April - 2010 Economic Brief

Review:



The same day the health care bill passed, U.S. government debt lost its "risk-free" status. Specifically, investors were willing to accept a lower interest rate to lend money to billionaire Warren Buffett's company, Berkshire Hathaway, for two years than to lend to the U.S. Treasury for the same period of time.

The huge run-up in equities we've seen over the last year is merely proof the US central bank is still powerful. The stock market rebound that's lifted shares in the United States started the same week the Federal Reserve began its $2 trillion program of "quantitative easing" – which simply means printing up money and buying debts with it. What is a person who started investing in 1982 to make of it? From then until 2007, he'd had a full quarter-century of gains. If the market fell, as it did in 1987 or from 2000-2002, it always snapped back.

The fact that a 25-year bull market for stocks had never happened before in history that probably means little to him. After all, it happened to him. It was the experience of his entire life.

But what if a 25-year bull market was an anomaly? A once in a lifetime event? For someone who, say, turned 30 around 1982 and is now nearly 60, this is a hard thing to contemplate. All your life things have been a certain way. You've come to accept them as normal. Any change is thus temporary. That is, until it isn't, and you are left holding on to past dreams. A new leg down in the general market could take down all stocks, even the mining stocks.

I know it can be hard for people to visualize what they grew up with completely being turned on its head. But investment history teaches us that this is exactly what happens, time and time again.
Don't jump to the conclusion that the credit crunch will immediately topple the U.S. economy or stock market. With all the money that Washington has pumped in, a weak recovery can continue and stocks could still enjoy an extension of their rally.
But it cannot last. In the long term, corporate profits cannot be sustained without credit.

Having said that, the S&P 500 and Nasdaq made new highs for the year mid-month after the U.S. and Japanese central banks sent clear signals that the easy credit environment will continue virtually indefinitely.



Fed repeats vow to keep rates near zero for an "extended period"
Source: CNBC
The Federal Reserve reiterated its pledge to keep interest rates close to zero for an "extended period" but offered a slightly more positive outlook for the U.S. economy. Fed officials said spending on software and equipment by businesses has "risen significantly," while the employment market is "stabilizing." "The data flow has been on the positive side," said Ethan Harris, an economist at Bank of America Merrill Lynch. "But the Fed needs to see something more fundamental in the economy to start hiking rates. The current path is not enough." CNBC (16 Mar.) , Financial Times (tiered subscription model) (16 Mar.) , Bloomberg (16 Mar.)

The belief is that economic weakness is not a decisive negative for the market right now because the Fed will keep rates low. Implicit in this thinking is the belief that Fed policy trumps the current economic conditions because the Fed has a history of being able to control/correct the economy via monetary policy. The market therefore trusts the Fed. If it should come to pass that the economy fails to recover despite the heroic actions of the Fed, it will usher in a new, problematic era for the U.S. financial markets and if you are a regular reader you already know my take on this.

To keep rates low, the Fed is printing money like there’s no tomorrow, then using that money to buy bonds.

Meanwhile, with consumers being responsible for 70% of the economy, this just came in from Bloomberg: “Confidence among U.S. consumers unexpectedly declined for a second month in March, a sign Americans are discouraged about the labor market. The Reuters/University of Michigan preliminary consumer sentiment index fell to 72.5 from February’s final reading of 73.6.”


DEBT:
$12,444,406,402,604 – US Debt as of April 1st


U.S. states are suffering from problems that plague Greece
Many of the problems that pushed Greece to the verge of default are showing up in U.S. states, according to The New York Times. Governments are using complex derivatives to compensate for a revenue shortfall, turning to accounting devices that hide debt and searching for ways to pay benefits promised to retired public employees. If buyers of state governments' bonds come to fear default, the matter might get worse, as it did for Greece, economists said. The New York Times (free registration) (29 Mar.)

U.S. adds $600 million to foreclosure-crisis fund
A special fund that helps U.S. states prevent residential foreclosures will get an extra $600 million, the Obama administration said. The funding will go to North Carolina, South Carolina, Ohio, Oregon and Rhode Island. The money is on top of $1.5 billion previously allocated to California, Nevada, Arizona, Michigan and Florida. The Washington Post (30 Mar.)





Country Deficit % of GDP

Iceland 15.7%
Greece 12.7%
Britain 12.6
Ireland 12.2%
Spain 11.4%
U.S. 10.6%
Portugal 9.3%
Poland 7.5%
Italy 5.3%
Canada 4.8%
Germany 3.3%

Ever since America's Declaration of Independence, deficit spending has been a recurring theme in Washington that invariably returns with a vengeance, especially during wartime. But it took 169 long years and seven major wars — from 1776 to 1945 — to rack up a cumulative deficit that matches the gaping budget hole of just 28 short days in February, in fact, last month's deficit of $221 billion was more than TRIPLE the sum total of ALL deficits during the six years under Nixon.

In just one week last month (ending 2/26), the U.S. Treasury issued a grand total of $236 billion in government debt issued in a single week, the most in the history of the world.

This means that Uncle Sam borrowed new money — and replaced old debt — at the rate of $390,212 per second ... $23.4 million per minute ... and $1.4 billion per hour — around the clock! What’s the impact? Credit is actually being sucked OUT of the consumer and corporate economy at a torrid pace, because Uncle Sam is continuing to hog most of the available credit.

Tight credit for small business might cripple recovery, economists say
The contracting availability of bank loans for small businesses might stop the U.S. recovery, economists said. While big corporations have access to the bond market, smaller companies get most of their credit from banks. Total lending by U.S. banks dropped 7.4% last year, the severest decline since 1942. The Wall Street Journal (15 Mar.)

But the kicker is that total household and government debt outstanding is at a new all-time high and has grown 21% over the past three years (and more than doubled in the past ten).

In other words, we’re still in the thick of it. And we expect it could get much worse before it gets better. Simply, absent energetic lending from foreigners, the only way the Treasury is going to be able to keep spending will be to engage in overt monetization. And that will be the starting gun on the next, and most damaging, phase of this crisis, in which the credit crisis morphs into a currency crisis.

Revised data show China, not Japan, is biggest owner of U.S. debt
The U.S. Treasury Department revised its statistics on the ownership of Treasury securities and concluded that China is still the No. 1 investor in U.S. government debt. Last month, the Treasury said China's reduction in holdings had put Japan in the top position. According to the latest data, China owned $894.8 billion in Treasuries at the end of December, considerably more than the previous estimate of $755 billion. Xinhuanet.com (China) (28 Feb.)

Although China has retained its spot as the biggest foreign holder of U.S. Treasury debt in January it trimmed its holdings for a third straight month.

The string of declines is likely to underscore worries that the U.S. government could face much higher interest rates to finance soaring budget deficits.
And out of the ether, CEO Jamie Dimon of JPMorgan told attendees at the bank’s annual meeting that "there could be contagion" if the country’s biggest state, California, can’t pay back all its debt.


JOBS:

Absolutely stunning inter-active unemployment map:

See what 30 million unemployed look like.



U.S. nonfarm payrolls shrank by 36,000 in February, but this figure is better than the 75,000 decline that was expected.
On March 18, with very little pomp and circumstance, president Obama passed the most recent stimulus act, the $17.5 billion Hiring Incentives to Restore Employment Act (H.R. 2487),


BONDS:

So on TOP of massive budget deficits ... on TOP of the biggest rise in U.S. debt ever ... and on TOP of increasing sovereign credit risk, you have an economic rebound underway. That's going to put even more pressure on bond prices, and help to push interest rates higher.

The data released today for January 2010 shows tepid improvement in foreign investor interest in purchasing U.S. assets. The biggest summary of cross-border flow is still just slightly negative for the last 12 months, and well off its 2006 peak of a trillion dollars per year. This should be a pressure for rates to rise, because there is less credit supplied to our markets, especially our corporate bond markets.




BANKS:

Regulators shut 7 banks in 5 states; 37 in 2010. These seven banks add up to about $1.3 billion for the FDIC.

Were one to ask the man on the street – or, indeed, most politicians and bankers – who creates the money that rules our lives they would reply “the State”. They would be wrong. It is true that governments create legal tender – the physical notes and coins that circulate in an economy – but that represents, at its highest, only 3 per cent of the total money in circulation in the global economy. It is the commercial banks, largely unaccountable and privately owned, that create the world’s money.

Governments do not control the single most important mechanism when it comes to their economies: the production and distribution of money. That role has been diverted to the banks, which manufacture money out of nothing and charge interest on that conjured-up money. Beyond an interest rate cut or a token change in VAT rates our politicians have no real power to direct their country’s economy.

Likewise all sorts of financial instruments and “products” are devised by the experts – collateralised mortgage obligations, put and call options, floating rate notes, preference shares, convertible bonds, semi-convertible bonds and endless other “derivatives” – but in essence they are mere variations of the same basic three card trick.

It is true that money is manufactured in the manner I have described – in other words by creating loans to the banks’ clients – surely just as much money is destroyed every time a loan is repaid? This is true to an extent. However, the point to be grasped is that while money is indeed created and destroyed in vast amounts every second of the day, the interest on that money remains un-destroyed and accumulates within the system – and at a compounded rate.

While there is no limit to the number of zeros we can create on a computer, there is a limit to the amount of oil in the ground, the wheat in the fields and the livestock in our farms.

Capitalism, banking and growth become inseparable, but logic dictates that the virtual economy must eventually peel away from the real one and sooner or later the day of reckoning arrives – when the gulf separating these two economies is too large to be sustained – for no power on earth can match the power of compound interest in the ether.

Consider the tale of the Chinese emperor and his chess opponent. The emperor asks what reward would satisfy him if he wins; the opponent replies that a single grain of wheat, doubled for each of the 64 squares on the chess board, would suffice. The emperor, imagining that he has a good deal, loses, only to learn that he now owes his adversary the equivalent of 2,000 times the current annual worldwide production of wheat.

Money breeds more money. Indeed, the banks never really want their loans to be repaid. So long as the interest is funded it is to their benefit for the capital to remain outstanding on their books as “assets” and for the debts to be rolled over. Every time the IMF or World Bank extends a line of credit to some impoverished nation, are they being “charitable” or simply perpetuating the enslavement?

But the system relies entirely, as do all Ponzi schemes, on the assumption of continued growth, hence its inherent instability. Once that growth is threatened the edifice collapses. Likewise with the banks – lend 10 times more money than you possess and when the economy grows, or at least pretends to grow, it’s Porsches galore, but when the lack of growth is exposed it requires only 11 per cent of the loans on your books (in value terms) to be bad and you are bust. The truth is not that these institutions have suddenly become insolvent but that they were never really solvent in the first place.

It is a simple and devastatingly effective swindle, but largely invisible because it has become so deeply embedded in our culture. The consequences of that swindle – the desperate need for economic growth; the environmental and cultural despoliation it engenders – require some radical thinking one encounters nowhere in any of today’s political parties.


REAL ESTATE:

Fannie Mae will seek $15.3 billion in aid from U.S. government
Fannie Mae reported a $16.3 billion fourth-quarter loss, its 10th straight quarterly loss, and will seek $15.3 billion from the U.S. Treasury Department. "Our financial results for 2009 reflected the continued adverse impact of the weak economy and housing market, which has resulted in record mortgage delinquencies and contributed to our recording significant credit-related expenses and net losses during each quarter of the year," Fannie Mae said in a filing with the Securities and Exchange Commission. Bloomberg (27 Feb.)

Refinancing help for U.S. homeowners gets 1-year extension
Homeowners who have seen the value of their house fall dramatically have an extra year to take advantage of a little-used program by the U.S. government. The Federal Housing Finance Agency said the Home Affordable Refinance Program, scheduled to expire June 10, will be extended to June 30, 2011. Google/The Associated Press (01 Mar.) , Housing Wire (01 Mar.) , American City Business Journals/South Florida (01 Mar.)

Since values are falling, many commercial property owners will not be able to refinance. The problem is widespread too since commercial real estate loans are usually the bread and butter of local banks. Only ten major banks made up the bulk of the housing lending market. Yet, according to The Wall Street Journal, more than 3,000 banks and savings institutions have more than 300% of their risk-based capital in commercial real-estate loans. And almost $100 billion of their loans coming due in the next three years may have difficulty getting new financing.


POLITICS and TAXES:

Combined, corporate tax withholdings and individual tax withholdings, these two items posted a multi year low of $34 billion, less than the previous recent low from February 2009 when the first leg of the Greater Depression was allegedly at its zenith. So, there is less tax revenue this year, judging from February’s numbers, and more spending. Something has to give, you can’t have it both ways for long.



Taxes on your investments will increase automatically on December 31st, 2010 whether congress votes on it or not! The Bush tax cuts that lowered taxes on dividends from 35% to 15% and capital gains from 20% to 15% gains are set to expire.

Possible War strategy

Is war just around the corner? While in theory it would make perfect sense to distract Americans from the long road to US insolvency, and other more pressing issues such as the endless criminality all around us, in practice we have so far heard merely rumors. The Herald of Scotland, however, may have credible proof that a US-led attack on Iran approaches and could be just days away. The newspaper has procured proof of an arms shipment to Diego Garcia, which consists of "of 195 smart, guided, Blu-110 bombs and 192 massive 2000lb Blu-117 bombs...put in place for an assault on Iran’s controversial nuclear facilities.


USX DOLLARS:

James Turk reports that the Federal Reserve is vastly understating the growth of the U.S. money supply. Turk writes: "When deposit currency created by the Federal Reserve is added to the traditional definition of M1... M1 after adjustment is actually 170% higher at $2,918 billion. Its annual growth increases to 29.5%, nearly three times the rate reported by the Fed and, more importantly, an annual rate of growth in the quantity of dollar currency that is approaching hyperinflationary levels."

Traders call the Canadian dollar a "commodity currency." Reason is, a large portion of Canada's economy is devoted to exporting commodities. Canada is the sixth-largest oil producer in the world, and the No. 1 foreign supplier of oil to the U.S. Canada is also a major producer of gold, copper, wheat, aluminum, and timber.

This "resource factor," plus the soundness of Canadian banks, has sent the Canadian dollar soaring... while the British pound and the euro are tanking. The value of the "Candol" has gained more than 20% in the past 12 months. This is an enormous move for a major currency.

Many people would like to see a world with currencies backed by "real assets" like gold and silver... rather than ones backed by "full faith and credit." That might happen someday. But for now, the Canadian dollar is about as close to a "backed by hard assets" currency as you can get. This underpinning of value supports the uptrend you see below.





Canadian dollar jumps well above 98 cents against the US dollar,
And we have gone from peak oil prices, to the housing crisis, to the commercial mortgage crisis, to a currency crisis. Go figure!

What’s going on?

The commitment to low rates in both Japan and the U.S. reflects a competition for the honor of having the world's premier carry trade currency. Why would they/we do that? Countries with low interest rates attract borrowers, who then sell the currency to invest in assets in other countries. The currency sales keep the carry trade currency relatively weak.

A weak currency inflates the value of assets within the carry trade country, so it functions as is a good substitute for inflation during a period when there is no real economic growth. That is the case in Japan and the U.S. at this time. In an asset-based economy (where people's net worth is leveraged to real estate and stocks) it creates the illusion of improving prosperity.


REGULATORY SUPERVISION:

Not even the most wild-eyed "conspiracy theorist" could have imagined the rampant criminality that characterizes Wall Street and the Federal Reserve today. This 11-minute clip is headlined "Why aren't these guys in handcuffs yet?"... and is definitely worth your time. The link is here.

Merrill Lynch says it warned regulators about LehmanFormer executives at Merrill Lynch said they notified officials at the U.S. Securities and Exchange Commission and the Federal Reserve about an issue related to the way Lehman Bros. was calculating a measure of its financial health. The executives said they contacted regulators for competitive reasons as they were coming under increasing pressure from investors and trading partners about their liquidity. Financial Times (tiered subscription model) (18 Mar.)

Inspector's report casts doubt on SEC's effectiveness
H. David Kotz, inspector general for the U.S. Securities and Exchange Commission, released a report that casts further doubt on the ability of the agency to oversee and police Wall Street and public companies. Kotz scrutinized the SEC's decision making in regard to launching investigations. "The SEC needs to open investigations based on evidence, rather than unsupported allegations, so as not to waste the agency resources and focus needed for investors and market integrity," said Sen. Charles Grassley, R-Iowa. The Washington Post (23 Mar.)


GOLD:


Over the last six months, we've seen gold outperform long-dated U.S. Treasuries by roughly 15%. I expect this trend to continue and accelerate over the next six months as the Fed stops supporting the U.S. Treasury market at the end of this month.
The man who earned $1 billion in a single day betting against the British pound in 1992 has just raised his bet against the dollar and all paper currencies by a staggering 152%!

According to Bloomberg, George Soros has more than doubled his gold holdings in the last three months of 2009, increasing his stake in the yellow metal by 152%.


QUOTES OF THE MONTH:

“Government is not the solution to our problem. Government is the problem.” – Ronald Regan 1980

“Rising prices of precious metals and other commodities are an indication of a very early stage of an endeavor to move away from paper currencies...What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment.” - Alan Greenspan, 9 September 2009

"If core sovereigns such as the U.S., Germany, U.K., and Japan 'absorb' more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee. The Kings, in other words, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle." - PIMCO Chief Investment Officer and "bond guru" - Bill Gross

“Gold is quietly, at the edge, becoming the world’s second reservable currency, supplanting the euro and rivaling the dollar. [This] trend shall continue months, if not years, into the future.” - Dennis Gartman The Gartman Letter, 18 March 2010

Population...



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. It 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, Monty Agarwal, Brian Hunt, Chris Weber, Tyler Durden, Greg Spears, Mike Larsen, Darius Guppy, Martin Weiss, Doug Casey, Porter Stansberry, Justin Ford, CNBC, Financial Times, Bloomberg, New York Times, Washington Post, Wall Street Journal, Xinhuanet, American City Business Journal/South Florida.

March - 2010 - Economic Brief

REVIEW:

Weak jobs data, soft housing prices, shaken consumer confidence and more bad news from Greece sets the tone, now see Obama’s milking cow.



Take the bucket, for example, AIG. “AIG’s” debt to taxpayers is evident. Yet what is not evident is the truth and the truth is that AIG owes taxpayers absolutely nothing. To understand my point, suppose AIG actually pays back the bailout money down to the last dime. Will you receive a check in the mail and a letter of apology? Of course not! Actual taxpayers will never see this money again. The U.S. government will see it – you won’t. Neither will the government do something indirectly beneficial to taxpayers, like repaying the debt. Once government gets money, it spends money. Social Security has been doing this for years. Each surplus has been wasted on other expenditures rather than paying down the debt or preparing for the inevitable retirement shortfall.

Take another bucket, for example, banks, and in particular, Goldman Sachs. In the spring of 2009 it was revealed that Goldman had insured all of its subprime exposure via AIG to the tune of $20 billion, and received roughly $14 billion of money the federal government used to bail out AIG. This allowed it to book huge profits on its subprime investments long before they were actually paid off because the bonds were insured. Of course, it was all a sham – AIG didn't have nearly enough money to pay off any of the insurance. But that’s only half of this disgrace.

Consider the truth, not only did Goldman profit from being insured by AIG but Goldman didn't merely buy insurance on a bunch of random subprime CDOs. It actually bought insurance on special CDOs it had put together and sold to its own clients. In other words, Goldman knew more about these CDOs than anyone else. Connecting the dots, Goldman bought insurance on these CDOs because it knew they’d collapse.
These facts all came to light because of research done by the office of Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform. These new documents will certainly lead to a full investigation of the Goldman-AIG dealings and the subsequent $180 billion bailout led by the New York Federal Reserve. If you own Goldman Sachs, you’d better sell.

How does that make you feel?

How about another “head fake”, the Fed announced it would raise the discount rate by half, to 0.75 percent and the markets reacted as though the announcement had been momentous, the dollar soared and gold fell. In fact, nothing of significance had changed. That’s because banks that face short-term stresses no longer have to borrow directly from the Fed; instead, they borrow “excess reserves” from each other at the federal funds rate – the rate the Fed conspicuously left unchanged last week at 0.25 percent.

The truth is, Wall Street fund managers aren’t paid to make you money (and, in fact, 99% of them lost money for their investors in 2008). With a 50% loss in 2008 and a 50% gain in 2009, do you end up even? Nope. It doesn’t work that way. Just to get even, you’d need a 100% gain in 2009. How did you do?

Avoiding big losses should be your number one investing priority.

It’s true stocks have fallen off somewhat recently. The S&P 500 is down about 6% from where it was a month ago. But stocks are still quite expensive in historical terms. Birinyi Associates reports the current S&P 500 P/E ratio (based on trailing twelve month as-reported earnings) to be 25.96, more than 60% above the long-term 15.98 average P/E ratio I calculated using Standard & Poor’s quarterly data.

These are challenging times. And being a smart investor is as important as ever.
Take note that the game’s table is skewed; a perspective shared by a fellow trader who observes the individual investor’s disadvantage at the gate, “banks that have high-speed computers co-located at the exchange (for the speediest nano-second execution) where they can read your orders in less than microseconds, take them from you and sell them to another bidder with the best spread before your broker can give you a read-back of your execution. They can read your stops, and when there are enough to justify a move, they will quickly buy up to them at millisecond speed in 100-share lots to spring your stops selling their accumulated inventory into them to make the fastest money you’ve ever seen. The SEC justifies all of this as ‘adding liquidity.’ Feeling ripped off yet?”

And what ever your pinstripe, Democrats and Republicans alike – we have spent the country into bankruptcy. That bankruptcy, which will affect the ability of Americans to build wealth for themselves, personally and for generations into the future, is of next to no concern to today’s politicians.



What’s important to them is getting through the next election.

One stark and sobering way to frame the crisis is this: if the United States government were to nationalize (in other words, steal) every penny of private wealth accumulated by America’s citizens since the nation’s founding 235 years ago, the government would remain totally bankrupt. Just in the last 12 months it has nationalized 30% of our economy, so much for capitalism, and now this:

With the budgetary equivalent of a straight face, the Office of Management and Budget reports in its long-term, inter-generational budget projection that the United States government will experience massive, non-stop deficits for the next 70 (SEVENTY) years, requiring the issuance of tens of trillions of dollars of additional debt. The OMB does not project even one year of surplus during the entire seventy year budget period.

$13.5 Trillion of New Debt: The president’s budget proposes to increase the national debt from today’s level of $12.3 trillion to $25.8 trillion in FY 2020 – an increase of $13.5 trillion or 109.8%. The amount of new debt proposed by this budget is larger than the total amount of debt accumulated by the federal government from 1789 to today (even including the $3.6 trillion of new debt over the last three years).


DEBT:

Meanwhile, there's no accurate tally of the government's debt. Supposedly, we owe around $12 trillion. This number is so large that it is meaningless. What does it really mean?

In Stewart Dougherty words, “One stark and sobering way to frame the crisis is this: if the United States government were to nationalize (in other words, steal) every penny of private wealth accumulated by America’s citizens since the nation’s founding 235 years ago, the government would remain totally bankrupt”.

My point? Our government is bankrupt - right now, today. Sure, it might still have access to the credit markets. And yes, since it owes dollars, it can always simply print more. I realize the government can't go bankrupt they way GM did.

It's not a good idea for the world's largest debtor and the world's strongest military power to go broke. Bad things happen in democracies when the government goes broke. At the very least, our creditors will demand much higher interest rates and abandon the use of our currency. That's going to devastate our standard of living.

The U.S. government suffers from the same, or worse, underlying disease as Greece, Portugal, or any other victim of the debt sickness — massive, out-of-control federal deficits. America's burden was $1.4 trillion last year and ANOTHER $1.4 trillion this year. But in the context of back-to-back $1.4 trillion deficits and in the face of a looming bond market collapse, team Obama’s plan represents to little to late.

Money and Markets' Mike Larson explains the situation this way:

"Imagine what would happen if Uncle Sam's borrowing costs shot up like they have in Greece — by 60 percent! Imagine what that would mean for the cost of car loans, mortgages, and other products whose rates track Treasury yields! And imagine the impact on an economy still struggling to recover from the Great Recession! This is the next big story that few people are talking about."

And guess who is at the party?

Goldman's Greek swap wasn't disclosed in subsequent bond sales: Goldman Sachs participated in $15 billion in bond sales for the Greek government after arranging a currency swap that allowed the country to keep its budget deficit a secret from the EU and bond investors, according to a Bloomberg review of documents. In at least six of the 10 bond offerings, there was no mention of the currency swap, according to the review. Not disclosing the swap -- and the deficit it concealed -- might have helped Goldman get better pricing for the bonds, said Bill Blain, co-head of fixed income at Matrix Corporate Capital. Bloomberg (16 Feb.)

Sovereign-debt sales in eurozone reach record high
Borrowing by eurozone governments has hit an all-time high, adding pressure on the weakest economies by driving up the interest rates they must pay on their bonds. This year, sales of eurozone government debt have reached about $153 billion. "The problem of sovereign risk is just beginning," said Theodora Zemek, global head of fixed income at Axa Investment Managers. "Countries with high debt levels will have to pay higher and higher yields to issue new bonds." Financial Times (tiered subscription model) (02 Feb.)

"Should Germany bail out Club Med or leave the euro altogether?"

Germany faces a terrible dilemma. Either Europe's paymaster agrees to underwrite a Greek bail-out and drops its vehement opposition to a de facto EU economic government, treasury, and debt union... or the euro will start to unravel, and with it, Germany's strategic investment in the post-war order.



Remember, back in December you could buy 1 euro for about US$1.52? Now you can buy that same euro for only about US$1.37. That means euros are almost 10% cheaper these days in terms of U.S. dollars than they were just two months ago.

So, what’s going on?

Lenders are afraid. They’re worried that Greece (and perhaps even Portugal, Ireland and Spain... and even France and did I say, England? It’s the Pound that’s really most vulnerable. In real terms, the Pound’s already devalued against virtually every currency and it’s especially exposed over the weeks running up to the UK election). might be forced to default on their debt. Apparently, the investment world thinks that the huge deficits (relative to GDP) in these countries are not sustainable, so it wants compensation in the form of higher interest rates, which just pushes things closer to default.

Greece didn't count most of its defense spending in its annual budgets because such amounts were state secrets; so almost 30% of its spending didn't officially "count."

Why on Earth would anyone loan to any entity (much less a government) that can't produce accurate financial statements? (By the way, the U.S. can't either. The government's own auditor won't certify the government's budgets.) And why does anyone believe a currency backed by a handful of insolvent governments will survive?

Portugal is latest flash point as fear of default in eurozone grows: The cost of insuring Portugal's sovereign debt reached an all-time high as investors became more concerned about a high level of public-sector debt in the eurozone. Yields on Portugal's 10-year bonds rose to their highest level in almost a year. Last week, the government announced that the budget deficit for 2009 amounted to 9.3% of GDP, much higher than it had expected. Financial Times (tiered subscription model) (04 Feb.) , Telegraph (London) (04 Feb.) , EUObserver (Brussels) (05 Feb.)

Are you unknowingly bailing out Greece?

It’s not out of the question, thinks Ron Paul. He says:
“Greece is only the latest in a series of countries that have faced this type of crisis in recent memory. Not too long ago the same types of fears were mounting about Dubai, and before that, Iceland. Several other countries (Spain, Portugal, Ireland, Latvia, Turkey) are approaching crisis levels with public debt as well. Many have strong ties to Goldman Sachs, and the case could easily be made that default could have serious implications for big US banking cartels. Considering the ties between the Fed and these big banks, it is not outlandish to wonder if the US taxpayer is secretly bailing out the entire world, country by country, even as our real unemployment tops 20 percent. Unless laws are changed to allow a complete and meaningful audit of the Federal Reserve, including its agreements with foreign central banks, we might never know if this is occurring or not.”

So the link between Goldman Sachs and Greece is well established. And everyone knows of the revolving door between Goldman and the Federal Reserve. Paul’s concern probably seems more plausible now, doesn’t it? And he’s right, unless laws are changed to allow a complete and meaningful audit of the Federal Reserve, including its agreements with foreign central banks, we will never know if this is occurring or not.

MIT’s Johnson said of Goldman Sachs - “From what we know, this is an egregious example of a conflict of interest... Even if the deal had been authorized, it doesn’t let them off the hook.”

“Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s Blain. “The bottom line is foreign exchanges and bond investors bought something sellers knew not to be the case.”

Report: Biggest names on Wall Street helped Greece, Italy hide debt: Greece and Italy were able to conceal their excessive borrowing with the help of some of the most prominent firms on Wall Street, including Goldman Sachs and JPMorgan Chase, The New York Times reported. Other European countries might have relied on similar derivatives deals to hide their budget deficit from the EU. In many cases, deals put together by the banks were similar to those that triggered the collapse of the U.S. subprime-housing market and the Great Recession, according to the Times. The New York Times (13 Feb.) , Bloomberg (14 Feb.)

Moody's follows S&P with warning on Greek debt's rating
Greek government bonds declined after Moody's Investors Service followed Standard & Poor's in warning that the nation's long-term debt could be downgraded "in a few months." Moody's is the only major credit rating agency that gives Greece's debt an A rating. That rating is important because it allows Greece to offer its bonds as collateral for loans from the European Central Bank. Financial Times (tiered subscription model) (25 Feb.)

Meanwhile, the US deficit has just up-ticked another 100 billion, the bailouts continue, oh, did I say anything yet about the inevitability of higher taxes? Runaway government spending is the way and now this year’s federal deficit is $1.5 trillion, in less time than I could write the words. And have you looked at the Federal Reserve’s balance sheet lately? Since the beginning of the financial market turmoil in August 2007, the Fed’s balance sheet has ballooned. It’s total assets have increased from $869 billion on August 8, 2007 to well over $2.2 trillion. And foreign central banks’ holdings (money we owe to foreigners) amount to $2.9 trillion. No, it’s not a pretty picture.



Obama’s new budget calls for a nearly 9% increase in spending over the 2009 level. Thus, the only way we won’t have another record deficit in fiscal 2011 will be if tax revenues grow by almost 15%. I highly doubt that, given the state of the economy and unemployment levels. What’s much more likely is for tax revenues to ring in at similar levels to today, which would suggest a 2011 budget deficit of around $1.7 trillion (nearly 75% higher than the CBO’s forecast of $980 billion). Even if tax revenues somehow climbed back to the levels of 2006 – 2008, we’d still be locked into a $1.3 trillion-plus deficit, more than 30% above the CBO’s ridiculous forecast.

So, while Greece is being singled out for having a 13% deficit-to-GDP ratio, the U.S. now sports a 10.5% deficit-to- GDP ratio, but if you count the $2.2 trillion that lies off the balance sheet at the Fed, we are right up there with Greece. The U.S. will need to borrow a record $2.5 trillion this year. Within five years, servicing U.S. government debt will account for over half the budget deficit.

There’s only one way out of this mess. We’ve got to pay our debts back with cheaper dollars. And that means inflation.

And higher interest rates follow inflation like summer follows spring. Interest rates right now are at mind-boggling lows. The three-month T-bill pays 0.06%! Want to go out five years? How does 2.39% sound? And the 10-year pays a whopping 3.66%.

This isn’t normal. The average yield for a 10-year Treasury over the last 30 years has been 7.5%. And, historically, three-month T-bills have approximated the CPI – which, over the last 12 months, came in at 2.7%. The Fed’s zero interest rate policy (ZIRP) has artificially depressed interest rates. But the ZIRP can’t go on forever. And it won’t. Rates will rise. It’s not a question of if. It’s simply a question of when. This is a long-term trend. And taking advantage of long-term trends is what makes you money.

Bottom Line: For the first time since just after World War I, we have serious sovereign debt problems in all of the major currencies. And for the first time in the history of man... we have a global monetary base that's not anchored to any real asset.


JOBS:

U.S. had 6.1 jobless workers for every opening in December
In December, the number of unemployed workers for every available position reached 6.1, up from 3.4 during the same month in 2008, the U.S. Labor Department said. The agency's Job Openings and Labor Turnover survey found that there were 2.5 million job openings at the end of December. Los Angeles Times/The Associated Press (09 Feb.)

U.S. consumer confidence is at lowest level in 10 months
The Conference Board said its consumer-confidence index dropped to 46 this month, compared with a revised 56.5 in January. "More than six months after the recovery started, consumer confidence is still close to a record low," said Paul Ashworth, senior U.S. economist at Capital Economics. "Without a sustained acceleration in consumption growth, this recovery will eventually fade." USA TODAY/The Associated Press (23 Feb.)


Chart via Bianco Research

Note: Stock market performance following these drops is usually poor. Just in time for the second “Green Shoots” campaign.

Initial jobless claims in U.S. increase 3 weeks straightFirst-time claims for unemployment benefits increased to 480,000 last week, compared with the previous week's 472,000, the U.S. Labor Department said. Most economists had forecast a decline in initial claims. Last week was the third consecutive week of increase. Forbes (04 Feb.)

Initial claims for unemployment benefits rose 22,000 to 496,000 at the end of February.

So, one survey shows a decline in jobs and the other shows an increase in the unemployment rate; it’s the same difference, but if you are a little skeptical, you should be, as these numbers are also subject to big revisions, and one month shouldn’t be taken too seriously.

Which gets to the special problems of seasonal adjustment and annual revisions: This month the BLS revised its estimate of how many jobs there were by looking at unemployment insurance data for March 2009. The total nonfarm employment level for March 2009 was revised downward by a whopping 930,000, and the previously published level for December 2009 was revised downward 1,363,000, both on a seasonally adjusted basis. The best I can say is that they haven’t learned how to count.

Employment firm Challenger, Gray & Christmas reported that U.S. companies announced layoffs for 71,000 workers, the highest pace of job cuts in five months and up almost 60% from December levels.

U.S. sees steep drop in construction spending for December
Construction spending in December plummeted to its lowest figure since 2003, the U.S. Commerce Department said. Expenditure for construction work totaled $902.5 billion, a 1.2% decline. The drop more than doubled the 0.5% decrease anticipated by economists polled by Reuters. Reuters (01 Feb.)

As ProPublica indicates, there are now 26 states which have depleted their trust funds, among these are the usual suspects including California, Michigan, New York, Pennsylvania and Ohio, which now rely exclusively on borrowings from the Federal government to prevent the cessation of insurance payments to recently unemployed workers. ProPublica estimates that another 8 states will be insolvent within 6 months, representing 68% of the United States. Did you know that 60% of the new jobs created last year, were created in Texas?















BONDS:

Already, total issuance of government debt already hit a stunning $922 billion in 2008. It then surged even higher to $2.1 trillion in 2009, and it's on track to top $2.5 trillion this year. The size of just ONE WEEK's debt auction has ballooned to almost $120 billion — more than the total supply hitting the market in a FULL year not long ago.

So, just make sure you avoid all longer term notes and bonds — whether government-issued or not. When the market price of bonds declines, so does your principal value. And because of that loss in principal, any extra interest they might pay you could be wiped out in a heartbeat.

And U.S. Treasury bills (always shorter than one year) would suffer virtually no price declines, even in the midst of a bond market collapse. Currency risk, yes. Yes, I know. Their yield is miserably low. But they still provide the world's best safety and liquidity.

State, federal debt puts additional pressure on credit market
The U.S. government is engaged in its largest series of Treasury auctions ever, and states are issuing bonds to support spending. These moves are putting additional pressure on the credit market while credit availability remains at a premium. "Clearly the government is not the 800-pound gorilla -- it's the 8,000-pound gorilla in the credit markets nowadays," said Mike Larson, an analyst at Weiss Research. "These numbers are just so mind-boggling. Really, what's going on is you have intractable debt and deficit problems in the country that neither side wants to tackle in a meaningful way, so the market is doing it for them." CNBC (22 Feb.)

This month, China, the single largest holder of U.S. debt, dumped more Treasuries than in ANY month since the government started tracking the data in 2000. Prices slumped. Yields surged. In effect, the U.S. Treasury had to bribe investors with higher yields to get them to buy. The 25-basis-point increase was the FIRST hike in the discount rate since early 2006.

Just a few days ago, Treasury tried to auction off $25 billion in 10-year notes and $16 billion in 30-year bonds. Investors failed to step up to the plate in either auction — a bright red warning sign for bonds if I've ever seen one!


BANKS:

According to Morgan Stanley, European banks will have to roll over more than $1 trillion in debt over the next two years. U.S. banks have an even larger debt load. If our economic forecast is correct, that will put upward pressure on borrowing rates without a commensurate uptick in the economy.

Fed aims to calm markets after surprise increase in lending rateBen Bernanke, chairman of the U.S. Federal Reserve, indicated last week that the central bank might increase its emergency lending rate to widen the spread between that and the main policy rate. Still, markets were caught off guard when the Fed raised the discount rate, prompting officials to say borrowing costs will remain low. "The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy," the Fed said. CNBC/Reuters (19 Feb.) , The Wall Street Journal (19 Feb.) , Bloomberg (18 Feb.)

The number of troubled banks has soared to 702. The FDIC says that 2010 will be the peak year for bank failures.

Bank lending in U.S. sees biggest annual decrease since 1940s
U.S. bank lending fell 7.5% last year, the Federal Deposit Insurance Corp. said. The $587 billion drop marked the biggest yearly decline since the 1940s. Most of the decrease can be attributed to cutbacks by the biggest banks, said FDIC Chairwoman Sheila Bair. The Washington Post (24 Feb.)


REAL ESTATE:

New Home Sales for the month of January declined 11.2% to 309K.

U.S. Economy: Sales of Previously Owned Homes Fall "Sales of previously owned U.S. homes unexpectedly dropped 7.2 percent in January to a seven-month low, indicating a lack of job growth is undermining government incentives to bolster the housing market." – Bloomberg

RealtyTrac has reported that, in January, the number of U.S. families facing foreclosure surged a shocking 15% higher compared to the same month last year!

Banks repossessed more than 87,000 homes last month alone — that’s a whopping 31% increase over January 2009. While an all-time record 2.8 million households were threatened with foreclosure last year, RealtyTrac expects that number to surge to 3.5 million this year — an appalling 40% increase!

Yet, during the past year in which the program has been in effect, sales of existing homes have climbed by 15%, while new home sales have actually dropped by 5% last year. But after being extended once already by the Obama Administration, the 1st time buyer tax credit will expire at the end of April—putting downward pressure on demand for existing home sales.

There are close to two million mortgages that are more than 90 days delinquent, and nearly all of these will end up in foreclosure. Add to that the 2.3 million properties that are in foreclosure or already seized by banks. At current sales rates, that adds up to a record high 16 months of supply. However, just as significant is the roughly 10 million households in a negative home equity position of worse than -20%, for whom strategic default - failing to pay when one could - is a very real option. Last year 25% of the 2.3 foreclosed were strategic.

Although we don’t expect policymakers to raise the fed funds rate until 2011, mortgage rates have already started to head higher and certainly will continue just as assuredly as quantitative easing continues. Thus the end of tax support, oversupply and increased borrowing costs will keep the market suppressed.
This isn’t the overall picture painted by the media that seems to imply that the housing market has at least hit a bottom and is starting to claw its way back from the abyss. Or has it?

First, we must consider the homebuyer tax credit mentioned above as a big contributor to the improved sales and price figures at the end of 2009. (There will likely be another surge in the spring, as homebuyers take advantage of the extended and expanded tax credit.)

Second, The Supply of Homes on the Market Is Likely to Grow
An influx of liquidated properties is likely to prompt a decline in prices if unaccompanied by a comparable increase in demand. An estimate of $473.4 billion in loans that will eventually need to be liquidated corresponds to approximately 1.75 million individual properties. This number represents almost 50% of the existing homes available for sale as of December 2009.



Now let’s not forget about the other market, there is growing concern in Congress that the shaky $6.7 trillion commercial real estate market could implode, delivering a major blow to the economic recovery. A bipartisan group of 79 House members led by Representative Paul E. Kanjorski, Democrat of Pennsylvania, and Representative Ken Calvert, Republican of California, sent a letter to the Treasury Department and the Federal Reserve on Monday urging them to take a more active role in keeping the commercial real estate market from turning into a disaster.

“The growing bubble in the commercial real estate industry has the potential to infect our economy and slow a recovery,” Mr. Kanjorski said in a statement.

Analysts warn of foreclosure crisis in commercial real estate
Analysts said a wave of foreclosure on commercial properties in the U.S. likely will hit community banks especially hard. "There's been an enormous bubble in commercial real estate, and it has to come down," said Elizabeth Warren, chairwoman of the Congressional Oversight Panel. "There will be significant bankruptcies among developers and significant failures among community banks." The Washington Post (19 Feb.)

Default rate on U.S. commercial mortgages continues to rise
The default rate on commercial mortgages in the U.S. increased from 1.6% in the fourth quarter of 2008 to 3.8% in the same quarter last year. Real Capital Analytics said the rate could hit 5.4% at the end of 2011. "The level of distress continues to rise irrespective of improving economic trends," said Sam Chandan, global chief economist at Real Capital. Bloomberg (24 Feb.)


POLITICS and TAXES:

State of the Union Address

President Obama unveiled a $3.83 trillion budget for fiscal 2011
The president has proposed a freeze on some domestic spending, but the freeze will impact only a small portion of the budget, would not kick in until next year, and would include a mix of spending cuts and spending increases. It would have zero impact on the 2010 deficit and little impact on future deficits.

The president has promised to give TARP funds back to taxpayers, but has also proposed applying unspent TARP money to community bank lending — the President is not interested in reducing the deficit.

The president supports "pay as you go" rules for Congress — requiring new spending to be balanced against spending cuts or revenue increases. But the devil is in the details. If the rules have no truly sharp teeth, they will be ineffective.
USX DOLLARS:

U.S. credit rating could come under pressure, Moody's warns
Moody's Investors Service said the U.S. faces a debt-growth trajectory that is "clearly continuously upward" as the credit rating agency warned that the country's triple-A credit rating might come under pressure. "Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the triple A government bond rating," according to a Moody's note. Financial Times (tiered subscription model) (03 Feb.)

Having said that, in fact, the dollar is operating in a win-win environment these days. Heads the dollar wins; tails practically every foreign currency loses. As euro investors stampede for the exits in the first half of this year, many will move their money into the “least ugly” currency available — the U.S. dollar. This inflow should help stabilize the dollar temporarily.

However, having said that, the value of the dollar is collapsing as the un-creditworthiness of the United States becomes evident. That means the price of hard assets – like gold – will keep rising and the value our government's long-term obligations will fall. Note the value of the U.S. long-bond market fell by more than 10% despite the government support. And the value of gold increased by more than 10% as investors fled the dollar.



Ultimately, despite obvious differences, the U.S. government suffers from the same disease as Greece, Portugal and other at-risk nations: Massive, out-of-control federal deficits. America’s red ink was $1.4 trillion last year and will be ANOTHER $1.6 trillion this year.

The safest thing to do right now is split your savings between short-term Treasuries and gold.

Why? Despite this “rush to safety” back into the U.S. dollar underway, and so the greenback continues to rally and the commodities continue to fall; for the moment. The the anxious market believes that the debt-money that trades under the “dollar” brand is of a superior quality to that of the euro (among others), and so the money flows back this way.

But the irony is that whatever brand of the stuff you own, it is still just the same thing: debt-money. Which is to say, an IOU masquerading as money.


REGULATORY SUPERVISION:

The financials were kicked while they were down this month. New York Attorney General Andrew Cuomo filed civil securities fraud charges against former Bank of America CEO Kenneth Lewis and CFO Joseph Price over the Merrill Lynch acquisition. My bet, Goldman Sachs will be next.

Ben Bernanke got reaffirmed for another term at the Fed this month. I’m once again reminded about how supremely unqualified this man is for the job. Prior to becoming Fed chairman, Ben Bernanke basically had zero experience outside academia. His resume only includes three full-time years working for the Federal Reserve and eight months on George W. Bush’s Council of Economic Advisors. The other 23 years of his career were spent teaching college.

What his virtues are I don’t know, but honesty, competence, and a track record of success are not among them. As this great YouTube compilation of Bernanke quotes shows, the chairman has a track record of being wrong on just about everything.
http://www.youtube.com/watch?v=HQ79Pt2GNJo&feature=related

SEC is poised to temporarily restrict short sales
The U.S. Securities and Exchange Commission is expected to approve a measure to restrict short sales on shares once they have fallen 10%, sources said. Charles Schwab, General Electric and thousands of people sent the SEC a petition urging the agency to adopt a permanent short-selling restriction. Meanwhile, Goldman Sachs, Citadel Investment Group and other hedge funds expressed opposition to such curbs. Bloomberg (23 Feb.)

It passed, oh, and good work SEC, you got Goldman Sachs pissed.

Thanks to Shapiro & Co's July 2009 amendment to NYSE Rule 452, that automatic broker vote is over. If shareholders don't send in their ballots, then their votes simply aren't counted. This means that each Proxy Season, corporations send their ballots out to shareholders; the problem is, only around 30% actually bother to cast a vote one way or the other. In other words, if you own 1000 shares of IBM and throw your proxy packet in the trash along with the LL Bean catalog and the Val-U-Pak, E*Trade or Merrill Lynch or whomever holds your stock in a brokerage account for you will do the voting in your name - and they will almost always just vote yes for the incumbent.

This sets the stage for the "No Vote" to mean more than it ever has before without that huge number of automatic "Yes Votes" coming in from the brokerage firms. There are many corporate board members who could find themselves voted out - even in an uncontested election!

To give you an idea of how powerful this rule change may be, in 2004, then-Disney Chairman Michael Eisner's vote count NOT INCLUDING the brokerage Yes's would have had him kicked out with the numbers against him 54 to 46. Instead, he won by that same margin because of the automatics. In other words, “No Votes” matter again and small investors who actually vote will have a proportionately louder voice in the absence of the brokerage firm’s “Yes” bloc vote. Enough said.


GOLD:

Overall investment in gold was 7% higher in 2009 than 2008.

Liu Yuhui, an economist at the Chinese Academy of Social Sciences, said last quarter that China might again scale back purchases of U.S. debt on concerns the dollar will decline. And this after their holdings were already lower in November than they were last July. Is it possible the Chinese (and the myriad other governments concerned about what U.S. leaders are doing to the dollar) and everyone else start buying gold for protection? Anything is possible, but it’s far more likely that they’re just getting started, considering that just 1.9% of Chinese foreign reserves are held in gold. I think most agree with the merits of diversification.



And this just in: An ING survey reports that 45% of investors in Asian markets (excluding Japan) picked gold as their most favored tool to protect their returns from inflation, more than any other asset.

Investment management firm Moonraker reported in a 2009 survey that 20 out of 22 fund managers interviewed bought physical gold for personal investment because they fear quantitative easing programs may lead to inflation. In other words, not only are they buying gold in their funds, they’re stashing some at home as one ounce coins.

Further, central banks are now net buyers of gold for the first time in 22 years. And last quarter it was reported by the Financial Times that the world's wealthiest families are also switching to gold.

George Soros's Soros Fund Management charged into gold during the fourth quarter, doubling its stake in the world's largest gold ETF. The $25 billion New York-based firm became the fourth- largest holder in the SPDR Gold Trust, adding 3.728 million shares valued at $421 million, according to a filing with the U.S. Securities and Exchange Commission yesterday. Taken together, these two investment positions are worth about $663 million and this doubling down represents the ETF fund’s largest single investment, as of Dec. 31.

Meanwhile, back at the Central Bank of Russia there was an update to their website for January. They increased their gold holdings by 100,000 ounces in January. That’s the first time they've added any gold in that month since January of 2007, hmm. It will be of great interest to see if they can improve on what they did during 2009... which was a record year.













QUOTES OF THE MONTH:

"The growing bubble in the commercial real estate industry has the potential to infect our economy and slow a recovery," said Chairman Kanjorski. "In order to safeguard the businesses operating on Main Street and protect the millions of jobs depending on commercial real estate, the Treasury and the Federal Reserve now must take needed and urgent action to stave off a potentially devastating wave of commercial real estate foreclosures and bank losses." - Congressmen Paul Kanjorski and Ken Calvert

“…we are still driving on the same winding mountain road, but this time in a faster car.” - Special Investigator Neil Barofsky, whose job it is to oversee the Troubled Assets Relief Program (TARP)

“Certainty? In this world nothing is certain but death and taxes.” - Ben Franklin
Note: If Ben Franklin were alive today, he would undoubtedly add inflation to his list. The almighty dollar has lost 82% of its purchasing power over the last 40 or so years. Inflation is the unseen pickpocket of modern life. Another pickpocket – a very visible one – is the taxman. Both steal from you and your children. (50% income + Sales tax, 20% Capital Gains + 50% Inheritance tax)

“As we all know, the global economic crisis started neither in Greece, nor in Russia, nor in Europe. It came to us from across the ocean.” - Russian Prime Minister Vladimir Putin, 16 February 2010

"It breaks my heart that 10 years ago we had a balanced budget, that we were on the way to paying down the debt of the United States of America," – Hilary Clinton, 2010

“I hope we can find a way of resurrecting the subprime market, because it was working well until those mortgages were widely securitized” - [Sir] Alan Greenspan, 2010

“There are no markets any more... only interventions.” – Ed Steers

“The point is, ladies and gentleman, that greed -- for lack of a better word -- is good...
Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit...
Greed, in all of its forms -- greed for life, for money, for love, knowledge -- has marked the upward surge of mankind. And greed -- you mark my words -- will not only save Teldar Paper, but that other malfunctioning corporation called the USA.” - Gordon Gekko’s “Greed is good” speech http://www.youtube.com/watch?v=7upG01-XWbY


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. It 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, Mike Larsen, Bob Irish, Chris Wood, Ambrose Evans-Pritchard, Porter Stansberry, Andrew Gordon, Tyler Durden, Doug Casey, Greg Spear, David Galand, Bryan Rich, Rick Ackerman, Elisa Martinuzzi, and Jim Rogers

Telegraph.uk, Star Tribume, Bloomberg, Financial Times, Telegraph (London), EUObserver (Brussels), Los Angeles Times, Associated Press, USA Today, Forbes, Reuters, CMBC, THE Washington Post, and The Wall Street Journal.

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.