December - 2009 - Economic Brief

REVIEW:

"See no evil, hear no evil, speak no evil"

The Dow has now retraced 67% of its bear market decline.
Suddenly and miraculously, the same economists who told you this crisis could never happen are now telling you that this crisis is "over." And the same government officials who scoffed at the notion of giant financial failures are claiming they have the final solution to those failures.

But the derivatives I warned you about are not gone. They are still there. Nor are the bad debts on the books of major banks. And most important, the government policies which created the crisis in the first place have not been modified or reduced, in fact, they have actually made the crisis worse.

They have now transformed the Wall Street debt crisis into the Washington debt crisis. They have transformed a crisis that was bankrupting individual institutions into a crisis that could threaten to bankrupt sovereign governments. Worst of all, they have converted a crisis of debt into a crisis of currency.

This is not just more of the same trend that we have witnessed over the decades. It's a massive, revolutionary change affecting the entire structure of the U.S. economy.

The trend going into 2010 will be for interest rates to stay down and liquidity of the money supply up. So far, as of this month, 120 banks have failed this year. There is a 10.2% unemployment, that represents 27 million unemployed, worse than the Great Depression in terms of families affected. Additionally, the collapse of the US dollar relative to the Euro and Yen is close to all time historic lows now and it will breakdown further with continued monetization by the Fed. On top of all this, Americans are insecure, if they haven’t lost their job, they are worried they might. They don’t have access to credit, energy bills are rising and Consumer Prices in US Increased 0.3% in October.


DEBT:

$12,031,299,186,290.07. That's more than $12 TRILLION in case you have trouble grasping a number that big. In just the past decade, it's up more than 111 percent.

We're running ever-larger budget deficits, including $1.42 trillion in fiscal 2009 alone.

The interest cost alone on our debt last year was $202 billion. In plain English, we're going to be dedicating a larger and larger share of the U.S. budget just to pay interest on our debt. Forget about defense, health care, Social Security or anything else.

China owned $799 billion of our Treasury debt as of September. That's up from $618 billion a year earlier and $468 billion the year before that. About 61 percent of the Treasuries traded in the marketplace, as of mid-2008, were in foreign hands. And now, China has surpassed Japan as the largest foreign owner. That means they control the purse strings. They don't even have to dump their existing bond horde to send prices plunging and interest rates surging. They can just step back and buy fewer bonds at auction! They used to say, it’s our dollar, your problem, but now it’s their dollar and our problem, hmm.

Bottom line: We're in hock as a nation like never before. Neither the administration nor Congress has any plan to change that fact. And both the actual and hidden costs of our debt are rising every day. We should all be concerned, and anyone who tells you otherwise is, in my view, woefully misguided.



Now, don’t just look at that chart – think about it.

Warren Buffett:

We cannot keep running fiscal deficits like we are currently without having a lot of consequences over time... If you are running a $1.4 trillion deficit, even if you are exporting $400 billion of I.O.U.s in effect to the rest of the world, that leaves another trillion. And you know, the domestic savers are not going to come up with a trillion...

Actually, Warren Buffet is mistaken, the percentage of foreign ownership of the US Bond market is now up to 61%, or $ 854 billion, almost double what it was at the beginning of the century, 9 years ago.

These levels of deficit spending are not just off the map, they are off the planet. And you know as well as I, as dire as that level of spending is, it is very likely understated. That's because it fails to take into account a multitude of off-balance-sheet obligations.

And include projections that assume very low levels of inflation, which is to say no significant increase in interest rates – i.e., no significant increase in the cost to the government of carrying all its many debts.

Economists say U.S. GDP is miscalculated
The calculation of U.S. GDP is not correct, a group of economists said. Imports priced at their point of origin at a certain amount are being accounted for at U.S. prices when GDP is calculated. The problem appears to have swelled GDP reporting, the economists said. While last quarter's GDP was reported at an annual growth rate of 3.5%, the number was actually 3.3%, they said. The New York Times (08 Nov.)

Can a nation really buy itself a recovery by borrowing trillions upon trillions? No way. And that’s the real story. As I mentioned in my last post, debt as a percentage of GDP is close to 40%, that three times more as a percentage of GDP than during the last Great Depression.

Geithner fails to spur bank lending in U.S.
Commercial and industrial lending in the U.S. has dropped 17% since October 2008, according to the Federal Reserve. Efforts by Treasury Secretary Timothy Geithner to incite banks to lend more seem to have had little effect. Analysts see this as a significant threat to economic growth. The lack of bank lending is "a serious problem," said Jan Hatzius, chief U.S. economist at Goldman Sachs. "This could keep growth significantly weaker than the consensus view in 2010 and is likely to keep the Federal Reserve at a near-zero-percent funds rate all next year." Bloomberg (08 Nov.)


JOBS:

Consider the Obama administration’s claim that the 640,000 jobs were created from $159 billion of stimulus spending (a cost of almost $250,000 per job, most of which are temporary, and many last for just weeks). But where did that $159 billion come from?

It came from you and me… the taxpayers. What would we have used that $159 billion for had it not been taken from us?
If that $159 billion had been left in our hands, we would have spent and allocated it on things that are the highest priority for us, not likely the government’s list of highest priorities.

Obama: U.S. needs "bold, innovative action" to halt job losses
Meeting with business leaders and members of his Economic Recovery Advisory Board, U.S. President Barack Obama said the government and the private sector must work together to stop rising unemployment. He said "bold, innovative action" is needed. "Having brought the economy back from the brink, the question is how are we going to make sure that people are getting back to work and able to support their families," Obama said. "It's not going to happen overnight, but we will not rest until we are succeeding in generating the jobs this economy needs." Los Angeles Times (03 Nov.) , USA TODAY/The Oval blog (02 Nov.)

Business bankruptcies rise 7% in U.S.
Bankruptcy filings by U.S. businesses increased 7% in October, according to researcher Automated Access to Court Electronic Records. Last month, 7,771 businesses filed for bankruptcy, compared with 7,271 in September. The real estate and retail sectors suffered the most, said Jack Williams, a bankruptcy law professor at Georgia State University. Almost any financial challenge could cause a business to file for bankruptcy in these difficult times, Williams said. The Wall Street Journal (03 Nov.)

The jobs report was horrific, with the 'official' unemployment rate hitting a new high of 10.2%. The 'real' unemployment rate, when all the B.S. is taken out, shows 17.5%. Normally an unemployment report as negative as that would have marked a great correction to the Dow-Jones Industrial Average, but in these days of managed markets, no one should be surprised that the Dow finished in positive territory...
Yes, it’s true, U.S. employers cut 190,000 jobs in October.

If you want to see the growing unemployment situation with your own eyes in your area, visit Whitney Tilson at T2 Partners’ interactive graphic.

(http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html)

It is called “The Geography of Recession” although it should be called “The Geography of Depression” which reminds me of one of Ronald Reagan’s quips, “Recession is when your neighbor looses his job. Depression is when you lose yours.”


BONDS:

Higher than normal inflation ahead

The fact is, buying 10-year Treasuries now makes you only 1.46% after inflation. That’s before taxes. After taxes, your returns barely break above zero.

The U.S. Treasury Department said it plans to sell a record $81 billion in its quarterly auctions of long-term debt next week and replaced its inflation-protected 20-year bond with a reintroduced 30-year security." By choosing to replace its 30-year TIPS with fixed rate, 20-year notes the Treasury is telling everyone that even they believe the US will have higher than normal inflation.

Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion.

Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That's an amount equal to nearly 30% of our entire GDP. And we're the world's biggest economy. Where will the money come from?

Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we're still going to come up nearly $3 trillion short. That's an annual funding requirement equal to roughly 40% of GDP.

It is ironic, the bond market, which is sometimes considered competition for equities, is actually one of the important factor boosting the major indices. In this liquidity-driven rally, the low interest rates provided by central banks are providing cover for massive corporate capital-raising. A record $2.7 trillion of new corporate bonds have been issued this year with all this “new” money floating around is it any wonder why stocks are up: no one seems to pay any attention to the debt anymore.


BANKS:

U.S. bank lending posts biggest decline in 25 years
Banks in the U.S. cut back the amount of money loaned to customers by $210.4 billion in the third quarter, the Federal Deposit Insurance Corp. said. The 2.8% reduction marks the sharpest drop since at least 1984. The biggest banks, which received billions of dollars in taxpayer bailouts, accounted for a disproportionately large part of the drop. "We need to see banks making more loans to their business customers," said Sheila Bair, the FDIC's chairwoman. The Washington Post (25 Nov.)
Sure, lots of people realize the government is propping up the banks with their repeated bailouts. But most folks don't understand the real way the government is saving the banks. It's not the shares the feds bought (and paid too much for). It's the whole system of paper money.

The government is deliberately helping the banks by keeping short-term interest rates super low, so the banks' funding costs almost disappear. Then, by running a huge budget deficit and spending record amounts of money on domestic programs, the government insures inflation (and longer-term rates) will remain high and the banks make money on the spread between short-term rates and long-term rates. So, this is really how it is done, it is not so much the bailout directly, but through the environment of inflation coupled with government’s control of short-term lending rates, manipulated artificially to be lower to advantage the banks so they can pay back their loans among other things with cheaper money.

Again, the problem is the bailout is with your money, not theirs. According to a Wall Street Journal analysis of regulatory filings, more than 2,600 banks and thrifts have commercial real estate loan portfolios that exceed 300% of total risk-based capital, the capital used as a cushion to cover losses. Regulators consider the 300% level a red flag for the banks’ health.

Meanwhile, despite the government’s best efforts the total number of banks closed by regulators this year to 115, the latest round of 9 closing represented, together, 153 offices. The problem is that the FDIC is out of money. The FDIC says this bailout will cost $2.5 billion. I noted a week later over at the FDIC website that another five banks have been closed. If you want to see if yours is on the list, click here.

Audit: Taxpayer bailout possible after FHA reserves plunge
Cash reserves maintained by the U.S. Federal Housing Administration are substantially less than the level required by law, an independent audit found. In the worst-case scenario, the agency's reserves could be wiped out, forcing a taxpayer bailout to cover its obligations, according to the audit by Integrated Financial Engineering. CNBC (12 Nov.) , The Washington Post (13 Nov.) , The New York Times (12 Nov.)

Rather than forcing banks to accept losses the FDIC allows banks to carry underwater commercial loans at pre-crash values. A commercial real estate crash would be so untidy, it mustn’t be allowed. Therefore, with a wave of its magical wand, the FDIC is allowing banks to carry loans on their books at bubble valuations, even if the underlying properties have fallen by 40% or more. Call it extend and pretend, or fraudulent accounting… the net result is the same: zombie banks that won’t lend because they know that, in time, the piper must be paid. Banks can do their best to disguise their books, but there’s no hiding from the grim future for commercial real estate.

The Fed has expanded its cash and reserves to the banks, so they can buy Treasury Bills to pay for our national deficit crisis. Since 2008. the U.S. monetary base (coins, paper money, and central bank reserves) has swelled from about $800 billion to $1.7 trillion.

Banks increase purchases of U.S. Treasury bonds to bailout the government
Major banks, including Bank of America and Capital One Financial, increased U.S. Treasury bond purchases 26% to $125 billion in the 12 months through June, the Federal Reserve said. Combined purchases by government-owned companies rose 18% to $1.4 trillion in the year through mid-October. "Banks will continue to purchase Treasuries for the next several quarters, at least until the end of 2010, as they continue to be reasonably risk averse," said Ira Jersey, an interest rate strategist at RBC Capital Markets. Bloomberg (02 Nov.)


REAL ESTATE:



Behind us is the subprime crisis of 2007 and 2008. In front of us, an equally big is the option-ARM commercial real estate crisis, a two- to three-year slog that lies just around the next bend and could continue through 2012.

Right now, 1 in 4 US homes (23%) have lost all their equity, and we're sitting in the eye of this mortgage hurricane. When we hit the opposite wall early next year, the storm will become deadly all over again.

One out of every six FHA mortgages was late by at least one payment in the third quarter. Foreclosures have reached the highest level in three decades. Almost more concerning, prime fixed-rate mortgages – the good stuff – has seen delinquencies rise to 5.8% and foreclosures to 1.95%, another three-decade high.

However, housing prices continue to stabilize, but at a low level and prices are still going down generally. Mortgage applications for new home purchases hit a 12-year low in the middle of November (down 22% in the past month).
Mortgages in trouble reach 14% in U.S.

About 14% of U.S. homeowners were either delinquent on their mortgage or in some stage of foreclosure during the third quarter, the Mortgage Bankers Association said. That is the highest rate since the group started collecting the data in 1972. Borrowers usually considered creditworthy and people with loans insured by the Federal Housing Administration are becoming a bigger proportion of the 7.4 million households with mortgage problems, the association said. The Washington Post (20 Nov.) , Los Angeles Times (20 Nov.)

Dennis Lockhart, president of the Atlanta Fed, warned that non-performing commercial real estate loans will be affecting smaller banks. Consequently, these troubled banks will not be making loans to small businesses, thereby crimping the recovery.

U.S. foreclosure filings slip 3% from September to October.
October saw 332,292 U.S. homes seized by lenders or listed in default or auction documents, data provider RealtyTrac said. It was the eighth consecutive month that the number was more than 300,000, but there was a 3% decline from September. "The fundamental forces driving foreclosure activity in this housing downturn -- high-risk mortgages, negative equity and unemployment -- continue to loom over any nascent recovery," said James Saccacio, RealtyTrac's CEO. "We continued to see foreclosure activity levels that are substantially higher than a year ago in most states." Bloomberg (12 Nov.)

Mortgages in trouble reach 14% in U.S.
About 14% of U.S. homeowners were either delinquent on their mortgage or in some stage of foreclosure during the third quarter, the Mortgage Bankers Association said. That is the highest rate since the group started collecting the data in 1972. Borrowers usually considered creditworthy and people with loans insured by the Federal Housing Administration are becoming a bigger proportion of the 7.4 million households with mortgage problems, the association said. The Washington Post (20 Nov.) , Los Angeles Times (20 Nov.)

Housing starts hit 6-month low in U.S.
House construction plummeted 6.8% in October, falling to an annual rate of 476,000 units and marking the weakest month since May. Building permits, an indicator of future construction volume, dropped 4%. In the broader economy, the Consumer Price Index increased 0.3% last month, the U.S. Labor Department said. Vehicle prices were the biggest factor, jumping the most in more than 28 years. Analysts attributed the increase to the end of "Cash for Clunkers." Reuters (18 Nov.)


POLITICS and TAXES:

The administration knows that it can’t keep running a massive deficit without taking a big political hit come the mid-term elections next November, but likewise, they won’t cut the spending out of fear that it will result in a crisis economy ahead of those same elections.

Watching the government rack up debts that will be impossible to repay while narrowing the tax base (at least 50% of Americans pay zero federal income tax) at the same time is very scary. Not only has the government gone mad with spending and corruption, but it also expects about 10% of the population to pay for essentially all the costs. The math simply doesn't add up: 10% of the population can't (and won't) pay for all of the costs of a “democratic” federal government, a government running $2 trillion deficits, taking over health care, owning all the banks... and by extension the mortgages on 90% of all homes.

October's $176.4B deficit in U.S. tops forecast, sets record
The U.S. government's budget deficit set a record for October, with $176.4 billion marking the 13th consecutive month of monthly deficit. The 13-month run also was a record. October's deficit exceeded the $150 billion shortfall expected by economists. The Washington Post/The Associated Press (13 Nov.)


USX DOLLARS:

Pro-Western Turkey announced last week that it’s no longer using dollars for its commodity trading with Iran and China. From now on, it’ll be using national currencies. The amount of money affected by this move – $65 billion – isn’t chump change. But that, in itself, is not going to bring down the dollar. However, notice the trend.

IMF sells 200 tonnes of gold to RBI. Notwithstanding the Indian population's interest in gold, the economic authorities there have traditionally been rather disdainful of the metal. For many years it has been clear that Washington has been strongly opposed to Central Bank interest in gold, out of jealousy for the US$. That India feels able to defy American preferences in this way is an ominous sign for the dollar hegemony."

Consider India the vanguard of central banks more aggressively diversifying reserves away from U.S. assets.

India’s got game, and China seems the overwhelming favorite to get more chunks of the gold the IMF is offloading to shore up its finances, but a question no one can answer yet is whether India will touch off a bidding war among central banks. Not that India cares all that much at this point as it leapfrogs past Russia to become the ninth-biggest government holder of gold.

Now, consider a Bidding War:

Traders are now betting on who will announce the next big purchase. Will it be China looking to employ its $2.3 trillion of reserves? What about Japan, which has the second-biggest pile of currency? Or Gulf states working to end dollar hegemony? And let’s not forget about Brazil and South Korea.
Oh, this just in, following Sri Lanka, the Central Bank of Mauritius has bought 2 tones of gold from the IMF. It seems to be an Indian sphere of influence phenomenon and now:

Gulf council considers changing currency peg from U.S. dollar
Members of the Gulf Cooperation Council forming a currency for the region will reconsider their decision to peg the currency to the U.S. dollar, Kuwaiti Foreign Minister Mohammed Sabah Al-Salem Al-Sabah told the country's parliament. "It is not necessary for the GCC currency to be linked to a certain currency," he said. "It could be one currency or a basket of currencies." If the dollar stays low for a prolonged period, Kuwait's argument against the peg could find support among other Persian Gulf states, analysts said. Maktoob/Reuters (17 Nov.)

Yes, oil producing nations are demanding the US dollar be replaced.

Also, Indonesia announced that it’s considering its first sale of euro-denominated bonds next year, South Korea too.

Dallas Fed President, Richard Fisher, said that a goal of the Fed is to maintain the purchasing power of the US dollar. To quantify the success of this or lack thereof, one should look at the rate of increase in the CPI to measure how much a like basket of goods cost over different periods of time. Using Bloomberg data going back to 1920(as far back as it goes and the Federal Reserve was established in 1913), the purchasing power of the US$ has fallen 91% since 1920. Since 1971 when the US went off the gold standard, the US$ has lost 81% of its value. Greenspan took office in 1987 and the US$ has since lost 47% of its purchasing power. Bernanke followed Greenspan in Feb ‘06 and since then the US$ has lost 8.3% of its value. This report card of the Fed’s ability to achieve its key goal speaks for itself.



What is the Federal Reserve System?

I came across this amazing chart by JP Koning called “A Visual History of the Federal Reserve System” that I must share with you. The free digital PDF version of the chart is too big to post, but you can download it here. (http://financialgraphart.com/history_of_fed_free.pdf)

This may be why:
•Hong Kong has asked London to return its gold.
•Middle East countries, too, want to get their gold back from London.
•Germany wants the U.S. to return its gold.
•And large money managers are demanding physical gold bullion (as opposed to
paper contracts).

REGULATORY SUPERVISION:

14,700-plus taxpayers use IRS program to declare offshore accounts
More than 14,700 U.S. taxpayers took advantage of amnesty from the Internal Revenue Service to report offshore bank accounts, said IRS Commissioner Doug Shulman. In most years, about 100 people come forward. "To put it simply, this is a historic milestone for the nation's hardworking taxpayers," Shulman said. Los Angeles Times/The Associated Press (17 Nov.)

Report: Problems in municipal bonds cost taxpayers billions
Corruption by local governments and their consultants, kickbacks from banks, a lack of transparency, and mistakes related to municipal bond finance cost U.S. taxpayers as much as $6 billion a year, Bloomberg News concluded in an investigation. Transactions mentioned in a nine-count indictment against CDR Financial Products, its founder and two employees, including wire fraud, obstruction of federal authorities and conspiracy, are only part of the picture. Federal and state laws leave a large portion of the $2.8 trillion municipal bond market beyond the reach of regulation or supervision, Bloomberg found. Bloomberg (02 Nov.)

It is already understood that in 2011, all sorts of bad things are scheduled to occur for income earners. The federal tax rate will bump up from 35% to 39.6%, and long-term capital gains, now at 15%, will be boosted to as much as 28%. Therefore you might want to consider selling most of your investments that are now showing long-term capital gains.

Audit the Fed?

The bill to audit the Fed, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits. Mel Watt, a Democrat from North Carolina, has eliminated "just about everything" while preparing the legislation for formal consideration. Watt is chairman of the panel's domestic monetary policy and technology subcommittee. Watt's district includes Charlotte, N.C... headquarters of Bank of America. Well, golly gee! What a surprise!

The problem is you cannot support the world's reserve currency when you are the world's largest debtor, when you plan to finance annual deficits exceeding $2 trillion with progressive income taxes and money printing. Our economy is a charade. And when it falls apart, the consequences will be devastating.

The FDIC, Federal Reserve, and Office of Thrift Supervision just released new guidelines for how banks deal with troubled commercial real estate loans. And get this: "Under the guidelines, loans to creditworthy borrowers that have been restructured and are current, won't be classified as high risk by regulators solely because the collateral backing them has declined to an amount less than the loan balance." Yes, you read that correctly. Banks won’t have to show losses “solely” because the collateral has fallen in value below the loan.

FHA delays release of independent audit
The U.S. Federal Housing Administration delayed releasing an audit by Integrated Financial Engineering. The audit was scheduled for release Wednesday, but the FHA cited problems with the economic modeling used. There is concern about whether the FHA might need more funding because its loan volume has sharply increased and the number of defaults it must cover has skyrocketed. The Washington Post (05 Nov.)


GOLD:

The Simplest Reason Gold Will Soar

1)
When the bank pays you nothing in interest, gold goes up. And right now, the bank is paying you nothing in interest.

The forecast for inflation in 2010 is around 2%. Yet the Fed is keeping interest rates near zero. So instead of earning nothing in interest at the bank, you're actually LOSING 2% a year to inflation. That's what's REALLY happening – the REAL interest rate at the bank (minus inflation) is NEGATIVE 2%.

2)
Banks, funds, insurance companies, governments, and individuals all over the world hold $200 trillion worth of financial assets. Less than half-a-percent of that is in gold (5 trillion). For investors over the world to increase that to just 1.25%, then they would buy $2.5 trillion more gold from a total gold market value of 5 trillion. And this demand has already started.
Case in point: BlackRock steps up and goes on the record as stating that they see central banks being net buyers of gold, as they diversify out of the dollar.
Here’s a quote:

“Central banks will be net buyers of gold this year as they diversify away from the U.S. dollar, marking a reversal of a decades-old trend.”

Another source says that BlackRock is doing more than just talking gold, but has a total of $4.655 billion invested in gold shares.

Do the math. Comparing the size of the gold shares market to the size of their portfolio, the 0.3% of their assets said to be invested in gold shares comes to something like 1 to 2% of the gold share market so investors are on their way towards increasing their percentage of wealth in gold assets.

John Paulson, the most successful money manager of 2008, has made a $4.3 billion bet on gold and gold stocks too this year.

Now consider this, Sovereign Wealth Funds which amount to government pension plans represent 3 trillion dollars in US currencies and they are moving to a position in gold as they hedge against inflation and diversify away from US dollar risk... Do the math, see the demand.

If Sovereign Wealth Funds diversify 1% into gold, then that represents another 30 billion in demand for gold in a gold market with a 5 trillion dollar value, representing all the gold mined in this world.

3)
What's the only investment that's gone up for the past eight years?

The answer is gold.

Gold is only approaching the halfway mark to $2,300 an ounce, which would be its 1980high when adjusted for inflation.

While the dollar is likely to bounce at some point, making gold correct, the long-term fate of the dollar has already dried in cement. If the dollar were simply to return to its March 2008 low of 71.30 next year - a 5% drop from current levels - this would imply a rise in gold of 23.5% and a price of about $1,437 an ounce.

The long-term scenario is more dramatic. If you believe the dollar will lose half its value from current levels, this would imply a gold price around $2,735.

Gold price hits record high after IMF sells to India
The price of gold surged to a record high of $1,087 per ounce Tuesday after the International Monetary Fund sold 200 tonnes to India's central bank. The $6.7 billion sold is about half of the gold the IMF wants to sell to increase its finances. The IMF is satisfied with proceeds of the sale, the fund said, and price changes on the market had to be expected. Business Standard (India) (04 Nov.)

4)
In terms of gold options, a central bank and investment bank equilibrium, higher volume was seen in early July... and, of course, open interest is well under the peak, [which is] just short of 600,000 [contracts] seen in January 2008. So, in this sense, gold is not yet blowing off steam.

5)
This gold revival has a clear geographic profile, too. Expect Asian central banks that took the whole “trust-the- Federal-Reserve-to-protect-the-dollar” hype too literally will be especially avid buyers.

You see, the gold price is not only making headway in US dollar terms, but also in most major (and minor) currencies as illustrated by the table and graph below.



Appeal of gold broadens as U.S. dollar weakens
The appeal of investing in gold is growing as the U.S. dollar weakens, analysts said. Investors bid up the price Friday to a record level, more than $1,100 per ounce, as investors fear economic conditions will worsen. "It's a structural shift we're seeing on the investing side, from Asian central banks right down to individual investors buying ingots and coins," said Suki Cooper, a strategist for precious metals at Barclays Capital. The New York Times (07 Nov.)

Gold closes in on $1,200 as falling dollar fuels rally
Investors looking for a safe refuge from the falling dollar are driving demand for gold, pushing it to a third record high this week. The rally accelerated on news that Sri Lanka had joined India, Mauritius and Russia in making major gold purchases. The International Monetary Fund said it sold Sri Lanka 10 metric tons for $375 million. "It's a fever," said Jonathan Barratt, an analyst at Commodity Broking Services. "The dollar index has broken through a massive support. That's only going to add weight to the gold and commodity rally." Bloomberg (26 Nov.)

6)
The entire rally in the DJIA from 2003 to the peak in 2008 was actually a continuous decline when priced in gold... Even the super-rally in stocks over the last six months is nothing more than a very weak bounce off the bottom. From a peak of nearly 42 ounces of gold to buy a share of the DJIA earlier this decade, we made it down to a low of almost seven ounces in March 2009. That is a decline in the "value" of the DJIA of 83%.

In real terms, a few years ago (summer of 2005), you would have needed 550 ounces of gold to buy an average house. Today, you need more like 150. Dow Is Down 83% in Terms of Gold.



But there's a much better and more accurate way to view the markets.

The S&P 500, but measured in gold, rather than U.S. dollars. What this shows is the value of stocks compared to gold. Gold is a much better standard of value than the U.S. dollar because it can't be printed or manipulated as easily as the U.S. dollar.

What the S&P relative to gold makes clear is how cheap stocks have really become – something you can't see on off regular S&P 500 charts because of the effects of inflation.


QUOTES OF THE MONTH:

“The dramatic increase in JPMorgan’s short position in the October Bank Participation Report dispels any notion that they are not controlling the price of silver. Without that short selling, the price would have been much higher. The US is a nation governed by the rule of law. It is perhaps our greatest quality. That means no one is above the law; not JPMorgan, not the COMEX, not the US Government itself. Whoever is responsible for the maintenance of this concentrated short position is undermining the best interests of our country.” - Ted Butler


“Furthermore, we have directly addressed exactly none of the actual causes of the crisis – our bloated and omnipotent banking sector, the ever experimenting Federal Reserve and regulation.” – From the Pragmatic Capitalist

Apparently, Warren Buffet was asked the secret to a successful life. He answered:

• Find work you love to do
• Share your life with the right person

“Nearly every article of the Communist Manifesto has been adopted by the government of the United States...” – Porter Stansberry

“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship. The average age of the world’s greatest civilizations from the beginning of history, has been about 200 years.” - In 1787, Alexander Tyler, a Scottish history professor at the University of Edinburgh, wrote the above about the fall of the Athenian Republic.

"your dollar will be worth just as much tomorrow as today"... - President Nixon promises the dollar won't be devalued, you can see the video here.
(http://www.youtube.com/watch?v=iRzr1QU6K1o)

"It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world". – Thomas Jefferson



Note to readers:
One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, my colleagues, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. I has been said, "When you take stuff from one writer it's plagiarism; but when you take it from many writers, it's research." In reference to my sources this month, they include in no particular order:

Chris Wood, Bud Conrad, Andrew Gordon, Ed Steer, Rusty McDougal, Ed Steer, Doug Casey, Martin Weiss, William Pesek, Brian Hunt, Ted Butler, Steve Sjuggerud, David Galland, Porter Stansberry, Bloomberg, New York Times, Business Standard (India), Washington Post, Los Angeles Times, Associated Press, Maktoob, Reuters, CNBC, Wall Street Journal, USA Today, and the Oval Blog.

November - 2009 Economic Brief

Perspectives:
The Bureau of Economic Analysis (BEA) released the advance GDP numbers for 3Q09, and they showed the economy grew at an estimated annual rate of 3.5%.

• Cash for Clunkers program added 1.66 percentage points to the Q3 change in real GDP.

• The change in non-farm inventories added 0.91 percentage points to the third-quarter change in real GDP and reflects inventory replenishing after the last three consecutive quarters saw very low restocking of inventory.

Just for fun, let’s see what the number would have been without these extraordinary events. Reducing the 3.5% advance GDP number by the approximately 1.47% artificial boost from the Clunkers scheme (1.66% - 0.19%), and 0.66% for inventory build-up (third-quarter trend is roughly 0.25%), gives us a rounded figure of 1.4%.

But wait, there’s more... the average revision from the advance GDP (what was just reported) to the final (what will be reported in two months) is ±1.3%. So the “un-juiced” number we just calculated is almost within the margin for error.

Now for the really bad news in the GDP: Real disposable personal income decreased 3.4%.

One guess not subject to error is that 4Q09 GDP, unless Washington rolls out some other spending-inducing programs, is almost certain to be far lower.

Why gold?

Since 2003, the U.S. dollar has lost a whopping 25 % of its value relative to a basket of major world currencies — but gold has more than TRIPLED, so today's 10,000 Dow is, in actual fact, worth 7,500.

"Plus ça change, plus c'est la même chose."

Nobody really knows how much gold there is, but the most reasonable estimates are something like six to eight billion ounces. Out of this, the U.S. government reports that it has 265 million ounces of gold in its treasury.

If we divide the money supply by the number of ounces the U.S. could back its paper with (and nobody, including the Federal Reserve, actually knows how much money they have floating around out there... more on the audit later, think Ron Paul).

Let’s estimate that M0 in the U.S., the narrowest measure of money supply that consists of just notes and coins, amounts to one trillion. So, 265 million into seven trillion gives you about $26,420 dollars per ounce of gold.

Now, if we add in the total obligations of the U.S. government, which it will either need to print more money to meet, or it will have to default on – that’s about 100 trillion. If those dollars are printed, that would give us $377,430 per ounce. The same ratio for M1 would give you about $6,226 per ounce and M2 would give you $31,320per ounce.

All of these numbers are far, far above the current level of roughly $1,000 per ounce.

The mainstream headlines will tell you that stocks – as measured by the S&P 500 – are up 18% this year. But gold is up 23% in the same time. So in terms of real wealth, stocks have actually decreased this year.

Dollars are flooding the market, but they're worth less and less.


Why do the media conceal and manipulate the facts?

The mainstream media shows a clear bias to report good news about the economy. And when there is no good news to report? They find a glimmer of improvement and put it in the headline… even when the rest of the article shows nothing but deterioration.

So what is their motivation?

The media is motivated to appease their advertisers, most of which depend on you continuing to spend money and keeping your investments in the market. And don’t forget, the media are also tools of their owners. That’s why you didn’t hear CNBC criticize General Electric (their parent company) for having to go hat in hand to the government for a $140 billion bailout. Finally, it can’t be ignored that the media is giving the new administration a pass, trying to make it appear that the stimulus and bailouts are working.

Over the last 10 years, while the dollar has lost 36 percent of its value, have you seen or heard Washington do anything to prevent the dollar's decline? From the Roman times to the modern day, inflating away debt problems by devaluing currencies has been part and parcel of every government on the planet. The U.S. — whether led by a Democrat or a Republican — is no different.

Washington's top priority is clearly to let the U.S. dollar fall in value, even if it ultimately means it will be replaced by a new world reserve currency. Their hidden rationale: It will inflate away the mountains of debts in this country by artificially raising asset prices.



In the first half of this year, the Treasury has stepped up its pace of borrowing to annual rates of $1.4 trillion in the first quarter and $1.9 trillion in the second quarter. That's 3.5 times and six times more than last year's pace, respectively.

Remember, the dollar is an abstraction representing a debt owed by a bankrupt government. As such, it has an intrinsic value of zero. Once it becomes obvious that the emperor has no clothes, we could see a serious loss of confidence that feeds back on itself.

There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. His conclusion: The tipping point occurs when a government's deficit exceeds 40% of its expenditures.

Guess what? The U.S. will hit the 40% mark in 2009.

What to do?

Right now, $1,000 invested in a 3-month Treasury bill yields a meager $1.20 in yearly interest. At that rate, just to match the 5 percent interest you could have earned on T-bills in early 2007, you'd have to leave your money sitting there for 42 years! What’s your tipping point? if your entering retirement like the boomers, you had better keep working.

U.S. savers are obviously getting shafted.

All told, that means that each and every household in America is now indirectly responsible for more than 1 MILLION DOLLARS in government debts and obligations. And that assumes no new government spending, no new social programs, no new wars, no new economic disasters or bailouts. Worse, it assumes no new deficits in the meantime!

Put another way, even if the government could somehow pay off that debt at the rate of $100 million PER DAY, it would take 3,446 years before the total government debts and obligations are paid off.

Think Debt:

Good news:
If government spends more – even if inefficiently – output goes up. In the last 60 years, the share of government output in GDP has increased from 21.4 percent to 38.6 percent in the US.

Dollar's slide lifts U.S. trade balance
The dollar's decline against other major currencies brought some good news with it in August. The U.S. trade deficit narrowed from $31.9 billion to $30.7 billion as imports declined and exports grew, the Commerce Department said. Los Angeles Times/The Washington Post (10 Oct.)

Bad news:

OK, Let’s talk about the debt problem again:

If you consider all of the structural problems in the U.S. economy, there has not been a lot of progress toward getting things back on track. The root causes of what created the near debilitating financial and economic crisis still remain:

Banks are still saddled with toxic assets,

Bank failures stack up: Now 106 for 2009



- Housing prices are still 30 percent lower,

- Foreclosures are still hitting new record levels,(foreclosures rose 44% this past month alone).

- Credit is still tight and demand for credit is still contracting sharply,

And now...

The budget deficit has ballooned, $1.58 trillion in 2009

And debt levels around the world have climbed.

The United States government is saddled with ...
• An officially recognized national debt of $11.8 trillion,
• Unfunded national obligations of $104 trillion!
• Another $9 trillion in cumulative deficits over the next ten years.
• Plus another trillion dollars for health care reform, no matter what bill finally makes it through Congress.

Grand total: $125.8 TRILLION of public debts!

To understand what's driving their approach to policymaking you have to see that their underlying principle is this: They are more afraid of a relapse in the economy than any big outbreak in inflation.

The Fed won't raise rates until unemployment starts dropping notably. St. Louis Fed President James Bullard went so far as to say that a falling unemployment rate was a "prerequisite" to boosting interest rates. His reasoning, huge excess capacity and additional job losses mean demand falls on its own. If you increase interest rates too to protect the dollar you risk more job loses and unhappy voters. And thus, we continue in the vicious cycle.

The problem with unemployment as an indicator is that unemployment is a lagging indicator. And inflation will get its toe hold before any shift in unemployment numbers, meanwhile consumers are hunkering down on their spending and saving rates, cost of living is going up, and banks are not making any new loans to business or consumers.

Overall unemployment rose to 9.8%, with the unemployment rate for men hitting a new post-depression high. The economy shed another 260,000 jobs in September and the previous figure for jobs lost in the recession was revised up by more than 800,000.

The banks aren’t buying into the phony recovery. Lending has fallen for five straight months

Out of 100 corporate bonds issued this year so far, 97 are stashing it away. Companies aren’t doing spending either, save for non-farm inventory relennishment after going "dry" for the previous two quarters.

In fact, Earnings season is now upon us and we expect it to be positive. Companies have had 3-4 quarters to make emergency adjustments to their business models, reduce capital expenditures, refinance debt at lower rates, cull workers, roll back compensation, pressure suppliers, improve productivity, jettison marginal operations and refocus on higher margin opportunities, like the suck-back before a tsunami wave.

We suspect those are some of the main reasons companies are "beating the Street" at this time; it is not due to improving end user demand.

Capacity now sits at 63%... and falling to cheep labor over seas.

So, be prepared to endure many more years of high unemployment, under-employment and declining real wages. Upwards of two million people are likely to lose their homes in 2010 and 2011. But the good news is that the economy is recovering and the banks are alright.






Domestic Economic bailiwick:

Up until the day, the investment bank, Lehman Brothers, collapsed in September of last year, it took the Fed a total 5,012 days — 13 years and 8 months — to double the cash currency and reserves in the coffers of U.S. banks.

In contrast, after the Lehman Brothers collapse, it took Bernanke's Fed only 112 days to double the size of U.S. bank reserves. He accelerated the pace of bank reserve expansion by a factor of 45 to 1. Now, just nine months later, the Fed has bought up a cumulative total of $924.9 billion in mortgage-backed securities (MBS). Simply put, the Fed has been buying up virtually all the junk and nonjunk mortgages it can lay its hands on.

Meanwhile, the private sector is getting killed...

Last year, banks provided new credit at the annual pace of $472.4 billion in the first quarter and $86.7 billion in the second. This year, they're not providing ANY new credit — they're actually LIQUIDATING loans at the rate of $857.2 billion in the first quarter and $931.3 billion in the second.

Ditto for banks and mortgages. Last year, mortgages were being created at the annual clip of $522.5 billion and $124 billion in the first and second quarters, respectively. This year, on a net basis, mortgages haven't been created at all. Quite the contrary, the Fed reports that, on a net basis, they've been liquidated at an annual pace of $39.3 billion in the first quarter and $239.5 billion in the second.

Getting cash out of credit cards and other consumer credit is even tougher. Last year, folks were able to add to their consumer credit at annual rates of $115 billion and $105 billion in the first two quarters. This year, in contrast, they've been forced to CUT back on their credit at annual rates of $95.3 billion in the first quarter ... and at an even faster pace in the second quarter — $166.8 billion.

Add to this the fact that Geithner has borrowed a mind-boggling $1.41 TRILLION to fund Washington’s debt addiction — nearly THREE TIMES MORE than the Treasury had borrowed at this time last year.

And still, this is only the beginning: The Congressional Budget Office (CBO) has warned that Obama’s budget will add nearly $10 trillion in new government debt over the next ten years.

Meanwhile, default notices, scheduled auctions and bank repossessions - were reported on 937,840 properties in the third quarter, a 5% increase from the previous quarter and an increase of nearly 23% from Q3 2008. “They were the worst three months of all time,” said RealtyTrac spokesman Rick Sharga.

U.S. residential foreclosures hit record high in Q3
During the third quarter, home foreclosures in the U.S. reached a record high. "They were the worst three months of all time," RealtyTrac spokesman Rick Sharga said. The firm said 937,840 homeowners received some form of foreclosure notice. The number is 23% higher than that of last year's third quarter, RealtyTrac said. CNNMoney.com (15 Oct.)

Commercial real estate is weakest sector in Fed's Beige Book
Weak or deteriorating commercial real estate markets were reported by all of the Federal Reserve's 12 district banks, according to the central bank's latest Beige Book. The Fed's regular anecdotal report found that the overall economy is still plagued by weakness in banking and increasing unemployment. Among the few bright spots in the report were observations of "stabilization or modest improvements" in manufacturing and housing. Bloomberg (21 Oct.) , Google/The Associated Press (21 Oct.)

The biggest single high-stakes derivatives gambler on Wall Street is Goldman Sachs: For every dollar it has in capital, Goldman Sachs is risking a whopping $9.21 on possible defaults by its trading partners, or more than TRIPLE the risk being assumed by the larger high-rolling champion JPMorgan Chase who, btw, currently controls 40% of the silver “market”.

So it should come as no surprise that, with the U.S. Federal Reserve virtually guaranteeing a Garden-of-Eden financial environment for banks, and Goldman has hit the jackpot this year on tax payer’s money: The bank has accumulated a bonus pool of an estimated $16 billion to dish out to an exclusive group of its heavy hitters.

Meanwhile, all across the USA, with small and medium-sized businesses unable to get credit or hire...


Food for thought:

1.
Europe is terrified of Russia, and the reason is: Liquefied Natural Gas.
Spain is especially dependent on natural gas, piped in from across the Urals.
Russia is threatening supply cuts this month. If that happens, the Spanish economy could be brought to its knees in approximately 45 days, bringing the rest of Europe with it in about 60.

2.
Water’s running out much faster than oil.
Blame mass migration. Migrants are flooding from farms to condos faster than they can be built in China. Add in over 70 million new people every year—a truly mind-boggling number.

3.
Closer to home, Canada's banks are estimated to be among the healthiest in the world, having avoided the subprime bubble. Canadian banks are hiring Wall Street investment bankers in droves. Canada is a resource-rich country and we expect a secular geopolitical shift of power in the direction of those nations.

4.
The cost of medical care in the U.S. is exceptionally high, at 16.5 % of GDP, dwarfing the 10.5% spent on housing and the 9.6% spent on food.


Quotes of the month:

1.

“A power has risen up in the government greater than the people themselves, consisting of many and various and powerful interests, combined into one mass, and held together by the cohesive power of the vast surplus in the banks.” — John C. Calhoun, Speech from 1836

2.

“Gold stocks are really a way to short government – or go long on government stupidity.” - Doug Casey

3.

This is a story about a 4-page letter written jointly by Congressman Alan Grayson and Congressman Ron Paul. It's addressed to Chris Dodd, Chairman of the U.S. Senate Committee on Banking. In it, they request that "the confirmation of Ben Bernanke be postponed until the Federal Reserve released documentation that will allow the public and the Senate to have a full understanding of the commitments that the Federal Reserve has made on our behalf." The headline of the story reads "Alan Grayson and Ron Paul Ask Whether Bernanke is "Fit to Serve"... and the link is here.

4.

"By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose." - John Maynard Keynes from 1920

5.

"...but what’s even more shocking is the fact that the interest of our [U.S.] debt will more than likely exceed US $450 billion for the fiscal year 2009 and that is significantly more than the estimated US $300 billion in tax revenues flowing into the government coffers. That means that the US cannot even service its debt without turning to the printing press." - Enrico Orlandini

6.

"More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other; to total extinction. Let us pray we have the wisdom to choose correctly." - Woody Allen

7.

“On Wall Street there have always been only two basic ways to make money… the second, and seemingly preferred method, exploit those who know less than you -- and take their money.” - Dylan Ratigan, anchor on MSNBC

8.

"My instinct was to want to short the dollar, but then I looked at other major currencies -- euro, yen and British pound -- and they might be worse." Picking these currencies is like choosing my favorite dental procedure," he said. "And I decided holding gold is better than holding cash, especially now that both offer no yield." - Larry Summers, White House economic adviser

9.

“Upon reflection, it’s quite obvious how tenuous it is to back up one’s currency with a pile of paper issued by another country, but this is exactly how the world of international currency has worked for decades. And it has worked quite well…until now.” – Eric Sprott

10.

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” - Ernest Hemingway


Note to readers:
One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, my colleagues, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. I has been said, "When you take stuff from one writer it's plagiarism; but when you take it from many writers, it's research." In reference to my sources this month, they include in no particular order:

Martin Weiss/Money & Markets, Richard Young/Investorplace, David Galland, Larry Edelson, Doug Casey, David Galland, Ed Steer, Brian Hunt, Bud Conrad, Bob Irish, Chris Wood: Bloomberg; Google; CNNMoney; Associated Press; Los Angeles Times, Washington Post, Federal Reserve Bank of St. Louis.

October - 2009 - Economic Brief

So why the rally?

It goes something like this, the S&P 500 posted a new closing high for the year this past month, Dollar Index down to fresh 11-month lows, crude oil gained 3% to settle at $70.93/bbl, while gold closed at $1006 per ounce.

Good News:
Retail sales spurted 2.7% in August vs July, the largest monthly pop in more than three years, thanks to the cash for clunkers program, higher fuel prices and deep discounting.

Bad News:
Retail sales are down 5% year over year, and the Commerce Department said that wholesale inventories fell for the 11th month running in July to the lowest level in nearly 3 years.

Yet,
Fed Chairman Ben Bernanke. said that the U.S. recession has “very likely” ended...

To which I ask, “Are you kidding me?” As evidence, I offer a few of Bernanke’s spectacularly poor miss-pronouncements.

You can watch it by following the link just here to see for yourself. http://www.youtube.com/watch?v=HQ79Pt2GNJo&feature=player_embedded

In fact:

Sales for companies listed in the S&P 500 fell 16% in the second quarter, compared to last year. That follows a decline of 14% in the first quarter. Of course, most analysts haven’t focused on that. All they seem to care about is that profit margins are improving.


“Beating Expectations”

If you expected your kid to get an “F” in math class and he came home with a “D”, would you celebrate? Of course not. It’s only slightly better than outright failure.

But over and over again, the media and the investment world celebrate when companies “beat expectations”, even when those companies post a substantial loss. This is what I call “the fog” of the markets.

Hello...

We are in the late stage of the bear market rally.

It’s expensive out there. Right now the dividend yield is a paltry 2.8 percent for the Dow Jones Industrial Average, 2.5 percent for the S&P 500 and a miniscule 0.4 percent for the Nasdaq 100.

So according to this time-proven indicator, the stock market has to be rated expensive because historically, the stock market was a bargain when the dividend yield was 6 percent or higher calculated by just dividing the annual dividend payment by the share price.

Another indicator, price-to-earnings ratio on earnings calculated using Generally Accepted Accounting Principles (GAAP).

Regular readers know that GAAP is under assault by the government who has forced them to change their rules to help out the banks and their “troubled assets” late last year. Anyway, flawed as GAAP is, it is what we have and by that standard the normal historical range for the GAAP P/E is less than 10 (undervalued) to 20 (overvalued). The current figure is 137 ... a record high! So according to this indicator, stocks are extremely overvalued. Did you know that the Price to Actual Earnings is actually higher now than at the top of the market in 2007?

Bottom line:
Based on the two classic valuation methods, this market definitely does not look cheap.

So why the rally?

Did you know that the amount of leverage in the banking system is even greater today than at its peak in 2007?

But at what cost?



Many foreign governments and central bankers are now demanding that the greenback be abandoned as the world’s reserve currency.

• China is already lobbying — aggressively — for a new global reserve currency and leading the campaign to establish an Asian currency reserve fund.

o For example, it announced last month that it will sell $880 million worth of renminbi-denominated bonds in Hong Kong. That marks the first time Beijing will offer renminbi bonds to foreign investors.
o Additionally, China recently established a $95 billion currency swap with other Southeast Asian countries, and a $10 billion currency swap with Argentina. It is the first major Yuan swap agreement with a Latin American country — and directly threatens the dollar south of the border. Its goal: To aggressively take its Yuan to the next sphere of influence in the currency markets, forcing a worldwide monetary change...
o In June, China became a net SELLER of U.S. Treasury notes and bonds!

• Over the past few weeks, the U.N., France, India, Russia, Brazil and several other nations — as well as economic thinkers such as George Soros and Nobel Prize winning economist Joseph Stiglitz — have joined China in demands to replace the dollar as the world’s reserve currency.

• The G-7’s recent funding of the IMF with $1 trillion of “fiat” money... new regulatory powers ... and broader use of the IMF’s Special Depository Receipts, or SDRs confirms that the stage is being set for a new global monetary order.

• Even South America’s Bank of the South is preparing to open its doors soon with seed capital from Argentina, Brazil, Venezuela, Bolivia, Ecuador, Paraguay and Uruguay. Its objective: Independence from the U.S. dollar!

On a related note, I noted with interest that Tim Geithner, the Goldman Sachs Secretary of the Treasury, has gone on record as saying that the government will withdraw its $3 trillion backstop guarantee from the money market fund industry, thus the expiration of the government’s guarantees for money market funds. Is your money in a Money Market?

Why would the government do this?

By simply looking at that of one of the world’s largest money market funds, one can see that 38% of the portfolio is made up of CDs issued by foreign banks, 9.9% in short-term corporate paper, and 12.3% in medium-term paper, much of it hitched to the fates of portfolios of car loans, insurance companies, and a variety of corporate entities.

SO?

The value of your dollars — have plunged more than 14% in the last 6 months.

(In the mean time, the Swiss franc has climbed 13 percent, the Canadian dollar has risen 18 percent, the Brazilian real has jumped 32 percent, the Australian dollar has soared 35 percent and the New Zealand dollar has vaulted 41 percent.)

This is the greatest economic convulsion in FIVE CENTURIES and its taking place right before your very eyes.

The domino effect of the financial crisis and economic downturn around the globe clearly shows how interconnected and interdependent economies have become under globalization.

Even the United Nations...

U.N. agency calls for reducing dollar's role as reserve currency
The world could reduce the risk of economic crises and prevent attacks on currencies by speculators if it reduces the role of the U.S. dollar as a reserve currency, a U.N. agency said in a report. The report calls for introducing a supranational currency, special drawing rights administered by the International Monetary Fund. "If we established an exchange rate system that would guarantee more stable exchange rates, the need for foreign exchange reserves would be much reduced," said Detlef Kott, a U.N. economist. "Therefore, in our report, we focus very much on the reform of the international system to determine the exchange rates." Russia Today (08 Sep.)

Meanwhile, the Chinese government is encouraging its citizens to buy gold and silver. If 1.3 billion Chinese citizens start buying gold and silver, even in tiny quantities, imagine what that will do to the market!

Why might the Chinese be pushing gold? While it’s only conjecture, and wild conjecture at that, China has a lot of gold – in the ground (it is now the world’s largest gold producer) and in its reserves (with the clear intention to increase its holdings, most likely from local production). Could they now be looking to actively encourage higher prices? This would decrease the relative importance of their U.S. dollars in their reserves and increase the overall quality of their reserves by a greater focus on a tangible asset. Who can say what motivates the cadre that calls the shots in China? But one thing is clear, precious metals are on their minds and that’s not the only metal, have you heard of Lithium Batteries, well, Lithium comes from Tibet... but I digress.

So what's next?

Will China dump the rest of its estimated $876 billion hoard of U.S. Treasuries, roughly 22% of our US government debt? NO, but China is a game changer and they know it.

China and The US: A Good Old-Fashion Trade War

China voiced unusually strong objections to tariffs put on its tire exports to the US. The American government believes that the Chinese are targeting the industry which is costing US jobs. Labor unions will like the decision, as will a number of members of Congress who think China does not work on a level playing field when it comes to trade.

China has a large advantage over the US on the trade issue. Large American companies like Wal-Mart (WMT) source so many good from China that the supply chain could not be replaced by getting manufactured goods elsewhere. China does not rely as much on American imports as the balance of trade shows every month.

The temptation to take actions against China for instances where it ships goods to America at what appear to be below market prices will increase as unemployment moves to 10% and beyond. But, it is a sucker’s game for the US. China has the factories and America has the consumers. All locking out China’s products does is drive up consumer prices and drive down consumer spending which is still the engine of US GDP.

One thing seems clear: One of Washington's most dependable sources of loans to finance our own out-of-control deficits is drying up. That means demand for longer-term Treasuries is softening.

That also means you can pretty much count on much higher interest rates in 2010 and beyond — and you can count on those higher rates to crush any chances of a vigorous recovery or rapidly rising stock prices going forward. Did I mention higher taxes too?

China's 500 biggest firms outperform U.S. counterparts
For the first time, profit generated by China's 500 largest firms outstripped earnings of the 500 biggest companies in the U.S., according to a report from the China Enterprise Confederation and the China Enterprise Directors Association. Last year, the Chinese companies produced $170.6 billion, compared with $98.9 billion in the U.S. "Chinese enterprises enjoy relatively better policies and domestic market environment," said Wang Jiming, vice president of the China Enterprise Confederation. "But Chinese companies still lag behind the world's leading enterprises in resource allocation, innovation, international presence, business models and corporate culture." China Daily (Beijing)/Xinhua News Agency (07 Sep.)

Switzerland replaces U.S. as most competitive economy
Switzerland has become the world's most competitive economy, with the U.S. slipping to second place for the first time, according to a report by the World Economic Forum. Economies that earn a large percentage of GDP from financial services, such as the U.K. and the U.S., were hurt in the crisis, according to the report. The BRIC countries -- Brazil, Russia, India and China -- all moved higher in the ranking, while trust for banks in both Switzerland and the U.S. fell to record lows. Reuters (08 Sep.)

The World Economic Forum released a report this month that rated the U.S. 108th for financial trustworthiness, 106th for access to financing and 93rd for economic stability. Ouch!

On the home front:

A mortgage trade group reported Thursday that more than 13% of the nation's mortgage holders were delinquent on their mortgages or in the process of having their homes repossessed during the second quarter of this year. That's the highest figure since tracking began in 1972. California's rate, 15.2%, was among the highest of all states

And it’s not just residential.

The default rate for commercial mortgages jumped from 1.62% to 2.25% in the first quarter and should hit 4.1% by the end of the year, says Sam Chandan, president of Real Estate Econometrics.

Unwilling to seize devalued properties in a moribund market, lenders have foreclosed on fewer than 10% of the loans, says Real Capital Analytics. That's prolonging the crisis by keeping properties from being resold at lower prices, says New York real estate lawyer Edward Mermelstein.

A bigger problem: the nearly $1 trillion in short-term commercial mortgages slated to mature by the end of 2010. With property owners unable to refinance, even solid loans could go into default.

Seven Foods for Thought:
1.
Cross-state purchase of health insurance. Interesting that the one power the Constitution grants Congress, that is, to prevent states from interfering with cross-state business contracts, is the one they refuse to use. One of the reasons that health insurance costs so much is because of mandated state coverages. (Drug treatment, alcohol treatment, acupuncturists, hair pieces, etc., and so forth.)

If a senior citizen wanted to opt out of Medicare and get private insurance, the rules now state that failure to accept Medicare means you cannot collect Social Security payments. Thus, the vast majority cannot opt out of the government plan even though a recent Harvard study concluded that the US health care crisis is costing more than 44,000 lives each year and the New England Medical Journal claims that medical treatment comes in behind cancer and heart disease as the number three reason for death in the US.


2.
Senator Timothy Wirth will be prosecuted for deliberately manipulating Congress during the sessions that ultimately led to the passage of punitive and scientifically unsound global warming legislation. You can read more and watch the senator smugly confess here. http://wattsupwiththat.com/2009/08/15/getting-steamed-about-global-warming-not-coming-to-a-theatre-near-you/

3.
Federal District Judge Jed S. Rakoff was supposed to a approve a $33 million settlement between the SEC and Bank of America over the issue of the financial firm making inaccurate statements regarding Merrill Lynch compensation. The SEC and Bank of America will have to return to court for a trial on February 1. The most important issue at hand will be that the judge says that BAC “materially lied” in its disclosures about the Merrill bonuses.

The unexpected action by the judge threatens to kill a time-honored gentlemen’s agreement between the SEC and major American public companies. That being, when the SEC catches corporations doing something that violates the securities laws, rather than take up the commission’s time which could be better used chasing people like Bernard Madoff, the companies are allowed to settle charges by paying large fines. This usually means that the company does not admit to anything, although its guilt is generally assumed. Why would a firm that is entirely innocent make a payment to settle charges? I digress.

4.
Senate Democrats might wait on climate-change legislation
Senate Democrats' consideration of putting climate change on the back burner might force U.S. President Barack Obama to send diplomats empty-handed to negotiations in December in Copenhagen. Obama was expected to offer congressional approval of concrete measures limiting emissions as evidence that the U.S. is serious about dealing with global warming. Senate Majority Leader Harry Reid suggested that Democrats want to handle health care before climate change and that global warming could be addressed next year. The Guardian (London) (16 Sep.)

5.
Part of the solution:

Contraception is almost five times cheaper as a means of preventing climate change than conventional green technologies, according to research by the London School of Economics.

6.
Right now the FDIC insures around $4.5 trillion of banking reserves. That’s the money you and I count as “safe” when we deposit it in almost any American bank account.

I think it’s important to knock some of the mystery off these almost incomprehensibly large numbers – because for most people, $1 billion is just about as unthinkably large as $1 trillion when it comes down to it. To further illustrate the point, it takes one thousand piles of $1 million to equal $1 billion. To get $1 trillion, you need a million piles of $1 million.

Doing some quick math, we can see that $10.4 billion goes into $4.5 trillion 432 times. So essentially, the FDIC insures every $432 of deposits with one lonely dollar.

The FDIC currently insures 8,153 banks. So far this year, 81 have failed – or 1% (in 2007, just three banks failed). And there are another 416 banks on a watch list. What happens if another 1% fails?

Well, the FDIC has a reinsurer of its own, sort of. It’s called the U.S. taxpayer, backed by the full faith and credit of the Fed’s printing presses. If they can’t tax us enough, they’ll backstop the FDIC with newly created dollars – the very definition of inflation.

6.
So much about the FDIC, what about the FHLB?
Who is the FHLB? Even if you heard their name, you probably haven't been worrying about what they do. They were created in 1932 as a government-sponsored entity (GSE) made up of 12 regional Federal Home Loan Banks, each of which is an individual corporation. Founded in the depression, they have carried on, providing money for mortgages. are 8,100 member banks, thrift and credit unions, and insurance companies that provide the mortgages. That's why you rarely hear about them – they are a bankers’ bank. They don't lend directly to buyers but only through banks. Banks collateralize their advances from the FHLB by the mortgages they make.

They have $1,147 trillion of assets and liabilities. They have $45.8 billion of total capital. So they are highly leveraged at about 25 to 1.

Even though there is no explicit government guarantee, the FHLB has been able to borrow at attractively low rates, because the public assumes such a guarantee. (Sound familiar? Fannie and Freddie pop to mind?) As such, the debt issued by FHLB is considered AAA by Standard & Poor's – so it's used regularly as a substitute for cash. Municipalities often invest here.

The next wave of mortgage difficulties is expected to include large amounts of Option ARM (adjustable-rate mortgage) loans that are scheduled to be resettled over the next year or two. That sets the stage for another federal government takeover or receivership like Fannie and Freddie. That means even more bailouts, and eventual Fed monetization to fund it. Credit collapse is destructive for housing, but it is dollar-destructive to bail out everybody. My bet is some of both will happen, with the easy path toward bailouts and dollar destruction being the more likely.

7.
Back to Tibet
Rare Earth Elements are exceedingly rare and hard to locate. They are found in sufficient quantities only in certain parts of the world. And the demand for these metals is increasing rapidly.

They are used to enhance the power of magnets in computer hard drives. They are used in wind turbines… catalytic converters… and the motors of hybrid cars. They are used to make lasers. And they are found in just about every iPod, BlackBerry, plasma TV, and mobile phone on the planet. They can even help filter viruses and bacteria from water.

China controls 95% of the world supply of Rare Earth Elements. That’s because most of these materials come from mines in Inner Mongolia and Tibet. And two weeks ago, the Chinese Ministry of Industry and Information Technology called for a total ban on the exports of most of them. Others will be restricted by quotas.

Did you know that Obama refused to see the Dali Lama because of China’s request that he not be received. Oh, let’s just sweep this under the rug or good old fashioned bad-boy politics.


Quotes of the month:

“But why do people have to pay 5,6,7 percent sales taxes in stores, but the derivative dealers on Wall Street pay no sales tax on hundreds of trillions of transactions every year? Seems like a hefty double standard.” – Ralph Nader
Which is why Cong. Peter DeFazio (Dem. Oregon) has introduced legislation to tax such speculation. (HR 1068)

“...you can make a moral argument that you shouldn’t buy T-Bills, because they will be repaid with stolen money – taxes.” - Doug Casey

And finanlly,

“One hundred senators, 435 congressmen, one president, and nine Supreme Court justices equates to 545 human beings out of the 300 million are directly, legally, morally, and individually responsible for the domestic problems that plague this country.

I excluded the members of the Federal Reserve Board because that problem was created by the Congress. In 1913, Congress delegated its Constitutional duty to provide a sound currency to a federally chartered, but private, central bank.

I excluded all the special interests and lobbyists for a sound reason. They have no legal authority. They have no ability to coerce a senator, a congressman, or a president to do one cotton-picking thing. I don't care if they offer a politician $1 million dollars in cash. The politician has the power to accept or reject it. No matter what the lobbyist promises, it is the legislator's responsibility to determine how he votes.

It seems inconceivable to me that a nation of 300 million cannot replace 545 people who stand convicted -- by present facts -- of incompetence and irresponsibility. I can't think of a single domestic problem that is not traceable directly to those 545 people. When you fully grasp the plain truth that 545 people exercise the power of the federal government, then it must follow that what exists is what they want to exist. Do not let these 545 people shift the blame to bureaucrats, whom they hire and whose jobs they can abolish; to lobbyists, whose gifts and advice they can reject; to regulators, to whom they give the power to regulate and from whom they can take this power. Above all, do not let them con you into the belief that there exists disembodied mystical forces like "the economy," "inflation," or "politics" that prevent them from doing what they take an oath to do.” - Charlie Reese, a former columnist of the Orlando Sentinel Newspaper

Note to readers:
One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, my colleagues, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. I has been said, "When you take stuff from one writer it's plagiarism; but when you take it from many writers, it's research." In reference to my sources this month, they include in no particular order:

Brain Rich, Gregory Spear, Doug Casey, CNNMoney.com;Bob Irish, Porter Stansberry, Doug Casey, Kevin McElroy, Larry Edelson, Douglas A. McIntyre, Dan Weil, Richard Young, Gregory Spear’s Market Commentary; Daily Wealth Reader; The Daily Crux, Money and Markets/Mike Larsen, Martin Weiss; The New York Times/The Associated Press; The Washington Post; The Wall Street Journal; Reuters; China Daily (Beijing)/Xinhua News Agency; The Guardian (London) and Bloomberg.

September - 2009 Economic Brief

As goes the economy, so goes dentistry, but how about the unease that many now feel as they observe the disconnect between what their own eyes see and what the government tells them they should be seeing?

Case in point:

ADA 4th economic confidence survey available
According to the 4th ADA Survey of Economic Confidence, 2nd quarter results were more negative than those of the 1st quarter of 2009, but more positive than those for the 4th quarter of 2009.

“...50 percent report that key dental metrics are still trending in a negative direction.…”

Yet, we are being told:
U.S. consumers become more optimistic than expected
The Conference Board Consumer Confidence Index surged to 54.1 this month, up from July's adjusted 47.4. Economists polled by Thomson Reuters had anticipated an uptick to 47.5. The index remains far from a mark of 90, which suggests the economy is in good shape. The New York Times/The Associated Press (25 Aug.)
In a period where less bad is the new good...

Good News:Unemployment rate “fell slightly” from 9.5% to 9.4% earlier this month.
BAD NEWS:
These people were removed from the official count, because they have given up their active job search. More than two-thirds of U.S. economic activity relies on consumer spending. American’s are just not spending like they once did for one big reason: Over 6.5 million Americans have lost their jobs since the Great Recession began; last quarter we saw a 1.2% decline in consumer spending.

Rising unemployment claims in U.S. catch experts off guard
A second consecutive week of increase to initial jobless claims in the U.S. came as a surprise to analysts, who had expected a decline. Initial claims for benefits rose to 576,000 last week, a 15,000 increase from the previous week, the Labor Department said. Most analysts' forecasts called for first-time claims to drop to 550,000. Yahoo!/Agence France-Presse (20 Aug.)

U.S. retail sales post surprise 0.1% drop
Breaking a three-month trend of increasing consumer spending, retail sales dropped 0.1% in July, the U.S. Commerce Department said. The boost triggered by the government's "Cash for Clunkers" program was not enough to make up for plummeting sales at department stores. Bloomberg (13 Aug.)


Bad News:
U.S. housing starts unexpectedly fell in July. Already, nearly 10% of U.S. home mortgages are in some stage of delinquency or default.
Delinquent home mortgages in U.S. reach record high.

The percentage of U.S. home mortgages either going through foreclosure or being classified as delinquent has reached the highest level since records began in 1972, the Mortgage Bankers Association said. Prime loans, made to the most desirable borrowers and considered the least risky by lenders, accounted for more than half of the mortgages in foreclosure. Rising unemployment and the recession are driving forces behind the housing crisis, said Jay Brinkmann, chief economist for the Mortgage Bankers Association. The Washington Post (21 Aug.) , The Wall Street Journal (21 Aug.)
GOOD NEWS:
The blow was somewhat blocked by a slight increase in single-family home starts


Bad News:
A New Debt Load
The Office of Management and Budget (OMB) is projecting a federal deficit of $1.5 trillion for the current fiscal year, due to a 24% increase in spending (to save Wall Street and stimulate the economy) and a 17% decline in tax revenues. The revenue drop is the largest since the Great Depression. The deficit this year will reach 11% of GDP, a level not seen since the end of WWII. But that's not all.
BAD NEWS:
According to the White House, the deficit is expected to average nearly $1 trillion annually for the next decade. Beyond 2013, deficits are anticipated to remain high largely due to demographic trends that will inevitably increase spending on Medicare, Medicaid and Social Security. Over the next decade, economists project that the national debt will rise to 75% of GDP as the boomers age. That would be a typical war time level, but it does not bode well for a peacetime economy.

GOOD NEWS:Governments around the world are injecting huge amounts of money and credit into the struggling patient known as the global economy. All this Monopoly money is driving rallies in stocks and bonds.
“GOOD NEWS”:
Changes to accounting rules sway banks' balances
An accounting expert studied the earnings reports of financial firms and found that 45 posted higher earnings in the first quarter because of a recent change in accounting rules. Bank of New York Mellon and other large companies were able to post profits instead of losses because of the change. The Financial Accounting Standards Board is considering another change that could force financial institutions to take paper losses, reversing the paper gains. The Washington Post (05 Aug.)


MORE BAD NEWS:
At the peak of the credit crisis last October, the Baltic Dry index fell 90%. Then it staged a recovery, hitting new highs on June 3 but in just 10 days of August, the Baltic Dry Index, a good proxy for global demand, had tumbled 25 percent. The worst week for the index since October. The Baltic Dry Index is down 35% in the last two months.

Our country's debt load at the end of July totaled $11,669,251,349,504.65. That's $11.7 trillion, or roughly about $520,000 per individual taxpayers, your household is on the hook for $771,000 when we include medical and social security obligations. Oh, and just this month Washington casually announced that another $9 trillion (a 27% increase from the previous forecast of $7.1 trillion) will be layered onto the federal government deficit over the next 10 years or roughly another $77,100 per household. Hello?



So, how big is a trillion again?
A trillion seconds is 30,000 years ago. And if you laid a trillion dollar bills end-to-end, it would stretch to the moon and back… 400 TIMES.

In the case of the U.S. government, our ever-increasing debt load means one of two things is going to have to happen. Either ...

1. Economic growth is going to surge, sending tax revenue through the roof and allowing us to pay off all these bills, notes, and bonds. That’s the American dream, dream on.

OR ...

2. Taxes are going to have to rise sharply to make good on our
debts

At the same time, we're counting on foreign creditors to finance that debt explosion. But those creditors ALREADY own about 53 percent of our marketable debt, the highest percentage share in history. And they're starting to rebel.

Case in point: Both Russia and China

They're talking about buying fewer dollar assets, and more assets denominated in other currencies.

Why would these guys want to move their money out of dollars? Simple.
As the dollar loses value on the global currency market, our foreign creditors lose money. That's because every dollar worth of bonds they own translates into fewer pounds, euros, yen, and so on.

The dollar's share of global reserves shrank to 64 percent at year-end 2008 from 73 percent in 2001, according to the International Monetary Fund. If that figure continues to decline, U.S. interest rates will simply have to rise.

That means Uncle Sam will pay more to sell Treasuries. Your mortgage rates will go up and so will corporate borrowing costs...

But here's the scary thing: even if the Chinese lent the U.S. all their $2 trillion of Foreign exchange, it would only cover this year's U.S. borrowing. Where is the U.S. going to get next year's?

According to the financial markets, the world has become a very calm and comfortable place again. The rally that began in March of 2009 is now 22 weeks long and has seen the S&P 500 rise 49.4 percent, but what have we done?

Maybe we are all in denial, replacing private debt with public debt, not dealing with our banking system by not holding it accountable, not changing structurally towards more sustainability, rewarding the fools who got us here, (Summers, Bernanke, Geithner) and the banksters are taking over again. Maybe you didn’t notice but almost 40% of the share volume on the NYSE was comprised of Citigroup, Bank of America, Fannie Mae, and Freddie Mac.

Is it working?

Geithner says White House to consider further stimulus
The Obama administration will look into extending subsidized bond programs and other efforts to spur the economy, said U.S. Treasury Secretary Timothy Geithner. "There's a range of things that we're going to look at as we get into the fall," Geithner said at the site of a school financed by qualified school construction bonds. "The important thing to note is that [the bonds] are really working, and people can see the difference. But we're not yet at the point where we need to make that judgment. We'll take a careful look at that as we get into the fall." Reuters (20 Aug.)

And,

U.S. Treasury Secretary Timothy Geithner formally requested that Congress raise the $12.1 trillion statutory debt limit in August.

And,
Reuters reports that corporate insiders recently pulled $53 from the market for every $1 they put in.

And,
Tax receipts are set to plunge 18 percent this year, the biggest decline since 1932 during the Great Depression. Individual taxes are off 22 percent year-over-year, while corporate revenue has plunged 57 percent.

Buffett noted this month that our government is spending $1.85 for every $1 it takes in from taxes ... that ever-increasing purchases of Treasuries by foreign investors are "no sure thing" ... and that our deficit is on track to hit 13 percent of GDP, more than double the previous non-wartime record of 6 percent. Additionally, Warren Buffett has gone public this month in agreeing with our contention that the government’s proliferate spending will lead to a serious degradation in the value of the dollar.

And, what about earnings,
This chart illustrates how earnings are expected (38% of S&P 500 companies have reported for Q2 2009) to have declined over 98% since peaking in Q3 2007, making this by far the largest decline on record (the data goes back to 1936). In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.



Finally, as you can see in the chart above, in no sense are the earnings being posted anywhere remotely close to prior levels.

And so the situation today is comparable to changing the grading curve. Further to this fairy tale economic recovery... There is a battle being fought behind the scenes, a fight that could set the stage for a very, very big correction in stocks of banks and other financial services companies. During the first phase of economic crisis, the government leaned on the Financial Accounting Standards Board, or FASB as it is usually referred to, to suspend its mark-to-market valuation standards.

The consequence of this change was that, presto, much of the capital challenges the financial institutions were struggling with just disappeared, and banks could trot out their freshly smudged balance sheets with a satisfied smirk.

That smirk could soon be slapped away if new proposals by the FASB to return to mark-to-market, and even extend it, are again accepted as required practice. Why would the FASB reverse itself on this issue? Simply, if accountants are to have any credibility at all – or serve any real purpose – they need to be true to their profession. Otherwise, why would anyone believe in the work they do?

Changes to accounting rules sway banks' balances
An accounting expert studied the earnings reports of financial firms and found that 45 posted higher earnings in the first quarter because of a recent change in accounting rules. Bank of New York Mellon and other large companies were able to post profits instead of losses because of the change. The Financial Accounting Standards Board is considering another change that could force financial institutions to take paper losses, reversing the paper gains. The Washington Post (05 Aug.)

Even so,
Defaults on corporate debt soar to record high
This year, 201 issuers of corporate debt have defaulted on a total of $453.1 billion in debt, compared with 126 corporate defaults totaling $433 billion for all of 2008, Standard & Poor's said. The latest data also top figures for the comparable period in 2001, which had been the worst year for corporate-debt defaults. Financial Times (tiered subscription model) (19 Aug.)

SEC faces dilemma as it weighs various public interests
The Securities and Exchange Commission is facing a dilemma because the U.S. government has become a large stakeholder in many of the country's banks. Actions taken by the SEC could hurt financial institutions in which the government holds shares. The agency must decide whether to protect investors or the government's investments. "Normally, the SEC's focus is on the protection of investors -- that is, people who are trading securities in capital markets," said James Cox, a Duke University professor. "With the government being a substantial stockholder, you could well think the SEC's consideration could extend to matters that relate to the financial success of the firm itself." The Washington Post (04 Aug.)

Questions arise as Wall Street profits from trading with Fed
The Federal Reserve has become one of the largest customers of Wall Street banks as it strives to stabilize markets by purchasing securities. The result has been huge profits for the banks, raising questions about how the U.S. government deals with private-sector counterparties. "You can make big money trading with the government," said an executive at an investment-management firm. "The government is a huge buyer and seller, and Wall Street has all the pricing power." Financial Times (tiered subscription model) (02 Aug.)

Remember, the Fed has failed miserably at protecting the currency, purportedly its primary purpose.



The U.S. dollar has lost more than 90% of its value since 1913, when the Federal Reserve Bank was created. It has lost more than 50% of its value since 1987, when “Easy Money Al” Greenspan began his tenure at the bank.

Food for thought:
People often mistake inflation with its effects.
They think that inflation means “prices going up.” But it doesn’t. Let me explain…
Inflation is when the supply of money expands faster than the growth of goods and services in the economy. When there are too many dollars chasing too few goods and services, prices rise.

So, the rising price of beer, milk, eggs and gasoline is the result of inflation. But that part of the equation doesn’t usually happen right away. And that’s what makes it so dangerous. It is a huge mistake to believe there is no inflation, just because prices aren’t rising.

The inflation has already happened. And it continues. Take a look at the chart below. It represents the U.S. Monetary Base – currency in circulation, plus bank reserves held at the Fed.



Hmm. Looks like inflation to me.
So, by definition, massive inflation has already arrived. The question is: when will the wave of monetary inflation show up in the prices we pay?

Did I mention the security wild card?

According to the 2008 official Pentagon inventory of our military bases around the world, our empire consists of 865 facilities in more than 40 countries and overseas U.S. territories.

We deploy over 190,000 troops in 46 countries and territories.

According to Anita Dancs, an analyst for the website Foreign Policy in Focus, the United States spends approximately $250 billion each year...

This is all staggering expensive. In an era when the need for funds at home is self-evident, on purely practical grounds – and there are obviously others – the maintenance of our global imperial stance, not to speak of the wars, conflicts, and dangers that go with it, should be at the forefront of national discussion.

For example, The U.S. has spent $223 billion in Afghanistan since 2003… What's more, mainstream cost estimates never show the huge, "hidden" costs of wars… like the cost to replace tanks and jets… and the future costs to take care of injured soldiers. The actual costs of both Afghanistan and Iraq will run into the trillions.

Did I mention hidden costs?

In a recent article titled, The Expiring Economy, Roberts pointed out that during the “worst economy since the 1930s,” the administration has ”embarked on a $1 billion crash program to build a mega-embassy in Islamabad, Pakistan.”
And who is going to pay for the $636 billion national “defense” budget the House just approved?

Did I mention the energy wild card?

Analysts: Rising energy costs threaten economic recovery
With the price of crude oil reaching $76 a barrel, experts are worried about the possible impact of energy costs on a still-fragile world economy. "Although the financial crisis had been addressed, the commodity crisis has not," Goldman Sachs said. Financial Times (tiered subscription model) (09 Aug.)

Did I mention the ethical issues?

Paulson's ties with Goldman continue to raises ethical questions
Seven months after Henry Paulson left his position as U.S. Treasury secretary, questions continue to be asked about his relationships with executives at Goldman Sachs, the investment bank he had previously run. "I operated very consistently within the ethic guidelines I had as secretary of the Treasury," Paulson said in response to a lawmaker's question about his dealings as Treasury secretary. He added that he obtained an ethics waiver for dealing with the firm "when it became clear that we had some very significant issues with Goldman Sachs." The New York Times (08 Aug.)

Did I mention China’s new gold policy?

2009– the FIRST year that the Chinese public is allowed to own physical gold or silver. Will the Chinese turn into goldbugs overnight? No. Over the next 5 years? Probably, yes.


Note to readers:

One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. I has been said, "When you take stuff from one writer it's plagiarism; but when you take it from many writers, it's research." In reference to my sources this month, they include in no particular order: ADA, Bob Irish, Gregory Spear’s Market Commentary; Daily Wealth Reader; Doug Casey, The Daily Crux/Dr. Steve Sjuggerud & Tom Dyson, Money and Markets/Mike Larsen, Martin Weiss; The New York Times/The Associated Press; The Washington Post; The Wall Street Journal; Yahoo!/Agence France-Presse; and Bloomberg.