0.11%.
The Canadian dollar is also known as the "loonie" due to the image of the aquatic bird on the Canadian one dollar coin.
"Those hoping to speculate on the Canadian dollar should be

Complete Story »

Endeavour Silver Intersects 448 gpt Silver and 14.0 gpt Gold Over a 4.6 Meter Width in the Daniela Vein at the Guanajuato Mine in Mexico

Posted: 19 Sep 2011 05:38 AM PDT

Endeavour Silver Corp. (TSX: EDR.TO)(NYSE: EXK)(Frankfurt: EJD.F) announces that exploration drilling in the Lucero South area of Endeavour's Guanajuato Mines project in Guanajuato State, Mexico continues to intersect high silver and gold grades over mineable widths in the recently discovered Daniela vein.

Weekly Market Outlook, And Comparing 1980s Valuations For Stocks

Posted: 19 Sep 2011 05:33 AM PDT

By Price Headley:

Isn't it amazing how stocks can stop and turn on a dime? From a 6.1% bearish swing in six trading days to a bullish swing of 5.4% over the past five trading days. It's just amazing, and a testament to how undecided traders are right now. And it's also a warning to not dig in too deep just yet on either side of the market - we're still feeling the aftershocks of the early-August 17% meltdown.

We'll examine where this zig-zag pattern is apt to take us next, right after a closer look at some key economic numbers.

Economic Calendar

Not only was it a wildly bullish week for stocks last week, it was wildly bullish despite some troubling economic numbers, of which there were plenty. Here are the highlights (or lowlights, as the case may be).

Inflation – The good news is producer inflation was reined in last month,

Complete Story »

The Contrarian: Euro ETFs

Posted: 19 Sep 2011 05:21 AM PDT

By Tom Lydon:

Global stock exchange traded funds tumbled to start the week as markets remained unable to shake worries that Greece will default and escalate the debt crisis.

The Contrarian looks at the market's most unloved ETFs — this week's installment examines euro currency funds.

The viability of the European Union's currency is facing a serious challenge. Last week, the European Central Bank worked with other central banks to provide dollar liquidity for banks.

The euro currency has depreciated 3.4% so far this month as the spreading debt crisis weighed on the Eurozone currency.

Last week, French President Nicolas Sarkozy and German Chancellor Angela Merkel said they would continue to support Greece and were "convinced" Greece will stay in the union.

However, Bloomberg reported Monday that euro bulls are capitulating after

Complete Story »

The Gold and Silver Rally Is Set To Begin

Posted: 19 Sep 2011 05:16 AM PDT

Are you ready for the annual Christmas Rally in Gold and Silver?
During 18 of the last 22 years, gold has rallied between US Labor Day and Christmas. Will the pattern this year follow the historical pattern?

The most bullish facilitator of rising gold and silver prices is the supply of money (see chart below).

CLICK IMAGE TO ENLARGE

The chart above is courtesy Mises.org shows the True Money Supply continues to rise exponentially. A rising money supply is bullish for gold and silver, as it increases the amount of money available for the purchase of precious metals. As long as the Central Banks keep the banking system supplied with money, the banking system will survive. This principle is far more important to the Central Banks than the integrity of the currency.

CLICK IMAGE TO ENLARGE

Featured above is the daily gold chart. Price is carving out a bullish pennant. The supporting indicators are at levels where they have found support many times in the past. The fact that the 50DMA is in positive alignment to the 200DMA (green oval), while both are rising, is bullish. A breakout at the blue arrow will mark the beginning of the next rally.

CLICK IMAGE TO ENLARGE

Featured above is the weekly silver chart. Price is carving out a bullish pennant. The supporting indicators (green lines) are positive with a lot of room on the upside. A breakout at the blue arrow sets up a target at the green arrow. The 50WMA is in positive alignment to the 200WMA (green oval) while both are rising.

Read more at SHTFplan.com

Gold Moves Higher as Greece Crisis Moves up a Gear, Financials Get Pummelled

Posted: 19 Sep 2011 04:10 AM PDT

Is the Eurozone Crisis a British-American fantasy?

Posted: 19 Sep 2011 03:11 AM PDT

The English-language media seems to be of one mind on Europe in general and Greece in particular: the system is toast, and a series of sovereign defaults leading to either a fundamental restructuring or failure of the Eurozone is inevitable.

But that's not the universal view on the Continent. Consider this from GlobalEurope Anticipation Bulletin, a French group (I think) that publishes provocative analysis of the global economy from a European perspective.

Global systemic crisis – Fourth quarter 2011: Implosive fusion of global financial assets

…But let's come back to Greece and what is beginning to be a "very repetitive old story" which, as we have already explained, returns to the front of the media stage every time Washington and London are in serious difficulties. Moreover, coincidentally, the summer has been disastrous for the United States which is now in recession, which has seen their credit rating cut (an event deemed unthinkable by all the "experts" only six months ago) and exposed their political system's state of widespread paralysis to an astonished world, all whilst being incapable of putting any serious measure in place to reduce their deficits. At the same time, the United Kingdom is sinking into depression with riots of uncommon violence, an austerity policy that fails to control budget deficits whilst plunging the country into an unprecedented social crisis, and a ruling coalition that doesn't even know why it governs together against the backdrop of the scandal of collusion between political leaders and the Murdoch empire. No doubt, in such a context, everything was ripe for a media relaunch of the Greek crisis and its corollary, the end of the Euro!

If LEAP/E2020 had to summarize the "Hollywood style" or "Fox News" scenario, we would have the following synopsis: "While the US iceberg is ramming the Titanic, the crew leads the passengers in search of dangerous Greek terrorists who may have planted bombs on board!" In propaganda terms, it's a known recipe: it's a diversion to allow, first of all, the rescue of the passengers one wants to save (the informed elite who know very well that there are no Greek terrorists on board) since everyone can't be saved; and then, hide the problem's true nature for as long as possible to avoid a revolt on board (including some of the crew who sincerely believe that there really are bombs on board).

…For now, as we have said for several quarters, the media and financial hysteria surrounding the Greek crisis is primarily in the realm of propaganda and manipulation. To see this, it suffices to note that outside Greece, no Euroland citizen would realize that there is a crisis in Greece if the media didn't regularly make it the subject of their headlines. Whilst in the United States, the daily ravages of the crisis do not need media coverage to be felt severely by the tens of millions of Americans…

Focusing on the background, we must emphasize that the "promoters" of a Greek crisis presented as a fatal crisis for the Euro have spent their time repeating it for almost two years without any of their forecasts coming to pass in any shape or form (except to continue talking about it). Facts are stubborn: despite the media outcry that should have seen off many economies or currencies, the Euro is stable, Euroland has come on in leaps and bounds in terms of integration and is about to break even more spectacular new ground, the emerging countries continue to diversify out of US Treasury Bonds and buy Euroland debt, and Greece's exit from the Euro zone is still completely beyond consideration except in the Anglo-Saxon media articles whose writers generally have no idea of how the EU functions and even less of the strong trends that drive it.

Now our team can do nothing for those who want to continue to lose money by betting on a Euro collapse, Euro-Dollar parity, or Greece's Euroland exit. These same people spent lot of money to protect themselves against the so-called "H1N1global epidemic" that experts, politicians and the media of all kinds "sold" for months to people worldwide and proved to be a huge farce fueled in part by pharmaceutical companies and cliques of experts under their orders. The rest, as always, is self-propelled by the lack of thought, sensationalism and mainstream media conformity. In the case of Euro-Greek crisis, the scenario is similar, with Wall Street and the City in the role of the pharmaceutical companies.

In fact we recall that what terrifies Wall Street and the City are the lessons that Euroland's leaders and its people have been in the process of learning from these three years of crisis and the ineffective solutions that have been applied. The nature of Euroland creates a unique forum for discussion among the elite and American and British public opinion. And this is what disturbs Wall Street and the City, which is systematically trying to kill this forum, either by trying to plunge it into a panic by announcing the end of the Euro for example; or by reducing it to a waste of time and evidencing Euroland's ineffectiveness, an inability to resolve the crisis. Which is the limit given the complete paralysis prevailing in Washington!

… Our team now expects a strong revival of European politics from the end of 2012 (similar to the 1984-1985 period) including a Euroland political integration treaty which will be put to a Euroland-wide referendum by 2015…For LEAP/E2020, there is no doubt that minds are ripe, throughout most of Euroland, for private creditors being asked to pay 50%, or even more, to resolve the future problems of public debt. This is, without doubt, a problem for European banks, but it will be managed to protect depositors. The shareholders themselves will have to take full responsibility: besides it's really the foundation of capitalism!

Meanwhile, with 340 billion USD to find for refinancing in 2012, the European and American banks will continue to kill each other while trying to maintain the pre-crisis situation which gave them unlimited central bank support. As for Euroland, they may have a very bad surprise.

… just as the EU and the banks, from 1982 to 2009, lent freely to Greece and without pressing for accounts, over the same period, the world has lent freely to the United States believing its leaders' promises about the state of the economy and the country's finances. And in both cases, the money has been wasted in real estate booms with no future, in extravagant crony politics (in the US cronyism is Wall Street, the oil industry, health service providers) and in unproductive military spending. And in both cases, everyone discovers that in a few quarters you can't fix decades of recklessness.

So, in November 2011 the United States will brace itself for a politico-financial "perfect storm" that will make the summer problems look like a slight sea breeze.

Some thoughts:

The idea that the UK and US have manufactured the Eurozone crisis in order to distract from their own impending doom is a little jarring to American sensibilities. But it's not surprising that the rest of the world differs from Fox News and the Wall Street Journal. Watch the political coverage of the BBC and Al Jazeera, for instance, and you'll see that US media's take on world affairs isn't universally shared.

Still, it's hard to see any other way of interpreting the euro's situation, since the numbers for Italy, Greece and the other PIIGS countries are what they are. At their level of indebtedness, austerity won't work because it produces lower tax revenues in the short run, which forces higher borrowing from ever-less-enthusiastic lenders. Interest rates rise, debt costs soar, and the numbers keep getting worse. When you can't pay your bills you don't pay your bills. And asking German and French taxpayers to cover the difference, as German chancellor Angela Merkel is discovering, is a recipe for regime change.

And the idea that a consensus is forming in Europe around forcing banks to take a 50% haircut on their sovereign debt seems to bump up against the size of the banks' holdings. According to these charts, European bank exposure to PIIGS country debt is so high that the result of this kind of writedown would be either multiple bank failures with all that that implies or a continent-wide bailout in which taxpayers (i.e. Germans) rather than bankers eat the losses.

It's also hard to see how it matters where the next crisis erupts. It could easily be the US or UK, since their numbers don't add up either. Both countries have insoluble problems which will eventually lead to collapse and/or currency crisis. But when one of us goes, the rest will necessarily follow. That's the nature of an interconnected financial system. A depression or hyperinflation here means a depression or hyperinflation there, and after a few years we won't remember or care where it started.

Dale Mah: Gold Companies to Watch from the Yukon to Colombia

Posted: 19 Sep 2011 01:29 AM PDT

$US!!

Posted: 18 Sep 2011 11:34 PM PDT

Looks like the $US, by force, is reigning in the safe haven trade this morning. I'm sure that will all change tomorrow when Ben hints a print. DOW futures are down -160, Gold hanging in, the rest look like they should fade this gap and fill in.

Site is to be launched Tomorrow or Wednesday. Finalizing some testing as we speak.

Watch the $EURO going into the close today...

Government Makes Us Slaves

Posted: 18 Sep 2011 10:52 PM PDT

Too often we get caught up in the silver-tongued compassion that political con men use to rationalize separating us from our money. What is wrong with thinking in this fashion: If any of us doesn't deserve to keep everything he has earned, then that man is a slave. Alternatively, he is less than human; he [...]

UK gold demand soaring

Posted: 18 Sep 2011 10:45 PM PDT

Europe's sovereign debt crisis is leading to more and more Europeans buying gold. Baird and Co., the United Kingdom's largest coin and bullion dealer, announced last week that its ...

Central Banks Net Buyers of Gold for 1st Time in 20 Years

Posted: 18 Sep 2011 09:56 PM PDT

European central banks have become net buyers of gold for the first time in more than two decades, the latest sign of how the turbulence in the currency and debt markets has revolutionized the bullion market.

The purchases are minuscule compared with the size of the global gold market, but highlight a remarkable turnaround from a wave of heavy selling by European central banks...

Read

Links 9/19/11

Posted: 18 Sep 2011 09:13 PM PDT

Australia's Kevin Rudd fights to get Vegemite on plane BBC (hat tip Buzz Potamkin). I never even tried Vegemite when I lived down under. I'm sure the only way one can like it is by being forced to develop a taste for it at a vulnerable age.

Gamers solve AIDS puzzle where scientists fail TG Daily (hat tip reader Skippy)

Dino-Killing Cosmic Impact Wiped Out Ancient Birds, Too LiveScience (hat tip reader May S)

9/11 Conspiracy Theories 'Ridiculous,' Al Qaeda Says The Onion (hat tip Lambert Strether)

Euro Bulls Capitulate After Trichet Comments Bloomberg

Merkel and euroskeptic allies beaten in Berlin Reuters (hat tip Richard Kline)

Ray Dalio on the D-Process in Europe Ed Harrison

UBS says trader hid loss with fake deals Financial Times.

'It was a moral mistake and I'm not proud of it': Strauss-Kahn breaks his silence in TV interview over allegations he sexually assaulted a maid Daily Mail (hat tip reader May S). Apparently his position is that he misread the maid's intentions. Lordie.

Is the GOP/Media Complex Using Silly Sex Smears to Scare Schneiderman, Other AGs from Probing Bank Crimes? Phoenix Woman, FireDogLake

Dear Alisha Smith: Thank You for Your Work Abigail Field

Hillary Clinton Popularity Prompts Some Obama Buyer's Remorse Bloomberg

Obama's Economic Quagmire: Frank Rich and Adam Moss Talk About What's Really in Ron Suskind's Revealing New Book About the White House New York Magazine

Rick Perry is for sale, but he's not cheap Daily Kos (hat tip reader May S)

Protest Closes Off Wall Street Roads Wall Street Journal and Media Blackout – Thousands peacefully protest Wall Street, No media coverage You Tube (hat tip reader Tim S). Well, there was not "no coverage" but the party line is that it was a small protest (true, but not as small as claimed, and the city apparently made it hard to assemble)

Fears over exemptions to Volcker rule Financial Times

Rearranging the Deck Chairs Tim Duy

Global recovery in danger of skidding off course Financial Times

Not Too Big to Fail. Be prepared to enter an alternative universe.

New York Appellate Court rejects validity of loan assignments by MERS Lexology (hat tip Lisa Epstein)

The theft of the American pension Salon (hat tip reader May S)

A Little Inflation Can Be a Dangerous Thing Paul Volcker, New York Times. OMG, he is still fighting the last war. In the abstract, he isn't wrong, but this is like worrying about obesity when trying to get someone with anorexia to eat more.

Another View: Why wage war against the working poor? Flint Journal (hat tip reader May S)

Inside the Trillion-Dollar Underground Economy Keeping Many Americans (Barely) Afloat in Desperate Times Alternet (hat tip reader Aquifer)

Poverty In America: A Special Report Economic Collapse (hat tip reader Carol B)

Antidote du jour:

Gold & Silver Market Morning, September 19, 2011

Posted: 18 Sep 2011 09:00 PM PDT

The Coming GOLD Breakout to 2100

Posted: 18 Sep 2011 08:37 PM PDT

From: Jesse's Café Américain:
The Gold Daily and Silver Weekly charts are growing rather large since the key breakouts that mark this leg of their bull markets. It does give the big picture, but it could make things a little more difficult to see for the short term movements. Here is a closer look at daily gold.

Although there are a number of possibilities, some of which have been promoted by other 'name' chartists which people have sent to me, it seems most likely that gold is in a short term consolidation pattern, as a pronounced symmetrical triangle. A breakout to the upside seems most likely. That breakout will target 2100.

Notice that gold seems to find resistance and support roughly every $100 higher, at the 80′s. So we might expect some hesitation and resistance at the 2080 level should the break out occur.

CLICK IMAGE FOR LARGER VIEW

Barring a major intervention by the central banks, or a liquidation selloff, I fully expect gold to continue to move higher. Rumour has it that China has responded with its terms to remain neutral during such an intervention, and they were draconian indeed. And there is no controlling the mass buying by the peoples of Asia which is still just awakening. Buying repression, if any, is most likely in continental Europe if bank runs occur.

Other forms of general political repression which are already underway in the Mideast, are most likely to make their appearances in at least a few Western countries seeking their Orwellian fulfillment. This depends on some variables which are understandably difficult to forecast. Who will be the first Nato member to declare martial law? .

This is not over, not by a long shot. There is no resolution to the global currency and financing situation which is in a multi-decade change from one system to another. So I would say that we are roughly half way there. My long term target for gold has been in the $4000 to $5000 area, although a spike panic could take us as high as $6700. If it reaches that point I will be a seller of at least a portion of my long term holdings.

My longer term target for silver is in the $250 area, although its volatility could take it above $400 in a buying panic or exchange signal failure. I would consider selling long term silver holdings at the $400 level.

Read more @ King World News

Richard Alford: The (Re)Education of Ben Bernanke and the FOMC

Posted: 18 Sep 2011 07:35 PM PDT

By Richard Alford, a former New York Fed economist. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.

When you compare Bernanke's "Deflation: Making Sure It Doesn't Happen Here" speech of 2002 with his recent Jackson Hole speech, you cannot help but notice changes in his view of the economy and the financial system as well as a significant decline in his confidence in the ability of monetary policy to insure full employment,. The changes between the speeches and the possible explanations for the changes have implication for the course of Fed policy in the near and medium terms as well as the long-run health of the US economy. They suggest that the FOMC sees less upside to further stimulative policy actions and at the same time sees possible downsides where it had not seen them before. This, in turn, suggests that the FOMC will be more tentative in adopting further nonconventional stimulative measures than past behavior would indicate.

The 2002 speech reflected a confidence in the underlying health of the US economy and the robustness of the financial system, as well as the effectiveness of both the regulatory system and economic policy:

"…we read newspaper reports about Japan, where what seems to be a relatively moderate deflation…has been associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems in the banking and corporate sectors

I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small, for two principal reasons. The first is the resilience and structural stability of the U.S. economy itself….A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape.

The second bulwark against deflation in the United States… is the Federal Reserve System itself… I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.

The recent Jackson Hole speech has a decidedly different tone. In particular, the Fed appears to have doubts about the ability of further monetary stimulus to produce a stronger economic recovery:

"…… As I mentioned earlier, the recent data have indicated that economic growth during the first half of this year was considerably slower than the Federal Open Market Committee had been expecting, and that temporary factors can account for only a portion of the economic weakness that we have observed..

….In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting….

Beyond the general tone, the speech is telling. Past speeches and FOMC minutes frequently referenced discussions centered on differing forecasts, but I do not recall another speech or FOMC minutes in which the discussion indicated that the FOMC did a "benefit/cost" analysis of possible policy tools, i.e. "We discussed the relative merits and costs of such tools". The speech also reflects the Fed's recent decision to stand pat, at least temporarily, on the policy front despite painfully slow growth, continued high joblessness and continuing problems in the housing and financial sectors. This stands in contrast to the statement in the 2002 speech wherein Bernanke stated that "the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation (and presumably the attendant slow growth and high unemployment) that might occur would be both mild and brief."

In the Jackson Hole, while Bernanke continued to be optimistic about the US economy in the long-run, he introduced a caveat that was not in prior speeches:

To allow the economy to grow at its full potential, policymakers must work to promote macroeconomic and financial stability; adopt effective tax, trade, and regulatory policies; foster the development of a skilled workforce; encourage productive investment, both private and public; and provide appropriate support for research and development and for the adoption of new technologies.

This shift in tone along with the decision to refrain from pursuing additional stimulus and the litany of additional required policy changes raises questions.

1. Does the recent speech and the Fed hesitancy to pursue further non-conventional policies reflect a reappraisal of the expected net benefits of further monetary stimulus?
2. Does the FOMC weigh the factors behind the decision to "pause" so heavily that a resumption of unconventional policy is unlikely?
3. Has the FOMC come to recognize that there are limits to the effectiveness of monetary policy and that the economy's problems reflect the failure of other policies and the need for structural reform?

FOMC members in the Bernanke inner circle among others have recently given speeches which suggest that the benefits of any stimulus that monetary policy might provide must be weighed against possible costs of resource misallocation, increased leverage/financial fragility as well as the cost of forestalling policy responses to a range of structural problems facing the US economy.

In a recent speech, "Assessing Potential Financial Imbalances in an Era of Accommodative Monetary Policy", Fed Vice Chair Yellen outline avenues by which an environment of low and stable interest rates could contribute to financial instability and economic dislocations:

The severe economic consequences of the recent financial crisis have underscored the need for central banks to vigilantly monitor the financial system for emerging risks to financial stability. Indeed, such vigilance may be particularly important when monetary policy remains highly accommodative for an extended period. As many observers have argued, an environment of low and stable interest rates may encourage investor behavior that could potentially lead to the emergence of financial imbalances that could threaten financial stability….

But a sustained period of very low and stable yields may incent a phenomenon commonly referred to as "reaching for yield," in which investors seek higher returns by purchasing assets with greater duration or increased credit risk….

But taken too far, this dynamic has the potential to facilitate the emergence of financial imbalances. For example, with interest rates at very low levels for a long period of time, and in an environment of low volatility, investors, banks, and other market participants may become complacent about interest rate risk. Similarly, in such an environment, investors holding assets which entail exposure to greater credit risk may not fully appreciate, or demand proper compensation for, potential losses. Finally, investors may seek to boost returns by employing additional leverage, which can amplify interest rate and credit risk as well as make exposures less transparent.

At present, we see few indications of significant imbalances, and the use of leverage appears to remain well below pre-crisis levels. That said, I've noted some recent developments that warrant close attention, including indications of potentially stretched valuations in certain U.S. financial markets and emerging signs that investors are reaching for yield. Should broader concerns emerge, I believe that supervisory and regulatory tools, including new macroprudential approaches, rather than monetary policy, should serve as the first line of defense.

While Yellen asserts that it would be preferable to have monetary policy specialize in macroeconomic concerns, leaving financial stability issues to be in the realm of supervisory tools, Yellen and FOMC are now aware that monetary policy and regulatory policy are intertwined.

In a recent speech, Andrew Haldane, the Director of the BOE's Financial Stability Committee, also recognized that prudential policy (or the absence of it) has implications for the macro-economy.

…, however, these arms (fiscal and monetary policy-ed.) are at present close to fully stretched…

With fortuitous timing, there is a new tool in the box, a third arm of macro-economic policy. This is so-called macro-prudential policy. As its name implies, this policy tool is intended to meet macro ends using prudential means.

Haldane recognizes the fact that regulatory, monetary and fiscal policies are to some degree substitutes for each other. However, his statement, "With fortuitous timing, there is a new tool in the box." is rather perplexing. The rediscovery of the fact that financial regulation has macroeconomic consequences can hardly be viewed as accidental (the first definition of fortuitous.) Policymakers and economists had been actively searching for non-conventional policy tools ever since Japan entered its lost decade.

Furthermore, this rediscovery was neither, lucky nor fortunate (the second definition of fortuitous). Changes in regulatory policy have always had the potential to have macro-economic consequences even if economists and policymakers chose to ignore them in the years prior to Lehman. If policymakers had stopped or reversed the erosion of the regulatory structure in the early 1990s, that would have been "fortuitous"', i.e., lucky or fortunate. The post-2008 realization of the implication of the weakened regulatory regime was not lucky or fortunate. It is just a case of two decades late (literally) and more than a few Trillion Dollars short (figuratively).

Recognition that regulatory/prudential policy has a macroeconomic dimension also has implication for efforts to distribute the "blame" for the crisis and recession . Acknowledging that financial regulatory policy is to some degree a substitute for conventional monetary policy implies that the appropriateness of conventional monetary policy and regulatory policy cannot accurately be determined in isolation from each other. Hence the argument that monetary policy was exactly where it should have been and that regulatory policy is exclusively to blame for the crisis and its aftermath does not hold up to scrutiny. The changing pre-2008 regulatory regime reinforced monetary policy. Together they had the effects for better (real growth and stable prices) and worse (unsustainabilities including external deficit, depressed private savings, and fragility of the financial system) on the financial markets and real economy that have been reflected in US economic performance. If the regulatory regime had been more robust and had limited credit creation and risk taking, then growth would have been slower, etc. However, given the Taylor Rule framework, the Fed would have simply run looser monetary policy until the market innovated and avoided/evaded the regulatory constraints. In the absence of an acceleration in inflation, the looser policy would presumably have been pursued until such time as the economy reached the same state that it was in 2007.

It is not certain that the current regulatory structure will promote socially advantageous levels of leverage and risk taking. It is still possible that regulation will once again allow destabilizing leverage and risk taking. The FOMC must still fear waking up some day only to find excessive leverage and risk taking embedded in the system just across a political or regulatory border, or hidden in plain sight.

In a speech titled "U.S. Economic Policy in a Global Context," William Dudley, President of the Federal Reserve Bank of New York, links the financial crisis and the current economic troubles to the interplay of globalization and policy choices made both here and abroad. Furthermore, Dudley's analysis implies that successful US stimulative counter-cyclical policy (in the absence of the other policy changes mentioned by Bernanke) would at best contribute to a return to the unsustainable patterns of trade, debt accumulation, savings, and investment that characterized the period from the mid-1990s to 2008.

… even before the crisis, it was evident that the relationship between developed and emerging economies was becoming strained and needed to be adjusted; the status quo would clearly be unsustainable…

Some experts have summarized the arrangements as follows. The United States bought Chinese exports at low prices, which bolstered U.S. living standards and held down U.S. inflation. The United States did not take extreme steps to try to force China to revalue the renminbi upward against the dollar, and China, in turn, invested its trade surplus and capital inflows into U.S. Treasuries in order to keep the renminbi from appreciating too rapidly. The U.S. terms of trade improved as the cost of imported goods dropped, and U.S. interest rates stayed relatively low as China recycled its trade surpluses back into U.S. financial assets. For China, the benefits included strong economic growth, technology transfer and the creation of many manufacturing jobs. These developments, in turn, helped foster rising living standards and political stability in China….I think this is a reasonable, albeit overly simplistic, description of what happened.

For the United States, the consequence was elevated consumption facilitated by asset price inflation, easy underwriting standards for credit and structural budget deficits. Of course, this particular outcome was not preordained or caused by the EMEs. There were multiple combinations of domestic demand consistent with full employment in the United States during the pre-crisis period. For example, if the United States had adopted different policies, it might have shifted the composition of growth toward more business investment and less consumption and housing.

…While it is tempting to draw a line of causation from actions in one part of the global system to the other, this is overly simplistic. Rather, we have to think of the global economy as a single system, with outcomes based simultaneously on all the choices and preferences throughout the system. What is new is that the so-called periphery is now weighty enough to have a large impact on the pattern of economic activity in the core, as well as vice versa.

It is clear that the pre-crisis formula for global growth was not sustainable. This is obvious in the case of industrialized nations where private consumption and fiscal deficits reached unsustainable levels and needed to be cut back.

Dudley acknowledges that US macroeconomic variables, e.g. the real growth rate, the rate of unemployment and the inflation rate, are no longer exclusively domestically determined. Furthermore, in the absence of a US adjustment to the "globalized" world, the analysis implies that the US will only be able to achieve full employment by returning to something like the unsustainable pattern of consumption and debt growth relative to s that was experienced between prior to 2007.

It is likely that consideration such as those cited by Yellen and Dudley led to the FOMC's discussion of the relative benefits and costs of the remaining tools of policy as well as to Bernanke's addition of the caveat to his optimistic view of the US long-term economic prospects. But are these considerations, weighty enough to dissuade the FOMC from taking further steps to stimulate demand in the absence of a good reason to believe that inflation is about to accelerate?

The simple answer is no. Neither Yellen nor Dudley have dissented or voiced disapproval of pursuing further stimulative measures. Furthermore, while Bernanke has expressed reservation about monetary policy alone being able to return the economy to potential output, he does not appear to have linked 1)low interest rates to financial fragilities as Yellen has done nor 2) the external imbalances to domestic policy and the financial crisis as Dudley has done. In fact, in his recent speech Bernanke attributes the current recession and its costs to the financial crisis itself:

I have already noted the central role of the financial crisis of 2008 and 2009 in sparking the recession. As I also noted, a great deal has been done and is being done to address the causes and effects of the crisis, including a substantial program of financial reform, and conditions in the U.S. banking system and financial markets have improved significantly overall.

Conspicuous in their absence is any mention of the external imbalances, the low interest policy and the other unsustainabilities which were reflected in massive misallocations of real resources in the years before the crisis hit.

However, the most telling comment in Bernanke's Jackson Hole speech is:

…the recent data have indicated that economic growth during the first half of this year was considerably slower than the Federal Open Market Committee had been expecting, and that temporary factors can account for only a portion of the economic weakness that we have observed..

It suggests that stimulative fiscal and monetary policies post-2008 have resulted in a shorter-lived and less vigorous recovery than had been expected by the FOMC. Some FOMC members may draw the conclusion that the possible benefits of additional monetary stimulus are smaller than they thought prior to past efforts at stimulating the economy.

Conclusion

Does the recognition that monetary policy has potential costs as well as benefits or the fact that there are non-cyclical (structural) impediments to a return to potential output preclude a role for stimulative monetary policy? No. Does the existence of structural impediments rule out stimulative fiscal policy? No. However, the market and institutional failures and the structural impediments do imply that 1) stimulative counter-cyclical policies entail risks and 2) counter-cyclical stimulative policies alone will not return the US economy to sustainable trend growth with full employment.

Bernanke and the current FOMC are not the Bernanke and FOMC of 2002, of QE1 or QE2. Nonetheless, the FOMC will almost certainly take additional stimulative steps. However, given:

1. 1) possible downside risks attached to continued low and stable interest rates,
2. 2) the failure to address the external imbalance and other structural problems, and
3. 3) the erosion of the effectiveness of monetary policy,

FOMC policy actions are likely to be tentative relative to earlier responses taken to the crisis.

Gold Market Update

Posted: 18 Sep 2011 05:53 PM PDT

Permission to Default, Granted

Posted: 18 Sep 2011 05:43 PM PDT

--It sure looks like mum and dad investors are about to get screwed again by the global financial elite. Australian stocks are down this morning. Friday's relief rally didn't last long. But why haven't more people seen the Greek default coming?

--Part of the investor confusion stems from the big news late last week. The heads of the five organised financial crime families - the Federal Reserve, the Bank of England, the European Central Bank, and the Swiss National Bank - announced they would offer three-month loans in US dollars to pretty much any European bank that needed it.

--This was a liquidity move to give European banks dollars. They need those dollars to repay previous dollar-denominated loans and to make new ones. Trouble is, US money market funds, with over $700 billion in cash, have stopped lending Europe short-term money. So the Fed stepped in to the rescue.

--This was how the story played out in the press. But as we wrote to Australian Wealth Gameplan readers on Friday, you could make a good argument that flooding Europe's banks with dollars (or the guarantee of dollars if needed) was a clear signal that Europe is ready to let Greece default. It's almost certain to happen now, and maybe as soon as this week.

--It probably should have happened sooner. But the European Central Bank (ECB) needed time to make sure the biggest French and German banks would not be wiped out by losses on Greek government bonds. And now, the whole system has ample dollar supplies on hand for any emergency capitalisations made necessary by Greece's default.

--You can tell how unstable a system is by how long its periods of equilibrium last. The Five Families news last week was good for 24 hours of higher stock prices. But our view is that this was just covering fire for anyone in-the-know to sell stocks before the crisis was stage-managed to the next phase.

--The next phase is the ECB, the European Union, and the International Monetary Fund making demands of Greece that will result in the failure of the Greek government and/or Greece saying "enough!" The triumvirate of monetary dictators from Europe have threatened to withhold the next disbursement of Greece's bailout fund unless the government fires at least 25,000 public servants and collects more taxes.

--Greece should probably do both. But it certainly won't. And the demands being made of it now serve only three real purposes. First, the ruling German coalition can tell German voters it got tough with Greece. Second, the ruling Greek coalition can tell Greek voters it got tough with voters. Third, Greece can be allowed to default and leave the Euro in a way that doesn't cause more panic in other government bond markets. At least not yet.

--Our analysis could be wrong. But the nature of all the moves in the last four days has been to ensure adequate liquidity in credit markets. Greece's fundamental insolvency hasn't changed. Europe isn't trying to fix what's broke. It's trying to break off the most broken parts in order to avoid collapsing the whole project.

--We'll see how that goes. In the meantime, any "surprise" Greek bankruptcy is going to catch stock market investors flat footed. But the bankers and policy makers are not worried about share market values at the moment. They're worried about saving their Byzantine, debt-backed, hopelessly complex financial system.

--This brings us back to last week's currency pyramid. We invited you to tell us the currency in which you'd prefer to hold most of your wealth in the coming years. There are only two observations worth passing on. Only about 10 people replied. And all of them said the silver coin. "I'll take the silver coin. The others are backed only by the honesty and integrity of politicians!," said Roly Mulvay.

--Precious metals are bouncing up and down this morning. As fearful as investors are, they know that intervention by the powers-that-be usually hits gold and silver the hardest. The Fed meets this week. Its interventions - buying long-term bonds, buying other assets, introducing new maturities - destabilise markets because they make long-term planning dangerous.

--But it is what it is. We have to live (for now) with the Fed and the ECB and their dogged determination to persist living in an alternate monetary reality. To be sure, the markets have already spoken about Europe's financial and monetary reality. Greek default is almost 100% certain according to credit default swap markets. And the fact that US money market funds won't lend to European banks at the moment is another market reality.

--Yet Europe and the Fed keep doubling down on the basic premise that more debt is the solution to a solvency problem. We reckon they have two more chances to recapture the confidence of the market. If they don't, they will have to borrow money from China and post central bank gold as collateral.

--Or the monetary system is in for more shocks between now and the end of 2011. One of them is bound to be fatal. If we were a betting man, we'd bet that the Euro is going to monetary Hell. And "risk assets", which include the Aussie dollar and Aussie stocks, are going to be collateral damage. Whatever you do, don't get caught believing the theatrics. Have your own financial survival strategy. And stick with it.

Dan Denning
for The Daily Reckoning Australia

Save Your ASSets First

Monday, September 19, 2011

saveyourassetsfirst3

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