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.