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Wednesday, February 1, 2012

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The Next 17 Months For Gold

Posted: 01 Feb 2012 07:07 AM PST

By David Nichols:

It's not often that a financial market tells us its intentions in a clear and obvious way. But occasionally it happens.

And it just happened last Wednesday.

First, to set the stage: gold came into last week off a 17-week correction, with the direction of the next 17 weeks still up in the air. The big correction in 2008 lasted 34 weeks, so gold was at a critical balance point heading into the Fed meeting -- it was either going to move into the next up leg now, or in 17 weeks, in early May.

This was a major balance point that could have gone either way, mostly because there is a big scary bogey still out there, namely another round of deflation and de-leveraging emanating from Europe.

The last recession in 2008, with its accompanying financial crisis, caused a massive bout of deflation, which slaughtered gold and other financial


Complete Story »

Noteworthy Insider Buys And Sells From Tuesday And Wednesday

Posted: 01 Feb 2012 06:51 AM PST

By Ganaxi Small Cap Movers:

Insiders reported on Tuesday that they bought and sold stock in more than 210 separate transactions in over 175 different companies. These transactions have to be reported within two days of the trade, so the transactions occurred sometime after late last week. We culled through these 210 or so insider buys and sells (based on SEC Forms 3, 4, and 5 filings), as part of our daily and weekly coverage of insider trades, and present here the most notable trades reported on Tuesday and part-of-the-day on Wednesday; notable based on the dollar amount sold, the number of insiders selling, and based on whether the overall buying or selling represents a strong pick-up based on historical buying and selling in the stock (for more info on how to interpret insider trades, please refer to the end of this article):

Ariad Pharmaceuticals Inc. (ARIA): ARIA is engaged in the development of drugs


Complete Story »

How To Play The Bull Market In Beef

Posted: 01 Feb 2012 06:23 AM PST

By Sammy Pollack:

The price of cattle has rallied to record levels and shows no signs of stopping.

Live Cattle Futures 1 Year Chart


(Click to enlarge)

CNBC

Factors behind the rally

  • Agriculture department reports that there are only 91 million head of cattle, the lowest number since 1952
  • Severe droughts have occurred in the mid-west leading to reduced supplies of water and grass to feed cattle
  • Higher input prices. Prices of inputs such as Corn (CORN) have gone up significantly over the past few years.
  • Strong foreign demand. Exports have surged over 20% in the past year due to strong foreign demand and a weak dollar.

Way to play the rally

One way investors can play the rally in cattle is through the iPath DJ-UBS Livestock Sub-Indx ETF (COW). COW is 60% cattle and 40% lean hogs. While cattle and lean hogs tend to move together, the bull market has been stronger


Complete Story »

Wolf Richter: Exodus from the Eurozone Debt Crisis

Posted: 01 Feb 2012 05:48 AM PST

By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.

Unemployment is a staggering problem in Eurozone countries that are at the core of the debt crisis. Spain’s jobless rate jumped to 22.8%. Among 16 to 24-year-olds, it's an unimaginable 51.4%, up from 18% in 2008 when Spain’s crisis began with the collapse of its housing bubble. In Greece, youth unemployment reached 46.6%. In Portugal, it’s 30.7%, in Italy 30.1%.

And optimism, that essential source of energy for the younger generation, has been replaced by pessimism. Gallup reported that 80% of the people in the EU had a negative outlook on their local job situation. Crisis countries were at the extreme end of pessimism: in Portugal, 84% thought it was a “bad time” to find a job; in Italy, 91%; in Spain, 92%; in Ireland, 93%; and in Greece, 96%.

These numbers convey a sense of utter hopelessness. For young people, the vision of a good life that their society has imparted on them has gone up in smoke. A bitter irony: it’s the best educated generation ever—and the most pessimistic.

People deal with it the best they can. Some retrench. Even 35-year-olds move back in with their parents. They delay plans and wait for the situation to turn around. But others, the most energetic and entrepreneurial, those that the country needs to rebuild the economy, they don’t have that kind of patience. They pack up and leave to find a job elsewhere. And they are doing it in massive numbers.

Spaniards are heading mostly to Argentina whose economy has been booming over the last few years, though troubles are everywhere. The exodus reversed the flow from Argentina to Spain following Argentina’s bankruptcy in 2001. For many years a magnet for immigrants, Spain registered a net emigration of 50,000 people in 2011.

Portuguese prefer their former colonies. Angola, whose official language is Portuguese, has a wealth of natural resources, particularly oil and diamonds. Since 2002, after a quarter century of civil war, the economy has grown in the double digits every year, and Luanda has become the most expensive city in the world. According to the Organization for Economic Cooperation and Development (OECD), 70,000 Portuguese sought their fortunes in Angola in 2010 alone. Similar numbers are expected for 2011. For Portugal, with a population of only 10.5 million, it’s significant.

Other Portuguese try their luck in Brazil whose economy is in need of engineers and experts of all kinds. Brazil recently softened its immigration restrictions to attract the educated elite—and others are have taken notice. For example, the number of Spaniards immigrating to Brazil jumped by 45% in 2011.

Ireland has had a net outflow of people since 2009. First, Polish immigrants who could no longer find work returned home, but then the Irish themselves set out mostly for Australia and New Zealand, which have favorable visa agreements with the EU. 40,000 left in 2011, many of them women.

Greeks head to Germany, an irony of sorts, given the bad will that German efforts to impose strict austerity measures have engendered in Greece.

When educated and entrepreneurial young people leave their country in massive numbers, it impacts the economy for the long term. Their country invested heavily in their education, an asset, and now they put this asset to work in another country. There, they earn money, pay taxes, consume goods and services, and rent or buy a home—the exact activities that their own country must have to get out of the economic quagmire. Sure, emigration reduces the expenses for unemployment compensation and other services, but it drains the economy of energy, entrepreneurial spirit, can-do attitude, and knowhow.

And it worsens the debt crisis. For national debt to remain “sustainable,” young people need to stick around, start a productive career, consume, build up assets, move into those vacant homes that banks are holding, and pay taxes. But the exodus underway now doesn’t bode well for a long-term solution of the debt crisis—assuming that a country like Greece can even stay in the Eurozone.

"The case of Greece is hopeless," Otmar Issing said. He should know. He was on the Bundesbank and the ECB. Another substantive voice in an increasingly loud chorus. But it’s legally impossible to kick Greece out of the Eurozone. So he suggested a procedure—a procedure that has been happening all along. Read…. Kicking Greece out of the Eurozone.

Corruption in Fascist Business Model

Posted: 01 Feb 2012 04:21 AM PST

Few can define fascism. Many cannot recognize it. History provides shocking stories of its past episodes. But its root structural feature is the tight relationship between the state and large corporations of a nation, which permit enormous fraud and lead to grand inefficiency, even while aggression and war accompany its handiwork in an ugly fabric weave. Nowhere is the bond more scummy and corrupt than with the banking industry, not in general but in Wall Street where defense of the USDollar has come. That defense was contracted from the USGovt to Wall Street, whose ties developed into a vast network of corruption. That cozy relationship led to the gutting of Fort Knox and its gold bullion in the 1990 decade of so-called prosperity. The 0% gold leasing resulted in vast speculation schemes, private multi-$trillion profit, and absent collateral for the USDollar itself. The other cozy connection is with the defense contractors, where war generates colossal cash flows, some of which result in kickbacks to Congress. The Fascist Business Model is a cord to strangle the neck of a nation. The rage of nationalism, the eradication of liberties, the pursuit of conjured enemies, the constant sense of alert, the attack on enemies with alienation of allies, all tend to effectively conceal the theft and corruption. The other tell-tale infection is of inefficiency, where the most insolvent lead in policymaking, where the most connected are not the best in class, where the most corrupt are shielded by cronies in watchdog posts. These ordinary teams have dominated, not from capability according to the marketplace forces or Darwinism, but from connection to the power center.

The United States of America had been the beacon of capitalism and freedom. In the last 20 years, it has proven to be the epitome of anti-capitalism, shown mortal wounds from the NeoCon assault on liberty and the more recent collectivism assault typical of Soviet regimes. The global revolt against the USDollar is not just an organized movement to protect against a reserve currency suffering declining value. It is a movement also intended to avoid a climax in corruption, the likes of which modern history has never witnessed. The bright light from the beacon has attracted a deadly swarm of moths, which tragically have enveloped the light completely, masked its wondrous effect, and disguised the vile cobwebs of fascism. The historians all too well are aware that the final chapter of a capitalist nation is embedded in fascism, as its institutions suffer from profound corruption, as inefficiency depletes the wealth structures, as the system breaks down, as the rule of law vanishes.

CORRUPT BIG BANKS

One must begin with the banks, whose leaders have formulated the plan at work. Perhaps their actions began in the removal of Kennedy in 1963, an obstacle in their path. Their plan was revealed more in the open with the abandonment of the Bretton Woods Accord, the basis of the gold standard. The most telling mark has been the Goldman Sachs grip on the USDept Treasury. The Rubin experience at the London gold desk was crucial. Goldman Sachs is a key Wall Street funnel toward the USCongress dole, the Financial Regulatory Bill being the backfire in reform that granted the bankers more powers. See the power to dissolve any financial firm that threatens the power structure, and see the protective cover given to firms deemed financially important. The TARP Fund congame was a clever ruse, a $700 billion segment of the congame. Hidden from view was the $138 billion reload of JPMorgan, given cover to handle Lehman private accounts by the Bankruptcy court that convened at 6am on a Saturday morning in Manhattan. The climax badge of dishonor and fraud was the phony bank accounting rules permitted by the Financial Accounting Standards Board, and blessed into law by the USCongress. The big banks in control of the USGovt were all hopelessly insolvent, but covered. Their quarterly earnings reports read like an Orwell chapter, riddled with Credit Value Adjustments and raids from the Loan Loss Reserves. Once in the news back in 2009, but not forgotten, the failure to deliver on USTreasury Bonds never went away, only the publicity and spotlight. Over $1 trillion remains a regular feature for the practice. Wall Street firms indeed found a source of income to replace their absent stock IPO and corporate bond issuance business. Sell USTBonds, take in income, and no bond delivery. What a business! The Facebook IPO is the exception, not the rule.

CORRUPT CENTRAL BANK

A debate brews as to which body is the actual corner office at the helm of the central bank in charge, the New York Fed or the Federal Reserve itself. Who cares? They operate in secrecy and with impunity, according to their agenda. The FinReg Bill did shed some light on this control box, as the USFed $16 trillion so-called loans plus the $8 trillion additional loans were revealed in a string of unending grants at 0%. To be sure, the borrowers could purchase global assets in preparation for the next chapter. Two of their most important ongoing projects are the Exchange Stabilization Fund and the Working Group for Financial Markets. The ESFund is charged with defense of the USDollar, but its actual project load extends far and wide in interpreting what defense is essential. Their reach includes the FOREX currency market, the sovereign bond markets, the Gold market, the crude oil market, the S&P500 market, and much more. Entire books can be written about the ESF history, a cross between an adventure novel and a spy novel. The other group is more aptly named the Plunge Protection Team for its regular and frequent rescues at 10am and 3pm when the stock market reacts to the endless string of bad economic news, all deemed better than expected. The mantras focused on confidence and volatility obscure the underlying corporate insolvency, fraudulent accounting, and pursuit of lower valuations. The spy novel aspect is furthered by the global financial bodies. The Intl Monetary Fund and World Bank are commonly filled with non-banker agents operating with agendas to obtain financial information in foreign lands. They are routinely used as weapons to maintain dominance. The resentment overseas is huge.

CORRUPT REGULATORS

The entire financial crisis in its fourth year (never to end until debt defaults) had its roots in the housing bubble and supporting mortgage finance bubble. The debt rating agencies granted AAA ratings to mortgage bonds of empty value, based upon the cockeyed notion that an included derivative in a package could protect like an insurance policy. It masked the worthless value instead, cover given by the regulatory system. The Gold & Silver market is without doubt the most corrupted in the world. The naked shorting by the Big Banks in New York and London is of such magnitude as to cause shock and disbelief. Certainly no action has been taken, or will be taken. The naked precious metals shorting is permitted by the Commodity Futures Trading Commission. The CFTC offers lipservice on position limits, on halting non-economic positions, and more. They simply obscure the process and muddy the waters, offering false hope to the silly observers who expect change, as they ignore the pattern of deceptions. The CFTC is composed of Wall Street henchmen, just like the Securities & Exchange Commission. The compulsory arbitration ploy is their calling card for injustice, like with USGovt contractors on foreign stations to handle crimes at the camps.

The latest regulatory lapse can be seen with the derivatives. As the Greek Govt Bond writedowns began in force, focus was drawn to the debt default event. The lapdog regulators at the Intl Swaps & Derivatives Assn saw fit to obediently order a redefinition of a default event. If voluntary, even coerced, the so-called bond haircut was not declared a default by the body charged with such enforcement, the ISDA itself. Payouts would start a chain reaction that would cause widespread bank failures. The non-payment of Credit Default Swaps was a travesty, one to perpetuate as Italy and Spain, even France, are next in big bond writedowns. The process actually exposes something much bigger, the unregulated shadow banking system of derivatives. Policies were written, huge cash flows were developed, fees were taken, but no payouts will be permitted. In essence, Rome is burning but no home fire insurance awards will be paid. In my opinion, the CDSwaps and ISDA corruption will result in court challenges to force insurance payouts, will result in subterfuge directed against the big banks that underwrote the bad faith insurance contracts, and will result in more motivated revolt against the USDollar itself.

CORRUPT MORTGAGE BUSINESS

The housing bust was bad enough, what with the lost equity, the lost home ATM machine for essentials and frivolities alike, the American dream turned nightmare. The mortgage bond bust was bad enough, what with the lost bank reserves, their lost ability to function as credit engine to the USEconomy, the ruined intermediary banking cable lines. The twin damage was the basis of my September 2008 forecast for an economic disintegration and eventual USGovt debt default. The forecast was a direct consequence of the entire USEconomy having grown intentionally dependent upon the housing & mortgage bubbles. That path is still in effect, the grip of the leash on the fascist dog held tighter with each passing month and year. They can kick the can down the road while walking the vicious dog, but the road has become narrow and the can has gone nuclear. The inner workings of the housing & mortgage debacle must bring attention to the MERS title database and the profound fraud bound in the mortgage bonds and Fannie Mae, the clearinghouse. The Mortgage Electronic Registration Systems enabled the same home titles to be used in multiple fashion, since run by Wall Street extensions. The MERS permitted easy fast title transfers as the bonds changed hands rapidly. Since 2009, the database has been denied legal standing in home foreclosure challenges, labeled a corrupt practice by several state courts. No remedy is even pursued. The practice of using home mortgage payment streams in duplicate fashion was common and rife within the system. The crowning blow to corruption exposure has been the continued mortgage contract fraud. The courts have been very occupied with resolutions and punishments.

The reason home loans have never had their balances adjusted for the benefit of the embattled undewater homeowner is simple. Hardly the unwillingness of banks to take losses, but rather the reluctance of the big banks to have exposed the colossal fraud in both duplicate income stream on the mortgage bonds but also counterfeit bonds. So Fannie Mae & Freddy Mac were nationalized, put safely under the roof of the USGovt. The corrupt tagteam firms are the clearinghouse for several $trillion fraud schemes in convenient manner. The Fannie Mae thefts of $1.5 billion from 1988 to 2000 remain well documented, complete with retaliations, the finger of accusation pointed at the White House. When the Hat Trick Letter was started in 2004, certain people were locked in debate, as the Jackass argued that the USGovt harbors the largest criminal syndicate organizations on earth. That perception and accusation has been very clearly confirmed, acknowledge by the informed, toward which some remain oblivious. The newer phenomenon noticed is that too many people prefer to ignore the facts and cling to fantasy, in order to protect their comfort level.

CORRUPT WARS

War is never good for an economy. It costs much money. It costs materials. It costs lives. It results in destruction. No trickle down effect of efficiency results, despite the propaganda about jobs. Relations are harmed, as allies are often alienated. The endless undeclared wars since 2003 have cost the USGovt $4 trillion in the last ten years. The creation of enemies and threats, even locations to spread freedom, have been at best highly questionable and at worst a total farce wrapped in fabrication. The chief end product in Iraq is crude oil, whose supply has been guaranteed by the war. Little publicized were the ample array of oil contracts with China and other nations, all torn to shreds after the liberation and annexation. Remember the odd story of yellow painted wooden bars and copper bars found in the Iraqi Central Bank. All false stories, as their central bank was looted of its gold bullion by US forces. The prevalent war service contractors led by Halliburton remain a fixture. Despite numerous court cases proving fraud and over-charges, they continue with a monopoly on the contract service. Recall the missing $5 billion from the Iraqi Reconstruction Fund. It was never found. The USGovt agencies never looked for it. The sitting president called it an acceptable loss given the magnitude of funds flow and importance of the war. Little known was a $2.3 billion transfer from the same fund by former agency head George Tenet. Suspicions swirl that the funds were directed toward groups designed to bring about a global totalitarian government, whose guiding light is a former Secretary of State and New York University political science professor with a funny accent.

Two indelible marks come from the wars. They further the dominant global narcotics role for USGovt agencies, and the deep Wall Street dependence upon money laundering and fees. Some banks have pled guilty to money laundering, like Wachovia, but the fines were less than 1/30-th of a penny per dollar involved. The US press provides regular and frequent devoted cover for the wars. The other indelible mark is the motive for liberating certain nations. The Libyan War was brief, but the bounty was great. The London and New York banks benefited from the 144 tonnes of gold bullion seized. It will likely never be returned to the Libyan people, regardless of any coalition government formed or pledge toward freedom put to parchment. My open question continues to focus on how much gold bullion Syria has. Probably not much at all, since no oil or mineral wealth. Sand has low value. Another more recent question is how widespread the practice will become for oil trade settlement with Iran in gold payments. See India and Iran.

CORRUPT EXCHANGE TRADED FUNDS

The Wall Street and London bankers set up the precious metals Exchange Traded Funds. They were clever. They have duped many people, including the hopeless scribe Adam Hamilton. He could not read a prospectus, not a balance sheet, nor an inventory report to save his soul. To be sure, he is a good man, but as a forensic analyst, he is Mr Magoo in human form, almost a poster boy for the gold cartel dupes alongside Dennis Gartman. The backdoor looting of inventory from both the GLD gold fund and the SLV silver fund are well documented. Shares are shorted, probably by their custodians, and metal bars are removed from inventory. Nothing complicated here. Lazy witless investors continue to invest in both GLD & SLV, without awareness of their deep corruption. They can buy gold and silver with a mere click, or so they believe. Instead, they divert demand from physical metal to the syndicate coffers, where the funds are used to short the metal, and to keep the supply lines coming to satisfy the rapidly growing demands for delivery. The other many Exchange Traded Funds do an exemplary job in controlling several important commodities. See the USO fund for managing the crude oil price. It has lost over 60% value relative to crude oil in the last decade. See the GDX fund for controlling the entire precious metal mining sector, managed by Goldman Sachs. The financial press assists the process by advertising and recommending the corrupted ETFunds, a valuable fixture in price controls. Many speculators use the GLD & SLV for their liquidity and ease of usage, ignoring their illegitimacy. The corrupt ETFunds go hand in hand with the flash trading corruption, also known as High Frequency Trading. It is insider trading by any other name, protected by FBI. See the Goldman Sachs unix box case three years ago that peeked at the order flow. The corrupt ETFunds go hand in hand with the naked shorting practice directed against mining stocks, organized by Wall Street firms and executed by associated hedge funds.

CORRUPT COMEX

The MFGlobal failure and theft of private segregated accounts has indirectly exposed the corruption of the COMEX itself. The bankruptcy trustee has been tarnished, having confiscated futures account receipts, thus making proof of theft and quantity impossible. The MFGlobal case should have been treated as a brokerage firm collapse, thus granting highest priority to private accounts, and making them full. Instead, the case was treated as a financial firm collapse, thus putting the private accounts at the bottom of priorities, and rendering them pilfered. The MFGlobal thefts will eventually lead to the COMEX being vacated of participants, since accounts are no longer secure. Entire Compliance Departments are banning the usage of COMEX accounts in financial firms and risk management outfits, a signal of the end being nigh. In time, the COMEX will become a cash & carry supermarket, but distrusted even for that lowly mart function. They will be devoid of inventory, exposed as a corrupted paper factory attached as a vital appendage to Wall Street.

CORRUPT ECONOMIC DATA

The entire system requires the constant banter of recovery, legitimacy, hope, and integrity. All are sorely lacking, glaringly lacking. The economic numbers have few honest series of data. My favorite honest series remains the income tax payroll withholdings, which screams of chronic recession in basic tones. Focus on three corrupted series. The Gross Domestic Product as calculated by the USGovt prefers the sequential method of comparing one quarter to the next, then multiplying by four. But ingrained are the fabled ample hedonics and imputations. Lifting the numbers from perceived quality improvements and the payments from right pocket to left pocket for individuals is laughable. The true GDP is half the size reported when stripped of nonsense fantasy. Its rate of change has been running at minus 2% to minus 5% growth (powerful recession) for the last four to six years. That explains the poor job growth and inability to make home loan payments. The Consumer Price Index routinely removes home rent when rising, includes home prices when falling, substitutes chicken for pork, sawdust for grains, stone pebbles for beans, and more. It also uses the same hedonics of quality improvements to suppress prices in the calculations. The GDP and CPI methods are interwoven exhibitions of statistical incest.

The Jobs Report is a joke each month perpetrated upon the American people. Inconsistencies abound. The mythical Birth-Death Model is handy for job creations, supposedly to reflect the uncounted small business sector. That sector is under great duress. Every March, a revision downward is made between 300 thousand and 700 thousand jobs, never noted by the financial press. The correction puts the series back into kilter. The USEconomy remains the weakest of all industrialized nations. Its corruption remains the highest in data reporting. See American Airlines for job cuts. See the Manhattan banking sector for job cuts. See state and local governments for job cuts. See college and university construction projects for job cuts.

GOLD COIL READY

The coalition against the gold cartel is making its presence known. They come from the Eastern realm, not necessarily from China, according to word passed. They shun publicity, but their handiwork is clear, as the heavily defended 1650 level was over-run and trampled. The upcoming planned event of the Greek Govt Bond default will be an important chapter in modern history. The collateral damage to Spain, Italy, and France will not be controllable. The exposure from the denied CDSwap debt insurance payouts will mark a turning point in bank corruption. They took in $trillions in contract premium, earned $billions in fees, and have blocked all payouts by redefinitions and ISDA strongarm methods. The required recapitalization of the Western big banks is an unavoidable event. The task will require several $trillions. The backroom coverage of the CDS payouts, if ever done, will require tens of $trillions. What is clear is that Quantitative Easing is the mainstay policy, but also that Global QE will be widely recognized as the device to avoid systemic collapse. The Gold & Silver prices will rise accordingly, as the paper monetary system is ruined further. The dons and castle lords will attempt to replace the failed paper system with another paper system, having given away their plan at the Davos Economic Summit conference. What a great location to conduct 300 arrests, a missed opportunity every year.

A unusual note came from a distant but informed niche, his office in step with gold corners and their many developments. He has commented in the past on the gradual pace of corruption taking its toll on the current system. He wrote, "The system will collapse and files from regulators and law enforcement will be destroyed during the collapse. The 911 event was an orchestrated event within the reaction matrix, a mega trial run to see how people would react and how the system would deal with the destruction. It was also the site one of the biggest gold heists ever. ScotiaMoccatta's gold in the vaults at the WTC was completely looted, never to be recovered, a well documented but poorly known story. The coming collapse is not a question of if but when. Only hard assets such as precious metal, agricultural assets, and other essentials will survive. Pay little heed to banks, the CDS contracts, the mortgage fraud, and all the other schemes these banksters run. The Roman Empire's back was broken. This cartel's back will be broken too. So just sit back and relax if well positioned in gold & silver."

THE HAT TRICK LETTER PROFITS IN THE CURRENT CRISIS.

From subscribers and readers:

At least 30 recently on correct forecasts regarding the bailout parade, numerous nationalization deals such as for Fannie Mae and the grand Mortgage Rescue.

"Your monthly reports are at the top of my list for importance, nothing else coming close. You are the one resource I can NOT do without! You have helped me and countless others to successfully navigate the most treacherous times one can possibly imagine. Making life altering decisions during tough times means you must have all the information available with direct bearing on the decision. Jim Willie gives you ALL the needed information, a highly critical difference. You cant afford to be wrong in today's world."

  (BrentT in North Carolina)

"You have warned over and over since Fall of 2009 that Europe would come apart and it sure looks like exactly that is happening. You have warned continually about the COMEX and now the entire CME seems to be unraveling. You must receive a lot of criticism regarding your analysis, trashing the man, without debate. Your work is appreciated. I do not care how politically incorrect or how impolite your style is. What is happening to our economy and financial system is neither politically correct or polite."

  (DanC in Washington)

"The best money I spend. Your service is the biggest bang for the buck."

  (DaveJ in Michigan)

"As the nation screams down the mountain out of control into the abyss, it is good to have a guide. Jim Willie helps to understand what is happening and more important, why. With that information, you can make the right decisions to protect yourself from the current apocalyptic catastrophe. Forget the MSM propaganda. Here is off

US-UK gold swap treaty disappears from UN Internet site, reappears at GATAs

Posted: 01 Feb 2012 04:03 AM PST

Rumours about Iranian oil-for-gold programme persist

Posted: 01 Feb 2012 03:21 AM PST

Goldmoney

Story on moore capital. Is bacon cooked?

Posted: 01 Feb 2012 03:06 AM PST

This morning I was trying to figure out if Moore Capital's trading ban in platinum had expired. I found this story about a class action lawsuit against them. Check out the quotes from Moore to its floor brokers. Wow. I can't imagine how they are going defend themselves against that kind of evidence... my favorite: "don't bid, just f–king pay up"

Full story: http://www.classlawsuit.com/investor...moore-capital/

The Historical Case For $960 Silver

Posted: 01 Feb 2012 02:52 AM PST

Don't Tread on me

January 2012 - Gold, Silver, Currency and Asset Performance Review

Posted: 01 Feb 2012 01:36 AM PST

Gov't OUTRAGE: Federal Reserve president denies inflation, but secretly owns millions in inflation hedges

Posted: 01 Feb 2012 12:36 AM PST

From Economic Policy Journal:

File this under: Watch what they do, not what they say.

William Dudley, the New York Fed president who famously pooh poohed the possibility of significant price inflation, actually owned Treasury securities that protect investors against price inflation.

In March of last year, Dudley played down the threat of price inflation to an audience enraged about increasing food prices, by telling the audience that not all prices were going up, and they should look at the prices of iPads...

In a Fed branch bank data dump late today, the Federal Reserve released the financial holdings of the presidents of its 12 regional banks. The disclosures covered 2008 to 2010. The disclosure came after a Freedom of Information request from Bloomberg News.

Guess what Mr. Chill on inflation Dudley held in his portfolio?

Read full article...

More on inflation:

The three HUGE lies the government is telling you

Why the Fed's dollar-crushing policies are completely insane

The world could finally be waking up to a new "safe haven" currency

Morning Outlook from the Trade Desk 02/01/12

Posted: 01 Feb 2012 12:14 AM PST

Ditto yesterdays comment. Equities up on better Chinese economic news. The hard landing in China is perceived to have been averted. Please note the word perceived. Romney appears to have the nomination sown up, if the concept of winning Florida holds true. The Republicans will at least have a candidate that looks good in a suit. Gingrich really needs to visit a tailor. No action on any serious front this year which leaves headline news( Europe) and free money the catalysts for the market. The markets have enjoyed a mutli year run on the back of zeroish rates, no reason for now to assume the same will not continue.

Highlights of the Silver Virtual Conference

Posted: 01 Feb 2012 12:08 AM PST

Courtesy of Ed Steer, Casey Research


Here are three transcripts from it...and there's enough reading linked below to keep you off the streets for a while. The first is Eric Sprott...and his speech is entitled "Mania, Manipulation, Meltdown."...and the link is here. The second one is headlined "James Turk reaffirms his $400 long-term silver target"...and the link to that is here. The third one is titled "David Morgan: Silver in the Next Decade"...and here's the link to that o ne.

Timberline Resources Appoints Steve Osterberg as Vice-President of Exploration

Posted: 31 Jan 2012 11:55 PM PST

COEUR D'ALENE, IDAHO, Feb 01, 2012 (MARKETWIRE via COMTEX) -- Timberline Resources Corporation (AMEX:TLR; TSX:TBR.V) ("Timberline" or the "Company") is pleased to announce the appointment of Steve Osterberg, Ph.D., P.G., Q.P. as the Company's Vice-President of Exploration.

Mr. Osterberg has 25 years of domestic and international minerals exploration experience, including mining geology and hydrogeology with multiple mineral deposit types, including sediment-hosted, Carlin-type, epithermal, and mesothermal gold and silver deposits. He has multi-disciplined experience in all aspects of economic exploration geology, and has been involved in advancing numerous exploration discoveries. Mr. Osterberg managed his own geologic consulting practice and developed and led the geology-geohydrology-geochemistry practice at Tetra-Tech Metals and Mining.

Mr. Osterberg has vast experience in various geologic terranes, including the Great Basin of Nevada, southwest U.S. porphyries, the Mid-Continent rift, the Canadian Shield, the Western Cordillera, and the Andean orogenic. His work experience also includes positions at Knight Piesold, BHP Minerals International, Minnova, Noranda, Kerr-McGee, and St. Joe American Corp. He earned his Ph.D. and M.S. degrees in geology from the University of Minnesota and his B.S. degree in geology from the University of Wisconsin.

Paul Dircksen, Timberline's President and CEO, said, "We are very pleased that Steve is joining the Timberline team. He brings a wealth of experience and education that will benefit us as we move the Butte Highlands Gold Project toward production and as we advance our exploration properties. Steve's experience in converting exploration discoveries into producing assets will be crucial in the development our properties."

In connection with his appointment, Mr. Osterberg has been granted 100,000 options to acquire common shares of Timberline at an exercise price equal to the closing price of the stock on February 1, 2012, vesting immediately, and with a term of five years.

About Timberline Resources

Timberline Resources Corporation is exploring and developing advanced-stage gold properties in the western United States. The Company is primarily focused on the goldfields of Nevada, where it is advancing its flagship Lookout Mountain Project toward a production decision while exploring a pipeline of quality earlier-stage projects at its South Eureka Property and elsewhere. Timberline also features a 50-percent carried-to-production interest at its Butte Highlands Joint Venture where gold production is slated to commence in 2012. Timberline management has a proven track record of discovering economic mineral deposits and developing them into profitable mines.

Timberline is listed on the NYSE Amex where it trades under the symbol "TLR" and on the TSX Venture Exchange where it trades under the symbol "TBR".

Statements contained herein that are not based upon current or historical fact are forward-looking in nature. Such forward-looking statements reflect the Company's expectations about its future operating results, performance and opportunities that involve substantial risks and uncertainties. These statements include but are not limited to statements regarding the timing, terms and value of the Company's sale of Timberline Drilling, the timing or results of the Company's drill programs at Butte Highlands and South Eureka, the timing of assay results from such drilling programs being released, the district-scale potential of the South Eureka project, the expansion of the mineralization at the South Eureka project, the timing of a production decision at the South Eureka project, the Company's 50/50 joint venture with Highland Mining LLC, the development and production of the Company's Butte Highlands project and South Eureka project, the targeted production date for the Butte Highlands project, possible growth of the Company and the Company's expected operations. When used herein, the words "anticipate," "believe," "estimate," "upcoming," "plan," "intend" and "expect" and similar expressions, as they relate to Timberline Resources Corporation, or its management, are intended to identify such forward-looking statements. These forward-looking statements are based on information currently available to the Company and are subject to a number of risks, uncertainties, and other factors that could cause the Company's actual results, performance, prospects, and opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, risks related to the timing and completion of the drilling programs at Butte Highlands and South Eureka, risks and uncertainties related to mineral estimates, risks related to the inherently dangerous activity of mining, and other such factors, including risk factors discussed in the Company's Annual Report on Form 10-K for the year ended September 30, 2011. Except as required by Federal Securities law, the Company does not undertake any obligation to release publicly any revisions to any forward-looking statements.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

Contacts:

        Timberline Resources Corp.

        Paul Dircksen

        CEO

        208.664.4859

Source: Timberline Resources Corp. via MarketWatch 

http://www.marketwatch.com/story/timberline-resources-appoints-steve-osterberg-as-vice-president-of-exploration-2012-02-01-82310?reflink=MW_news_stmp

Comment:  Note the mention in Mr. Osterberg's CV on Hydrogeology and Geohydrology.  Without having spoken to Mr. Osterberg, we recognize that his background works well for Butte Highlands.  Probably Lookout Mountain as well. Our complements to management for bringing in seasoned, apparently very qualified talent for the project. – Gene Arensberg 

Disclosure:  Timberline Resources is a Vulture Bargain Candidate of Interest (VBCI) and is our fully fledged Vulture Bargain #4. Members of the GGR team are actively accumulating shares of TLR and continue to hold a speculative long position in the company.   

Venezuela Receives Last Shipment of Repatriated Gold Bars

Posted: 31 Jan 2012 09:09 PM PST

¤ Yesterday in Gold and Silver

Gold traded more or less sideways up until about 2:00 p.m. Hong Kong time...and then began a smallish rally that got cut off at the knees shortly after 9:00 a.m. in London about three hours and change later.

After selling off a bit, gold began to rally once again...shortly before the Comex began to trade.  The high of the day came a few minutes after 9:00 a.m. in New York...and it was all down hill from there until minutes before noon Eastern time, which just happened to coincide with the top of a rally in the dollar index which was going on simultaneously.

From the New York high to the New York low, gold was clocked for about $21...but regained about half of that by the close of electronic trading at 5:15 p.m. Eastern time.

The gold price closed at $1,736.70 spot...up $6.40 on the day.  Gross volume was 174,000 contracts, give or take.  The net volume was a tough read looking at yesterday's closing volume numbers from the CME website.

The silver price followed the same basic pattern as the gold price did...with the various highs and lows coming at precisely the same times.  Of course the big difference was the takedown between about 9:15 a.m. and 11:50 a.m. during the New York morning...as 'da boyz' really kicked the living snot out of the silver price during that time period.

From its New York high of $34.24...to it's low two and a half hours later at $32.87...silver got smacked for $1.37.  That's an intraday price move of 4.00%.

Silver gained back about two bits of that loss during the rest of the New York trading session...and closed the day at $33.13 spot...down 'only' 37 cents from Monday's close.  Net volume [mostly high-frequency trading] was a quite high at 37,000 contracts.

The dollar index declined about 35 basis points between the Far East open on Tuesday...and 9:15 a.m. in London, which was its low of the day, around 78.75.  From that low, the dollar crawled up about 10 basis points before a rally of real substance got underway at 9:00 a.m. in New York...about five hours later.

The rally lasted for just a bit under three hours...and this portion of the dollar rally showed a gain of just under 60 basis points...about three quarters of a percent.  from that high, the dollar index gave back about 20 basis points of that rally.

If you check the Kitco charts above, gold and silver were both in rally mode between 7:00 and 9:20 a.m...even thought the dollar was moving higher at the same time.  It took this major dollar index rally to end it...and it looked very much like a "rally the dollar and kill the precious metals" operation to me.  I've seen many of them...and this looked pretty typical.

The moment the dollar index stopped rising, the gold price turned higher.

The gold shares gapped up at the open in New York at 9:30 a.m. yesterday morning...and that was the high of the day.  From there, they got sold off almost four percentage points before recovering a bit into the close.  Even though gold finished up on the day, the HUI finished in the red by 0.29%.

The silver shares finished mixed...and Nick Laird's Silver Sentiment Index closed the day down only 0.48%.

(Click on image to enlarge)

Yesterday was "Day 2" of the February delivery month in gold.  The CME Daily Delivery Report showed that 1,036 gold contracts [and no silver contracts] were posted for delivery on Thursday.  There were a lot of short/issuers...with the three biggest being JPMorgan, Credit Suisse First Boston and HSBC USA.  The biggest long/stopper was Deutsche Bank with 877 contracts.  The Issuers and Stoppers Report is definitely worth your time...and the link to that is here.

There were no reported changes in either GLD or SLV yesterday.

The U.S. Mint had one last sales report for January.  They sold 4,500 ounces of gold eagles...1,500 one-ounce 24K gold buffaloes...and 25,000 silver eagles.  For the month of January the mint sold 127,000 ounces of gold buffaloes [4 tonnes]...13,500 one-ounce 24K gold buffaloes...and 6,107,000 silver eagles.  I hope you got your share.

Over at the Comex-approved depositories on Monday, they reported receiving one good delivery bar weighing 996 troy ounces...and shipped 433,762 ounces of the stuff out the door.  The link to that action is here.

Here's an interesting chart that reader Gerry Navarre sent me yesterday. It shows the total of the eight largest central bank balance sheets in dollar terms.  It's only current through October 2011, as that is the latest number from the People's Bank of China. The combined size of these eight central banks' balance sheets has almost tripled in the last six years from $5.42 trillion to more than $15 trillion and is still on the rise!

(Click on image to enlarge)

This graph is part of a much bigger article headlined "Living In a QE World" that was posted over at the ritholtz.com website on January 27th...and the link to the whole essay is here.

I have the usual number of stories today.

So what the overnight markets giveth, the London and New York markets working together, make every attempt to taketh away.
Bill Fleckenstein - Get Ready, Public to Enter Gold & Silver Markets. Stephen Leeb - Silver to Break $100 This Year & Gold Bull on the Move. Eric Sprott: Mania, Manipulation, Meltdown.

¤ Critical Reads

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Senators: Get Rid of Dollar Bills

Some U.S. lawmakers want the coin to be the dollar of the realm.

Sens. Tom Harkin (D., Iowa), John McCain (R., Ariz.) and two colleagues Tuesday are introducing legislation that would kill off the dollar bill in favor of dollar coins, touting the move as a way to cut costs over the long run.

"Promoting the dollar coin is a smart investment for our country that saves taxpayer's money," Harkin said.

The move is latest in a long-running battle between those who think it is wasteful to print dollar bills, which wear out and have to be replaced frequently, and those who say the $1 coin is the real waste of money because Americans don't like them.

Let's see if this attempt is successful.  The story appeared in Monday's edition of The Wall Street Journal...and I thank Washington state reader S.A. for sending it along.  The link is here.

View full GSD edition

CBO: Taxes Will 'Shoot Up by More Than 30 Percent' Over Next 2 Years

The amount of money the federal government takes out of the U.S. economy in taxes will increase by more than 30 percent between 2012 and 2014, according to theBudget and Economic Outlook published today by the CBO.

At the same time, according to CBO, the economy will remain sluggish, partly because of higher taxes.

"In particular, between 2012 and 2014, revenues in CBO's baseline shoot up by more than 30 percent," said CBO, "mostly because of the recent or scheduled expirations of tax provisions, such as those that lower income tax rates and limit the reach of the alternative minimum tax (AMT), and the imposition of new taxes, fees, and penalties that are scheduled to go into effect."

This story was posted on the cnsnews.com website yesterday...and I thank reader Scott Pluschau for bringing it to my attention.  The link is here.

View full GSD edition

California Faces Cash Shortfall by March on Low Receipts, Controller Says

California's cash may be exhausted by March as tax collections trail budgeted amounts, Controller John Chiang said in a letter to lawmakers.

The nation's most-populous state needs $3.3 billion for March and the first two weeks of April, Chiang said in the letter to state Senator Mark Leno and Assemblyman Bob Blumenfield, who lead the Joint Legislative Budget Committee. The Assembly Budget Committee is holding a hearing today in Sacramento on the state's spending plan.

State receipts were $2.6 billion lower than forecast through Dec. 31, while expenditures were an equal amount higher, Chiang said. In a previous report, Chiang said the collections shortfall for the fiscal year that began in July was led by corporate and personal-income taxes.

This Bloomberg story from yesterday is also courtesy or reader Scott Pluschau...and the link is here.

View full GSD edition

Illinois Faces 'Potentially Paralyzing' $35 Billion Unpaid Bill Backlog

Illinois's unpaid bills may more than triple to $34.8 billion by 2017 unless lawmakers and Democratic Governor Pat Quinn immediately bring Medicaid and pension spending under control, said a research group.

The "potentially paralyzing" backlog, projected to reach $9.2 billion when this fiscal year ends June 30, would be fueled by an "unsustainable" increase in Medicaid spending, according to the Civic Federation, which calls itself a nonpartisan government research organization.

"Failure to address unsustainable trends in the state's pension and Medicaid systems will only result in financial disaster for the state of Illinois," Laurence Msall, president of the Civic Federation in Chicago, said in a press release on Monday.

I borrowed this Bloomberg story from yesterday's King Report...and the link is here.

View full GSD edition

Portugal Suffers as Loss of Confidence in Bonds Sends Yields Higher

Investors fled out of bonds of weaker European countries on Monday, sending yields on Portuguese government bonds to a record high over concerns that the euro zone debt troubles were spreading beyond Greece.

The fears of contagion spreading to other periphery countries in the zone that share the euro have grown more intense in recent months, with much of the latest focus on Portugal.

Yields on Portuguese 10-year government bonds closed at 16.58 percent, the highest they have been since the start of the euro currency and up from 14.645 percent on Friday.

This is another story I lifted from yesterday's King Report...and it was posted in The New York Times on Monday.  The link is here.

View full GSD edition

Investors face more than 70 pct loss in Greek deal

Investors participating in a deal to slash Greece's massive debt would face an overall loss on their bond holdings of more than 70 percent, a person involved in with the negotiations said early Tuesday.

European leaders at a summit in Brussels said a final debt deal could be signed off in the coming days, together with a second multibillion-euro bailout package designed to save the country from a potentially disastrous bankruptcy.

Athens and representatives of investors holding Greek government bonds over the weekend came close to a final agreement designed to bring Greece's debt down to a more manageable level. Without a restructuring, those debts would swell to around double the country's economic output by the end of the year.

This AP story filed on Monday evening was posted over at the breitbart.com website...and I thank reader Brad Robertson for sending it along.  The link is here.

View full GSD edition

Stephen Leeb - Silver to Break $100 This Year & Gold Bull on the Move

Posted: 31 Jan 2012 09:09 PM PST

Stephen Leeb - Silver to Break $100 This Year & Gold Bull on the Move

Here's another blog that Eric King sent me yesterday afternoon.  It's posted over at the King World News website as well...and that link is here.

Bill Fleckenstein - Get Ready, Public to Enter Gold & Silver Markets

Posted: 31 Jan 2012 09:09 PM PST

Bill Fleckenstein - Get Ready, Public to Enter Gold & Silver Markets

"A gigantic amount of buying in the metals has been from China and India.  The average American has been more concerned about preservation of capital."

"I'm suggesting that's going to change and if you are going to have Americans buying gold, on top of the Chinese and the Indians, and the Europeans get involved, you are not going to be able to increase supply, so the only thing left to adjust is going to be price."

Eric sent me this blog yesterday afternoon.  It's posted at the KWN website...and the link is here.

Gold & Silver Market Morning, February 01, 2012

Posted: 31 Jan 2012 09:00 PM PST

WATCH: Junk Silver Investment

Posted: 31 Jan 2012 08:38 PM PST

from CollectingSilver:

~TVR

WATCH: Bill Still on Fort Knox

Posted: 31 Jan 2012 08:35 PM PST

Still reporting on Ft. Knox and an upcoming History special investigation.

From Money Masters:

~TVR

Trader Tracks Situational Trading Alert

Posted: 31 Jan 2012 08:33 PM PST

Wednesday 1-25-12:

Since Europe is diddling and fiddling while economic Rome burns down, the Federal Reserve had to do something quickly. Once again they pulled a rabbit from their bag of tricks and told us they will hold rates near zero until 2014. Ha! If you believe that you'll believe anything. What they are not telling us is, inflation is growing faster and that they are in a fever with stealth QE-3 buying, trying to save Europe from a major crash. If Europe goes down then the New York Banks and the Federal Reserve will lose not billions but trillions. That would be game over!

The FOMC says they see 2012 growth at +2.2% to +2.7%. Actual growth right now is negative at -1.5% to -2%, which is very conservative. In reality, it might even be -2.55 to -3.0%. By making this announcement today, they knew it would pump markets and provide some support for numerous stock sectors about to peak and go over the cliff. The leading indicator signal, the Nasdaq 100 was getting toppy and with no news of help on the Euro crisis, they had to move quickly and impose new supports. Real USA inflation is now running near 11-12% and rising. Of course they said it was under control.

Gold futures opened at $1666.50 and the last price was $1707.70 with a high of $1708.60 resistance, and a low at $1649.20. Our futures gold chart has a breakout rally underway and did not finish an ABC correction. The C wave up is supposed to be today; since Chicago is closed on gold for the regular session, the normally modest C wave up, (price) just blew by high-end technical restraints and continued to rise. We expected one more day, or two of corrections followed by a new wave one up. If the corrective C wave today has been skipped and this is the new wave one, our next rally could be a Doozie as three waves have to be much higher. Following this thinking, today's rally of +$43 would be surpassed by a new three wave up on Friday, or Monday with +$65, or even more. Silver futures for March are $33.23 with high of $33.36 and a low of $31.53.

The Swiss Franc, Euro and Canadian Dollar are all up about +1/2 point while the US Dollar is down a similar amount. The 30-year bonds are slightly up at 141.31 and were lower on 140.00 support this week. Beans are 12.14 and corn is 6.35. Crude oil was selling but is now rising back toward $100 resistance at $99.70. Commodities are all rising and copper is near $3.80.

If our traders have been following our recommendations they should be positioned for the current and future rallies in precious metals and shares. (Continuing through to April, with two mid-cycle corrections).

The Vancouver Conference, where we were speaking and visiting was up-beat and well attended.

Pre-registration had 8,000 and an additional 2,000 were walk-ins and paid at the door. We have seen larger ones in 2006-2007, but there were no complaints on floor traffic at this show. The new Palm Springs (Indian Wells) Hyatt conference next month (transferred from Arizona) should also be a dandy. We will be speaking there and visiting our friends, colleagues and traders-investors to answer questions February 11-12, 2012.

If you would like to attend our April, 2012 Wealth Conference Event in Tempe, Az. ALSO consider our technical and fundamental charting-training class on 4-26-12, just before the other event. Readers have been asking for this class for some time. Now we are doing it with slides, and a booklet with charts you can use as class tool and later for your personal trading. We intend to reveal some of our best and most productive personal trading secrets at that event. Call Linda Gorman at Resource Consultants for my training class reservations and reservations to the Gorman Resource Wealth Conference on April 27-28, 2012; at 800-494-4149, or 480-820-5877 Meanwhile, stay in your trades and watch for new alerts.


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

Silver Update: “Broken Promises”

Posted: 31 Jan 2012 08:26 PM PST

from BrotherJohnF:
BJF on silver's trend and defining default in the 1.31.12  Silver Update.

Got Physical ?

~TVR

Great Deals on Gold and Silver: James Turk

Posted: 31 Jan 2012 06:00 PM PST

GoldMoney Founder and Chairman James Turk knows how to find great deals on gold and silver. He claims that the 2012 bottom for gold came during the first week in January. If the year's low is already...

Visit the aureport.com for more information and for a free newsletter

How Currencies Die and Gold Prospers — Part II

Posted: 31 Jan 2012 05:02 PM PST

In Part I of this two-parter a coming currency collapse and accompanying sovereign bankruptcies were discussed. This part discusses why a currency collapse is nearly certain and what options and motivations government has to avoid or facilitate such an event. Whether the coming collapse is slow and orderly or takes place rapidly and haphazardly is [...]

Silver Market Update

Posted: 31 Jan 2012 05:00 PM PST

Mainstream Economics as Ideology: An Interview with Rod Hill and Tony Myatt — Part II

Posted: 31 Jan 2012 04:37 PM PST

Rod Hill and Tony Myatt are Professors of Economics at the University of New Brunswick in Saint John and Fredericton (respectively). Their new book, The Economics Anti-Textbook is available from Amazon. They also run a blog at www.economics-antitextbook.com.

Interview conducted by Philip Pilkington

Philip Pilkington: I think it was Joan Robinson who said something along the lines of "while we may have to teach a limited amount of material, we could at least teach that which is useful". I've often encountered economics students who, frankly, seem to me to have a very tenuous grasp of the important aspects of economics. I recall one in particular who graduated from a very prestigious university not understanding what I meant when I said that I thought the chronic unemployment in Ireland was due to a lack of effective demand triggered by the bursting of the housing bubble.

In your experience do you find that students leave mainstream economics courses equipped to deal with real world issues? Maybe you could say something about this more generally.

Rod Hill: The person you describe – who was apparently unfamiliar with some basic concepts in Keynesian economics, like effective demand, or with ideas about asset price bubbles – reminds me of the distinction that Paul Krugman often makes in his blog between saltwater economics departments (where a student is likely to learn these things) and freshwater ones (where they are not so likely to learn them). I think both sets of schools might be broadly viewed as training students in 'mainstream economics', but clearly some would equip students better than others to understand real world issues.

This is another way of saying that 'mainstream economics' includes a pretty broad range of ideas and that the borders between it and heterodox economics are rather fuzzy. What we are really taking aim at in our book is the narrow range of 'mainstream economics' that is presented to undergraduate students, but I think your point is that the narrow range of ideas can also extend beyond that into graduate training, and I agree. This is a rather more pessimistic view than that expressed recently by Dani Rodrik, who seems more optimistic about what goes on at the graduate level, but then he's in a saltwater school.

My own experience of students leaving mainstream courses is pretty limited, but I can say that I've been unhappily surprised during hiring interviews by quite a few fresh PhDs who don't seem to know what the Keynesian fiscal multiplier is.

Tony Myatt: We could compare economics to other professions. In Canada, at least, someone can graduate from a university with an engineering degree, but they still have to pass a competency exam set by the national body of engineers in order to practice engineering. Perhaps the economics profession should implement a competency exam?

This raises the question: is economics really a practical science like engineering? We argue in our Anti-Textbook that it isn't…despite the claims in all the mainstream texts to the contrary. Testing predictions isn't all it's cracked up to be and core hypotheses are incapable of being refuted. While disagreeing with much of what McCloskey says about methodology, I really like her characterization of economics as being the Art of Rhetoric. So, perhaps the gulf between Saltwater and Freshwater views that Rod mentions shouldn't surprise us that much.

You cite an economics graduate who doesn't understand that unemployment could be caused by lack of aggregate demand triggered by the bursting of the housing bubble. That could have a fairly mundane explanation. I'm in the early stages of research in writing the Macro Anti-Textbook. But from my reading of the mainstream principles textbooks so far, I would say that all of them contain an explanation of how wealth affects consumption spending, and all of them have chapters explaining how a decrease in aggregate demand can cause an increase in short-run unemployment. But there are differences between the texts that could underline or obscure that message. Some texts emphasize long-run results and fast speed of adjustment. They all emphasize inherent stability. They all emphasize that the fundamental cause of unemployment is wage stickiness – oh if only wages would fall quicker! And in all the books, by the time the student gets to the Philips curve chapters it seems that the only cause of unemployment is overly high expectations of inflation. So, the sensible stuff on how the bursting of an asset bubble could increase unemployment gets lost in the overall confusion by the time the student gets to the end of the course.

Macroeconomics has been in a real mess for quite a while. Yet there was – supposedly – a new consensus in macroeconomics by the early 1990s. A consensus which, in my opinion, was completely wrongheaded. In a way I'm delighted that the financial meltdown and subsequent Great Recession has blown this "new consensus" out of the water, both fresh and saltwater. It has stimulated interest in heterodox views. It has revealed deep schisms even among mainstream economists. I'm enjoying them.

It's astonishing how quickly things are changing. Where there was a "consensus" there is now vociferous debate. Whereas in the past this debate would go through the journals, with long time lags, now the debate is instant and online. The blogs are becoming where it's at. So, you mustn't underestimate what you're doing here Philip.

PP: If the blogs are doing anything – and I think they are – they are pulling back students who became completely disillusioned with economics (or who never did it because they thought it was nonsense) and who now see that they need to understand it in a very pressing way if they are to partake in any way of fixing what has gone so wrong. Actually, this ties into what I was just going to ask.

Tony, you say that you think many very important (I would say: chronically important) things get lost in a sea of context. This, I think, is what many students find when they go into an economics classroom with a relatively critical mind. It's very hard to pick out what's what and – in my experience at least – you are confronted with a closed system that appears to work perfectly with no problems and this grates with what you see all around you in the real world (especially now – I did economics during the bubble era and even then it was obvious to me).

What do you think about this? Is mainstream economics giving students the impression of a closed system in which nothing can happen that is not predetermined – and that everything that is predetermined is always already happening? I guess that's a pretty oblique question and I apologise, but I think it's worth asking.

Tony Myatt: Yes, I think that's an interesting way to put it. A system that is inherently stable, with a unique equilibrium, determined by tastes and technology – this is a very closed system. While the standard consensus DSGE model (dynamic stochastic general equilibrium model) allows for random shocks, these only influence the short-run movements around the long-run equilibrium. Stability guarantees that unemployment will revert to its natural rate. Of course, there are still a few microeconomic problems in this kind of world. There are the usual problems of externalities and inequality, but these are portrayed as political choices or political failures rather than failures of the political-economic system. To get a more open system we could introduce true uncertainty, hysteresis, multiple equilibria, and strategic interactions. But to account for the asset bubbles I think we also need a good healthy dose of Minsky, and a recognition of the role of power and corruption.

Rod Hill: We did manage to get a hint of some of this into The Economics Anti-Textbook in a way which I hope is not too abstract for the undergraduate audience that we are primarily targeting. One of the authors we cite is Alan Kirman, who expands on some of these themes (multiple equilibria, no guarantees of convergence to equilibria, and how mainstream economics ignores this) in a recent interview in the Erasmas Journal for Philosophy and Economics.

As Kirman points out, Walrasian microeconomics is hardly a suitable foundation for macroeconomics, but (as he puts it) macroeconomists "simply said that we will have to simplify things until we get to a situation where we do have uniqueness and stability." So what's constructed is a closed system that appears to work perfectly, as you put it, because it's internally consistent. But it doesn't necessarily have much contact with reality.

PP: Another point that is noted in the book is that textbooks rarely engage the student with empirical material. Could you say something about this and perhaps indicate how you set out to deal with it in your book?

Rod Hill: The microeconomics principles texts make some real effort to link the theories they present with evidence or observations, much more so than higher-level texts that deal only with mathematical models of imaginary situations. The principles texts do this to convince the student of the practical relevance of the theories they are learning. However, the point we try to make is that important empirical evidence is often either absent or incomplete.

We spend some time in the book indentifying and filling those gaps. In that way, the readers get not only the missing information, but also some sense of how the rhetoric of the texts works. A couple of brief examples might help to illustrate what I mean.

Every beginning microeconomics student struggles through the theory of the firm's production and costs. While trying to follow what's going on in all the diagrams, the student might not notice that all of the examples are of simple imaginary firms making a single product by varying mysterious homogeneous inputs called 'labour' and 'capital'. Little or no empirical evidence is given about the behaviour of firms' actual costs.

It's long been known that the general story being told about costs is fiction. The textbooks say that eventually firms' costs of producing another unit of output in a given time period (their 'marginal costs') rise. In the short run, this is attributed to the diminishing marginal productivity of the inputs the firm can vary; in the long run, it's said to be due to decreasing returns to scale and rising average costs.

In reality, marginal costs for a great many production processes seem to be generally either constant or decreasing. The texts ignore the evidence and they do this for an important reason.

The rising costs of the textbook firm limit its size. At some point, the competitive firm looks at the market price (over which it has no control) and decides that it's not worth producing and selling another unit of output: its marginal cost of producing it will exceed the market price. But if its marginal costs were constant or decreasing, it could just go on expanding output. However, then the firm could become large relative to the size of the market and it would no longer be a little price-taking firm and the theory of perfect competition would not be applicable. Because the theory of perfect competition is the centrepiece of these texts, the evidence about actual costs has to go.

We identify a number of other key ideas where the texts set out some theoretical ideas but fail to discuss evidence in any serious way. For example, the texts assert that there is an equity-efficiency trade-off, but we show that there is plenty of evidence that contradicts this. This is an omission with important political consequences: the texts invite millions of students to conclude that reducing social and economic inequalities and strengthening social insurance is significantly more costly than it actually is.

Aside from ignoring inconvenient evidence, texts can also present incomplete evidence about a question. We point out, for example, that discussions of rent controls in the texts are simplistic and ignore features of many actual rent control systems that mitigate the negative effects of controls. While some texts now do a better job of discussing the minimum wage by acknowledging that other models are possible (such as monopsony, in which employers have power over the wage), most still use only the perfectly competitive model of the labour market to examine the policy. The further points about the minimum wage that Dean Baker raises in a recent article are something I've never seen in a textbook, even though it's not technical or hard to understand.

What the texts are doing in these kinds of examples is making a single point over and over: government interference in market outcomes causes inefficiency, which is bad. Again, the political implications are obvious should large numbers of young people absorb that point of view.

Tony Myatt: My favourite example is the incidence of taxation. The texts assume (of course) perfectly competitive markets, and derive the result that the incidence of a tax (say the sales tax) is determined by the relative elasticities of supply and demand. It is not determined by who legally has to remit the money to the government. The texts then "illustrate" the theorem in a wide variety of markets, which invariably include cigarettes and gasoline. The illustrations are purely diagrammatical.

Logically the texts should show that the model's predictions are corroborated by the evidence. They should go out and measure the elasticities of demand and supply for say cigarettes and gasoline, and generate their predictions about the incidence of taxation in those markets. Then they should go and find detailed empirical studies on the effects of taxation in those markets and compare their predictions with the detailed empirical evidence.

But this is never done. And there is a very good reason why it is never done: it is impossible to do it! No-one can measure the elasticity of supply when the supply curve doesn't exist! There is no supply curve of cigarettes or gasoline because they are sold in oligopolistic markets. You can only define and derive supply curves when all firms are so small they have no influence on market price. This explains why

    no text

presents any corroborating empirical evidence on the ability of the competitive model to predict the incidence of taxation.

The moral of that story is not to confuse an "illustration" with empirical corroboration.

My second favourite example is about minimum wages. For example, perfect competition predicts that any small increase in minimum wages (no matter how small) must produce a decrease in employment. On the other hand, non-competitive markets predict that a small increase in the minimum wage might actually increase employment – though a large increase in the minimum wage would decrease employment. What does the evidence say? Actually, the evidence is all over the place. Sometimes minimum wage increases seem to increase employment; sometimes they seem to decrease employment. This mixed evidence is much easier to explain using non-competitive models.

PP: This touches on something very interesting. In mainstream economics academics generally distinguish between 'positive economics' – that is, describing the 'real world' – and 'normative economics' – that is, describing how things 'should be'. The former is supposedly the realm of 'science', the latter the realm of 'policy' and ideology'.

But if, as both your points imply, the texts assume perfect competition and bury monopoly and oligopoly in much of their models, then the texts are always making not 'positive', but 'normative' judgments. They are saying that the world should be free from monopoly and oligopoly (and government) when in reality it is not. Could you say something about this? How do academics that recognise the positive/normative distinction gloss over this? I assume they do so in their own minds as well as in their texts and classrooms…

Tony Myatt: Mainstream textbook writers recognize that much of the real world is non-competitive. But they justify the assumption of perfect competition on positive grounds. They say it is simpler than alternative models and most crucially that it is a good approximation for more complicated market structures. This follows on from their methodology that realism of assumptions is not important. What is important is predictive power. That's why it is so crucially important for us to show that perfect competition is NOT justified on the basis of its predictive power.

Most of economics is normative, in so far as we're discussing what the government ought to do to increase overall wellbeing. Analysis of how governments actually make decisions, and what objectives they actually try to fulfill, while "positive", is normally left to political scientists.

Economists recognise that governments have two main jobs: promoting equity and promoting efficiency. Promoting equity is recognized as the normative bit. But most texts don't emphasize that promoting efficiency also has a normative basis. Mainstream texts argue that efficiency is obviously a "good thing" because this potentially allows everyone to have more stuff. But it is just an assumption that more stuff will make us happier. Empirical tests of this assumption suggest that the evidence in favour of it is pretty weak.

When it comes to industrial policy, the texts get themselves into a right mess. They go through all their efficiency arguments to suggest that perfect competition is ideal, and monopoly and oligopoly involve "waste". But these arguments are based on static analysis. As soon as we bring in technological innovation, static efficiency becomes irrelevant.

PP: Are you saying that monopoly/oligopoly might be more efficient? I believe I've heard this from both the right (Schumpeter) and the left (Galbraith), perhaps you could outline the argument and speculate why the mainstream economists ward it off.

Tony Myatt: When discussing efficiency the textbooks focus on "static efficiency." That is, how to maximize wellbeing with given resources and technology and tastes. They go through an awful lot of trouble to show that – with this proviso and that proviso – that perfectly competitive markets are ideal for maximizing static efficiency.

But I mentioned earlier that the one thing that capitalism has been undeniably very good at is technological change and innovation. Indeed, this is probably the most important feature of the modern world. Now, in which market structures does this innovation occur? Both theory and evidence suggests that it is NOT in perfectly competitive markets. On theoretical grounds, firms in these markets are small and lean, just covering their costs. They lack resources to invest heavily in research and development. Empirically, William Baumol in his book The Free Market Innovation Machine reckons that oligopoly is the best market structure from the point of view of innovation. And as Schumpeter argues, if the lure of monopoly profits are the reward for successful innovation, and if that monopoly power is then eroded by new innovators, then it's hard to see the "static inefficiency" of monopoly as being a serious problem. It's dwarfed by the dynamic benefits.

So, where does this leave us? It leaves us realizing that most of what the microeconomic textbooks teach concerning efficiency is a tale told by an idiot, just sound and fury signifying nothing. It's completely irrelevant.

Mainstream economists certainly don't want to admit this. They'd have to find something else to teach.

Rod Hill: And this raises again the distinction between what we call 'textbook economics', the version of what's taught to undergraduates, that has hardly changed since I was a student in the mid-1970s, and what some (even mainstream) economists are actually doing these days. Lots of people have been working on models of economic growth, some of them using Schumpeterian ideas, for example.

PP: That's really interesting. But I guess we should wind this up. Are you guys hopeful that the next generation will be more aware of the flaws in the textbook version of economics? Do you think they'll be more willing to engage with alternative ideas? And what do you see for the future of economics as an academic discipline if such a sea change fails to take place?

Rod Hill: It would be easy to be pessimistic. Plutocratic power seems deeply entrenched, as does the propaganda system that supports it. The 'mainstream' textbook version of economics is part of that system, ignoring critical perspectives and encouraging a Panglossian view of the world. If that's all that economists were to continue to offer, they would ultimately condemn themselves to irrelevance as the disconnect between the world and the textbook grows unbearably large.

That's one reason I'm actually rather optimistic about the long term. The unsatisfactory performance of the political and economic system is too hard to miss and encourages economics students to consider alternative ideas. Unlike in my student days in pre-history, before the internet existed, those alternative ideas are now freely available and easy to find. Good alternatives to the mainstream texts also exist, such as the Economics in Context texts published by M.E. Sharpe, for instructors who are tired of the standard fare.

As well, within the economics profession itself, there is lots of interesting work going on. The growth of behavioural economics is just one example. Another is the increase in work being done on economic inequality, for instance as seen in the rising prominence of those like Emmanuel Saez and Thomas Piketty who are examining the explosion of 'high incomes'. Every year, the traditional mainstream principles texts look ever more outdated. I hope Tony and I have been able to help in a small way to hasten their demise.

Tony Myatt: Nice one Rod. Let's hope you're right.


On the Edge of Evolution: An Investment Story in Three Acts

Posted: 31 Jan 2012 04:19 PM PST

Today you're going to read a Daily Reckoning that's been five years in the making-that's if you can manage to get through it. If you do, I'm willing to bet you'll be a Daily Reckoning reader for the next five years. You'll want to see how today's story finishes. But I'm going to guess that less than 10% of all readers today will get to the end. Why?

It's too long! I've been getting that complaint ever since we first began publishing the DR in Australia in 2007. You're busy. You don't have time. You want me to get to the point. Blah blah blah. I've heard it all before.

But good stories take as long as they take. Do you think Tolstoy's editor told him that War and Peace was too long? Do you think Shakespeare's proof reader said, "Bill...I really love this Hamlet guy. But you need to get rid of one of the Acts. Five is too many. People can't stand and watch a play for five acts. They need to drink ale."

Today's story is how the investment world you live in came to be...and how we're on the edge of a great leap forward...or a great leap into a deep abyss. If you don't have time to read it, go over to Facebook and tell everyone you're too busy to read about the most important investment story of your life.

Act One: Globalisation in Retreat and Insiders in Flight

Like any good story I'll begin in the middle, then show you how we got here, and finish with where we're headed next. I've even chucked in an epilogue on the value of Facebook for storytelling. But let us begin with the facts. And the first fact is that globalisation is in retreat.

Consider the initial public offering of Swiss commodities trader Glencore in mid-May of last year. Glencore is still down 21.6% from its IPO price. It's up from its lows in September of last year. You can see the woeful state of affairs in the chart below.

Glencore: a peak in the commodities cycle?

Glencore: a peak in the commodities cycle?

Source: StockCharts


When Glencore went public I asked if it was a sell signal for the whole commodities complex. When there's more money mining the share market than trading the output of mines, you know business conditions have changed. It would have been tempting for long-time Glencore employees to get out while the getting was good.

Nine months later, some of them are starting to. The Financial Times reports that Steven Blumgart, the head of Glencore's aluminium division and one of its most senior executives, announced his retirement in late January. The FT says, "It's the first significant departure since [Glencore's] multi-billion pound initial public offering last year."

The FT goes on about the IPO and Blumgart's departure, "The windfall for Glencore employees prompted some investors to question whether the IPO marked the staff's cashing it at the top of the commodities cycle. The departure, which insiders say was planned months ago, is likely to reignite those concerns."

Now there are many valid and non-conspiratorial reasons for a person to leave a job after many years. It's perfectly normal. What's more, Glencore's CEO Ivan Glasenberg said he has no plans to leave any time soon. He's even bought shares. The truth is, Glasenberg can't cash out without damaging the value of his own equity stake in Glencore.

Glasenberg's dilemma should remind Mark Zuckerberg of the irony of having your wealth linked to the value of your company: you're only fabulously rich if you stay with the firm. You can leave the firm and be moderately rich. But to be truly fabulous, you must remain in the service of the customer.

When the CEO becomes the brand (Apple with Steve Jobs, Microsoft with Bill Gates, or even Warren Buffett with Berkshire Hathaway) the investing public associates the performance of the company with the man or woman at the top. If that man or woman leaves, the shares can fall and the paper wealth of the CEO is diminished.

There is a paradox in there somewhere for a graduate student to write a thesis. CEOs have been so successful in making themselves into superstars that they can't afford to leave! To be fair, it is clearly possible for a CEO to get rich even if he leaves a business.

In fact, these days you can make more money getting fired than you can by keeping your job. For example, Hewlett Packard fired its CEO Leo Apotheker last year. He'd been CEO for just 11 months. The stock fell by 45% during his tenure. Yet he was paid a severance of $7.2 million and received another $2.4 million in performance related bonuses.

As an aside, its stories like this which cause people to wonder if hard work is really rewarded any more. If it's possible to get ahead by being fired, then why bother working at all? This is partly what the current crisis is all about: loss of faith in the fairness of the economic world. How did we get here?

Act Two: The Cult of Shareholder Value, the Financialisation of the Western World, and the Consumption Boom

Somewhere in the early to mid-1980's having a telegenic, dynamic, and likable CEO became important on Wall Street. It was probably around the same time that executive compensation became tied to quarterly earnings performance. In fact, it was about the time Jack Welch became CEO of General Electric.

I'm going to spend a little time on Jack Welch. His story coincides with the greatest equities bull market of all time. And though Welch is now often referred to as one of the great CEOs ever, I'd like to make the claim that his success as a CEO is directly related to the expansion of a massive credit bubble. Credit bubbles make everyone look like a genius CEO, just as bull markets make all punters feel like a genius.

You do need to give Welch a certain amount of credit. He started at GE as a junior chemical engineer in 1960. He worked his way up the ranks to become CEO in 1981. At that time, GE had total revenues of $26.8 billion and a market capitalisation of $14 billion. When he retired on September 2nd of 2001, GE had annual sales of $130 billion and a market cap of $410 billion.

You read that correctly. When Welch took over, according to GE's official biography, the market value of the company was about half of annual revenues. You can only ever buy a company selling at less than one times sales if you're in a savage bear market, or if it's a lousy company.

GE wasn't a lousy company. It was mostly an engineering and high-value manufacturing company. And in 1981, stocks were pricing in the Reagan recession. Stocks were cheap. In fact, they were as cheap as they were going to get for the next twenty years. Welch had very good timing.

In 1981, Welch gave a speech at the Pierre Hotel in New York. It's a famous speech now. Its title was "Growing fast in a slow-growth economy". He never used the phrase "shareholder value" in the speech. But this is now widely regarded as the moment when corporations began judging their success by the performance of the share price rather than any underlying metric of value.

Welch gave birth to the cult of shareholder value, although he later repudiated the idea in a 2009 interview with the Financial Times. In the late 1980s, he became famous (or infamous) for his management technique of regularly firing the bottom 10% of his management team. He popularised the six sigma management strategy originally developed by Motorola. And for the next twenty years, GE grew its earnings and its share price by virtue of a record expansion of money and credit in the world.

To understand how GE grew its revenues by 385% during Welch's tenure (and its market cap by 925%), all you really need to do is look at the consolidated revenues by business segment in GE's 2000 annual report. That was the last full year Welch led the company.

As you can see below, GE Capital Services (GECS) - the financial arm of the business involved in everything from commercial finance to insurance to mortgage lending - made $66 billion in sales 2000. The old industrial manufacturing part of the business, by contrast, generated $63 billion in revenues.

The conversion of GE to a finance firm

The conversion of GE to a finance firm
Click here to enlarge

Source: General Electric Annual report for 2001


Of course, it's no sin for GE to have a diversified business portfolio. But it is useful to know what was driving the company's growth. Maybe it was the brilliance of Jack Welch. Or maybe it was something else, like credit growth. GECS revenues doubled between 1996 and 2001, from $32 billion to $66 billion. Meanwhile, total company revenues, which included the plodding industrial operating segment, grew by 63% over the same period.

Now, 63% isn't exactly smoked chicken either. But even without knowing what GE's income statement and balance sheet looked like in 1981, it's safe to say the expansion of money and credit in the United States took GE to new heights by the late 1990s. The focus on shareholder value (management of the share price) led the company to grow earnings (and earnings per share) by expanding the financial arm of the business. This set an example and led to a trend across corporate America: stock price strength through debt growth.

Not coincidentally, the broadest measure of US money and credit, M3, began to expand dramatically by early 1995. M3 is a discontinued money supply figure that includes coins, currency, savings and demand deposits, checking accounts, and institutional and retail money market funds.

In other words, it's the best measure of the supply of money and liquid credit assets in an economy. That's probably why the Fed discontinued publishing it in 2005. As you can see, the rapid expansion of M3 from 1995 to 2005 matches the 515% increase in GE's share price from $9.39 in April of 1995 to $57.81 in June of 2000.

The credit boom takes off in America...

The credit boom takes off in America...

...and GE benefits from the financialisation of the American economy

GE benefits from the financialisation of the American economy
Click here to enlarge

Source: www.yahoo.com/finance


GE is probably the most visible example of how the credit bubble distorted the business model of major corporations. The credit boom altered incentives in the macro economy and rewarded speculators. It also caused other companies to increase production based on consumption that was boosted by credit. If consumer demand was growing, then the supply of goods and services had to grow to meet it. This process would eventually filter all the way down to the demand for raw materials from Australia. This brings us to the final act of our drama.

Act Three: The Commodity Boom and the Evolving Nature of Chinese Growth

Yes, our story has finally made its way to the Lucky Country. It's no coincidence the explosion in credit growth that began in 1995 coincided with the bottom in commodity prices. Stocks were peaking as an asset class. Commodities were at a nadir.

But the consumption led boom in the Western world finally led to the great supply shock in commodities. Two decades of under investment in productive capacity plus huge growth in demand led to rising commodity prices. And directly to the current boom, whose future is very much in doubt.

The demand shock hits commodities

The demand shock hits commodities

Source: www.stockcharts.com


You don't need me to remind you of how good the commodities boom has been to Australia. I visited Australia for the first time in late 2002. Early the next year I recommended BHP Billiton to the readers of my US newsletter, Strategic Investment. The argument was simple: China was about to undergo a lot of rapid, metals-intensive industrialisation.

This was all part of the plan in China, by the way. China's economy is managed by five-year plans. The 11th five-year plan featured a lot of investment led growth. This fixed asset investment - roads, bridges, railways, and urban housing - was heavy on steel consumption. This was manna from heaven for BHP and Rio Tinto.

This huge demand for steel was also based on China's deliberate move to migrate hundreds of millions of people from rural farms to cities, where they could work in factories and be part of China's export machine - the machine driving China's growth.

It wasn't hard to understand this process. Credit growth in the Western world led to an export boom in China. That export boom demanded huge quantities of raw materials. Many of those raw materials came from Australia. Australia's Treasury Department even recognised this in 2005.

Treasury produced a chart that put China's steel-based industrialisation into historical perspective. It compared world GDP to world steel production. The great growth periods of the past were matched by giant increases in steel production from newly industrialising nations. China's industrialisation was just the latest, greatest example of how economic growth is driven by fixed asset investment.

Steel and global GDP growth march together in history

Steel and global GDP growth march together in history

That Treasury paper was published in 2005. By 2007, as you know, the credit bubble had truly popped. And here we are today. We are now at the final phase of China's metals intensive growth. China's commodity demand is shifting toward resources involved in an expanding consumer sector. That's the claim I'm making, anyway. But let me offer you some proof.

My first item of proof is the resignation of Steven Blumgart from the aluminium division at Glencore. Blumgart leaves shortly after aluminium prices neared a two-year low. They could recover, of course. But the weak performance of base metals in general (aluminium, zinc, and nickel) could confirm what I'm suggesting: metals consumption in China is peaking.

Now, it may be more of a plateau than a peak. The 12th 5-year plan urges China to move slowly from an investment led economy to a consumption led economy. This would change the structure of China's demand for resources. It would slowly demand fewer metals, but more of different commodities.

Mineral sands like zircon, rutile, and titanium dioxide are used in the production of ceramics, glassware, and paint, for example. This is right up the alley of a company like Iluka Resources (ASX:ILU). I profiled Iluka in Australian Wealth Gameplan in 2010 (although to be fair, I talked about it as a potential thorium play). Look at what Iluka has done in the last two years.

Up 444% in two years on Chinese urbanisation

Up 444% in two years on Chinese urbanisation

This story - how Chinese commodity demand is evolving in 2012 and over the next five years - is what I hope we can explore at our After America conference in Sydney. For the last five years, I've written about the collapse of the global credit bubble and how to survive it. This is the year that the story could move beyond crisis and collapse and turn into a real transition in the leadership of the global economy. That is the central idea of the After America symposium.

The good news is that every editor I've spoken with has ideas on what opportunities may evolve from China's plans. And some, like me, think those plans could go awry. If you're not able to come to the conference, I can assure you this is the story that will dominate the Daily Reckoning over the next year.

Can the world economy make a seamless transition from Western- led growth to BRICS- led growth? Or is this the year we all stumble and fall in the ditch?

On the opportunity side, China's 12th five-year plan calls for more investment in alternative and renewable energy, IT, and biotechnology. This is a small-cap investor's dream and something Kris Sayce will be speaking about in Sydney. Now, I'm not convinced the official goal will lead to any real breakthroughs. That's not how innovation works. But it will spur investment in clean-energy start ups and also other industries like biotech and IT.

Another example is the focus on "Strategic Emerging Industries" in the plan. China isn't planning on quitting the manufacturing business. It's trying to move up the value chain by making things that are more sophisticated, complex, and have higher trade value. This should create value for some of the "strategic metals" Alex Cowie is researching in Diggers and Drillers.

All the keynote speakers - Satyajit Das, Dylan Grice, Paul Monk, and David Thomas - will have something to say about the current state of play. And Murray Dawes, Greg Canavan and I will be speaking as well. I can't promise any consensus. But I can promise a lot of discussion and actionable ideas.

In some ways, the whole purpose of the Daily Reckoning over the last five years has been to prepare you for the bursting of the credit bubble. That aftermath of the credit bubble - huge government debt in Europe, a chronic housing mess in America, and global deleveraging - are still with us.

But I sense the China aspect of the story is evolving (especially in terms of energy). Now is the right time to set aside a few days and think hard on the issues to see what we can come up with. And speaking of thinking, let's return to Facebook.

Epilogue: Redemption through Relevance

I should clarify my main complaint about Facebook yesterday. It's not that sharing pictures of your breakfast is evil. After all, breakfast is just breakfast. My main point is that the more information you flood your brain with, the less time you have to distinguish between what matters in this world and what doesn't.

We live in an age where too much information degrades your ability to make sound judgements. Facebook understands this. For starters, the information you're presented with on your Facebook page is already sorted by importance.

Granted, the default sorting order is set by Facebook. It tells you which stories from which friends it "thinks" will be more interesting to you. This is kind of aggravating. But this attempt to sort information is in recognition of the fact that some information is more valuable to you than other information.

Facebook also understands the importance of stories. Stories are how human beings transmit useful knowledge. Stories are also how we create or impose meaning on the random events of our life. Telling stories isn't just how we communicate. Telling stories is how we try and understand the world.

Facebook's new format is based on the importance of stories. The new format for presenting information is called "Timeline." Mark Zuckerberg said, "Timeline is the story of your life".

It's a fascinating marketing move. Facebook is trying to become the medium by which people tell their stories to the rest of the world. Those stories may or may not actually reflect the real lives of the story tellers. But I should at least give Facebook credit for understanding something important about communication:

Gresham’s Law and the Venezuela Gold Recovery

Posted: 31 Jan 2012 11:33 AM PST

Gresham's Law states that when a government (or governments) forcibly overvalues one money and undervalues another, the undervalued money will disappear, and the overvalued money will flood into circulation. The popular simplification of Gresham's Law is simply "bad money drives out good money." When a crappy currency impersonates a solid money (and they are equally valued), the solid money will usually disappear as people begin saving the solid money and spending the crappy currency.

Gresham's Law hasn't been violated since the dawn of money, and any time a government introduces a shaky currency to float alongside precious metals, the precious metals lie in wait (which is what happens when we invest in precious metals) until they revalue at a much higher price.

Just yesterday, the Venezuelan government finished a two-month-long process of repatriating (bringing back to their own country) 160 tons of gold that had been stored in offshore vaults in the United States and Europe. The Wall Street Journal had this to say:

Description: 
Venezuelan government reclaims 160 tons of gold stored in offshore vaults. This is the early sign of Gresham's Law happening in modern society.

read more

LISTEN: Interview with Harry Dent

Posted: 31 Jan 2012 10:51 AM PST

From GoldSeek Radio:
This week 1.31.12 Chris Waltzek interviews:
Harry Dent

About Gold Seek Radio:
The 2 hour Goldseek.com Radio show is the brainchild of Chris Waltzek & Peter Spina, President of Goldseek.com, the world's leading precious metals network. Goldseek.com Radio was a contender for the prestigious, 2009 Peabody Award for internet radio.

More interviews @ radio.goldseek.com

Mining Stocks Yet to Go Up Decisively

Posted: 31 Jan 2012 10:10 AM PST

Based on the January 27th, 2012 Premium Update. Visit our archives for more gold & silver analysis.

According to Goldman Sachs, gold provided the best returns of all commodities in the past five years when adjusted for volatility and says the rally will continue as options traders signal no change in the metal's relatively low risk.


The Bloomberg Riskless Return Ranking shows the Standard & Poor's GSCI Gold Total Return Index produced a 6.5 percent risk- adjusted return in the five years that ended last week, the highest among 24 commodities tracked by S&P, data compiled by Bloomberg show. Silver, the next-best performer, yielded a risk-adjusted gain of 3.1 percent, while a total-return index for all raw materials slipped 0.2 percent.


Goldman Sachs forecasts gold will reach a record this year. In a Jan. 13 report Goldman Sachs said that gold futures will advance to $1,940 an ounce in 12 months. Morgan Stanley forecasts the metal will climb to a record average $2,175 in 2013. David Einhorn's Greenlight Capital Inc. said in a Jan. 17 letter to investors that the fund continues to hold gold and gold-mining equities because of concern that global fiscal and monetary policies "tempt fate." George Soros increased his stake in SPDR Gold Trust (GLD), an exchange-traded fund tracking the metal, to 48,350 shares as of Sept. 30 from 42,800 and added options, according to Securities and Exchange Commission filings. Soros reinvested in gold shares after selling 99 percent of his holding in the first quarter of last year.


Nouriel Roubini, the economist who predicted the 2008 financial meltdown, said last week that the risks that spurred market volatility last year will keep swaying asset prices and the global economy. He listed as "persistent problems" rising commodity prices, saber rattling and uncertainty in the Middle East, the spreading European debt crisis, increased frequency of "extreme weather events" and U.S. fiscal issues.


In other news, we ran across unconfirmed reports that India may barter some of its gold holdings with Iran, in exchange for crude oil. The report, which appeared in an Israeli website, coincided with the visit of an Indian official delegation to Tehran to find ways to continue the bilateral trade despite the sanctions imposed on Iran. Use of gold as currency may help India get around the proposed freeze on Iranian central bank's assets and the oil embargo that the EU foreign ministers have agreed to impose on Monday. India depends on imports to meet around 80% of its oil requirements and Iranian crude accounts for a 12% share in India's total oil imports. Naturally, this is a step toward re-introducing gold as a major international currency, which is a very bullish factor for yellow metal's price.


To see if the short term picture is just as bullish for the precious metals sector, let's turn to the technical part with the analysis. This week we will focus on the mining stocks. We will start with the XAU Index and the very long-term chart (charts courtesy by http://stockcharts.com.)

In the very long-term XAU Index chart, a move above an important long-term support/resistance line is seen. The recent breakdown is therefore invalidated (just like it was the case with previous similar moves), and the recent strong move should be viewed as a bullish confirmation of this fact.

In the long-term HUI Index chart (proxy for gold stocks), a sharp rally has taken place following the recent fake-down (instead of breakdown) below the 500 level. This is very much in tune with last October's trading patterns which were followed by a sharp rally in which the index rose in excess of 20%. Such a rally appears possible once again.

The next few days could see a small move to the downside, but a reversal will most probably follow. The above chart has very bullish implications and suggests a major move up is in the cards.

In the short-term GDX chart, the miners have followed an interesting path. The recent decline took miners to the October 2011 level. If the correction is over, then expect a move to the upside similar to the previous one. Calculating the medium-term resistance line brings us to a likely target around $58.


The miners appear to be heading to the $58 level where the declining resistance line and the 50% Fibonacci level coincide. Once this short-term resistance line is reached, a pause in the rally is probable after which an additional period of rally seems likely.


Overall, the situation in miners is a mirror of what we wrote in our essay on January 27th, 2012 on the bullish outlook in the precious metals market:


(…) the breakout in euro above the short-term declining resistance line has been confirmed, which is bullish for euro and bearish for dollar. The situation for the general stock market is a bit unclear for the next few days, but the outlook remains bullish for the weeks and months ahead. Based on correlations, these factors do not disrupt our bullish view on the precious metals sector.


Summing up, the situation in mining stocks remains bullish. The miners' sharp increase has confirmed the similarity with the late October trading pattern, and the implications are bullish from here.


To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, we urge you to sign up for our free e-mail list. Gold & Silver Investors should definitely join us today and additionally get free, 7-day access to the Premium Sections on our website, including valuable tools and unique charts. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski
Editor
www.SunshineProfits.com

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