October - 2009 - Economic Brief

So why the rally?

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

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

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

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

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

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

In fact:

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


“Beating Expectations”

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

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

Hello...

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

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

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

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

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

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

So why the rally?

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

But at what cost?



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

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

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

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

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

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

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

Why would the government do this?

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

SO?

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

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

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

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

Even the United Nations...

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

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

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

So what's next?

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

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

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

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

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

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

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

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

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

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

On the home front:

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

And it’s not just residential.

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

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

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

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

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


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

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

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

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

5.
Part of the solution:

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Quotes of the month:

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

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

And finanlly,

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

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

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

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

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

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

September - 2009 Economic Brief

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

Case in point:

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

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

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

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

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

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


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

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


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

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


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

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



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

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

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

OR ...

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

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

Case in point: Both Russia and China

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

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

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

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

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

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

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

Is it working?

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

And,

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

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

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

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

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



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

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

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

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

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

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

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

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

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



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

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

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

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



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

Did I mention the security wild card?

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

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

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

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

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

Did I mention hidden costs?

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

Did I mention the energy wild card?

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

Did I mention the ethical issues?

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

Did I mention China’s new gold policy?

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


Note to readers:

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

August - 2009 Economic Brief

From July 10 through July 23 the S&P 500 index gained 11.1 percent and we are still rolling, but on just exactly what is not so clear; what's clear is it certainly is not earnings, they are way down.

Earnings declined over 98% since peaking in Q3 2007, making this by far the largest decline on record (the data goes back to 1936). In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.”

As you may note, materials, consumer discretionary, and information technology were the three biggest sector winners.

Note that all three of these sectors are highly cyclical. In other words, they do well when the economy is strong and poorly when the economy is weak.

The fact that these three continue posting strong gains means investors are betting on a quick economic recovery.

But even if things are now less worse ... and possibly even bottoming ... is such an optimistic rotation into these riskier stocks warranted?

Case in point, even after announcing a poor quarterly earnings report, shares of Google posted a new yearly high, go figure!

Consider too what we heard from Microsoft in July. The firm said profits sunk 29 percent in the second quarter of 2009 vs. the same period a year earlier.
What about the financials and their bogus profits?

According to Bloomberg.com,

Goldman Sachs’ current record $3.44 billion earnings from their free or low cost capital supplied by broke American taxpayers has led the firm to decide to boost compensation and benefits by 33 percent. On an annual basis, this comes to compensation of $773,000 per employee.

As Eliot Spitzer said, the banks made a “bloody fortune” with US aid. And now, Goldman is taking the most trading risk in the firm's history.

Yes, it's true, Goldman generated record profits in the second quarter. Now it's also true that it doing so by taking the most trading risk in the firm's history, with money it, heretofore, never had access to until it' s new partner showed up, the US government with money from the Federal Reserve.

Yet presently, the banks have more than a $1 trillion in toxic assets on their balance sheets and the wholesale credit markets (securitization) are in a shambles. Nothing has been done to separate commercial from investment banks, force all derivatives onto regulated platforms, unwind insolvent financial institutions, establish prices for complex securities, increase capital requirements, or put an end to off-balance sheet operations. In short, we are not fixing the problem are we? The next bubble is already here. This time it’s government spending, fiscal deficits and increasing risk...

The point being... Beware of the Bear Trap

Here are my reasons:

1)
The sheer size of the derivatives market.
In 2006 the global market for derivatives was $285 trillion. Now it's $592 trillion. Its six-year compound rate of growth: A shocking 34.5 percent per year!

Despite all the talk of reducing risk and reforming the financial system, U.S. commercial banks still hold record amounts of high risk derivatives. The latest tally: $202 TRILLION in notional value derivatives. And even that pales in comparison to the global tally by the Bank of International Settlements, now at $592 trillion.

Bank of America has total credit risk to derivatives to the tune 169 percent of its capital; Citibank, 216 percent; JPMorgan Chase, 323 percent; HSBC Bank USA, 475 percent; Goldman Sachs, a whopping 1,048 percent, or over TEN times its capital

2)
The Lack of Transparency.
We railed against over-the-counter (OTC) derivatives, representing 96 percent of all derivatives held by U.S. commercial banks. No one but the parties involved knows precisely what the contracts are, or what their value really is.

Now, in Senate Banking Testimony, SEC Chairman Mary Schapiro has openly admitted that
"OTC derivatives are largely excluded from the securities regulatory framework by the Commodity Futures Modernization Act of 2000. In a recent study on a type of securities-related OTC derivative known as a credit default swap, or CDS, the Government Accountability Office found that 'comprehensive and consistent data on the overall market have not been readily available,' that 'authoritative information about the actual size of the CDS market is generally not available,' and that regulators currently are unable 'to monitor activities across the market.'"

3)
Too much in the hands of too few.
Back in 2006, there are close to 9,000 commercial and savings banks in the U.S. But... 97% of the bank-held derivatives in the U.S. are concentrated in the hands of just five banks. Today, 3 years later, virtually nothing has changed. And if you include the recent shotgun mergers and restructurings, such as Bank of America's acquisition of Merrill Lynch, the concentration of risk today is even greater.

4)
Cancerous growth in Credit Default Swaps (CDS).
It was just $180 billion in 1996. That grew to $893 billion in 2000 ... $1.95 trillion in 2002 ... and a stunning $20 trillion in 2006. It's hard to believe. That's a 111-fold expansion in just a decade! CDS are just one of the derivatives in a larger $592 TRILLION market of all different kinds of derivatives controlled by U.S. commercial banks. It’s the derivative that relates to the insurance-for-insurance for home mortgages through Fanny Mae and Fredy Mac.

The problem: Now, hedge funds and other investors are using these derivatives to spin the roulette wheel. In fact, the hedge fund industry now holds 32% of the credit default swaps, up from 15% two years ago. Think about that for a minute:
Thinly capitalized, gun-slinging hedge funds are now essentially taking on the responsibility for insuring billions of dollars in bonds.

5)
Outstanding derivatives dwarf the trading in the underlying securities.
The sheer volume of total derivatives outstanding (not just CDSs) ... is dwarfing the amount of underlying debt securities. In other words, the sheer volume of derivatives outstanding ... is dwarfing the amount of original debt in the underlying debt securities or the amount of debt the specified company owes. That's causing major market distortions.

6)
The Baltic Dry Index,
which measures the freight rates for dry cargo traveling by ship, hit an all time high of 11,793 on May 5, 2008. Then it plunged to 663 on December 5, a decline of 94.4 percent. It was as if trade was coming to a standstill. However, freight rates soon started to recover...

Since its December low, the index is up to approximately 4,000 for a whopping gain of some 500 percent! And the "green shoot" crowd is pointing to this surge as proof of the revival in world trade, even though the index is still down 68.6 percent from its May 2008 high.

7)
Container vessels reflect the movements of goods instead of raw materials. So their behavior is more representative of what's going on with sales of finished goods. And they exclude any possible commodity speculations.

According to Germany's Commerzbank, freight rates of container vessels are down 75 percent from early 2008. More importantly, they declined by almost 30 percent this year and hit a new low in June.

Association of American Railroads reports that total traffic for the major players fell 21% in Q2 vs a 16% decline in Q1, which means business inventories are not getting replenished.

8)
The Chinese stock market is up 78 percent from its November low. But even so, it's still down 50 percent from its October 2007 high.

9)
The secular credit expansion has reversed, both consumers and banks are deleveraging and companies in the middle are downsizing to accommodate a leaner business model going forward: the "new normal." The asset boom was driven by liquidity and liquidity was driven by easy credit. Whether you wanted to buy a car, a condo, a corporation or a Collateralized Debt Obligation, financing could easily be arranged. Things are different now.

This rally is celebrating the fantasy that the old normal can be revived. Dreams die hard and these developments do not bode well for world trade.

Meanwhile, the Fed is stealthily tightening, not by raising rates, but by withdrawing funds from the money supply and extending time periods for short-term bond offerings! And it is a good thing to because according to the U.S. Federal Reserve, seasonally adjusted M2 has gone from $7.25 trillion in July of 2007 – to over $8.37 trillion today.

(Note: M2 is calculated by totaling up the value of cash held by the public, checkable deposits, household savings deposits, small time deposits, and money market mutual funds. M2 is an important economic indicator used to forecast inflation. If you have too much money or M2 awash in the economy chasing too few goods and services, the result is higher inflation.)

That’s 15.44% more money circulating around the economy in just two years, a colossal $1.12 trillion increase. This large injection of currency into our economy will certainly lead to higher inflation, which will be further amplified due to our fractional reserve banking system. In a fractional-reserve banking system a new sum of money is created whenever a bank gives out a loan.

Unless backed into a corner (do I hear China?) the Fed won’t increase rates as it could cause interest payments on the government’s debt to double, it would be better to devalue the currency than to make still larger payments; today payments are slightly below $500 billion annually. Year over year M2 growth (actual currency in circulation and key economic indicator used to forecast inflation) was 9.3% in June and has only increased 2.5% year to date. Banks have increased their cash reserves by more than 25% in the last year, but lending is not increasing.

Money pumped into financial system not reaching broader economy

Central banks worldwide have frantically poured money into the financial system to cope with the credit crunch, but that liquidity does not appear to be reaching the broader economy. Central bankers are encouraging financial institutions to use the funds to bolster lending, but banks are concerned about their balance sheets and potential losses on loans. (Financial Times tiered subscription model) (21 Jul.)

Instead, the velocity of money, (See March – 2009 Economic Brief for an explanation of monetary velocity), in the U.S. financial system is slowing as banks hold on to capital for a rainy day. And not just banks; consumers, too, the U.S. savings rate is now approaching 7%, having been near zero two years ago.

In fact, just about everything in the U.S. seems to be slowing down. For example, the country is experiencing the longest and steepest decline in driving since the invention of the automobile.

10)
According to the latest data from Standard & Poor's, the second quarter of 2009 saw just 233 dividend increases.

How does that stack up historically?

Well, it's the worst second quarter on record since 1958! This year might just go down in history as the worst year ever for dividends. In the first quarter of 2009, companies cut $40.8 billion in dividends, more than were eliminated in all of 2008.

11)
The number of states that have exhausted their unemployment insurance fund and now must borrow from the federal government to meet weekly payment obligations continues to rise. So far, 18 states have tapped the feds for a total of $12 billion.

And all this pales in comparison to California’s fiscal disaster — the nation's most populous state, with the largest GDP and the greatest impact on the entire U.S. economy — collapsing.

Remember: California has a GDP of $1.8 trillion, larger than the economies of Russia, Brazil, Canada and India.

12)
And U.S. employers have just slashed another 540,000 jobs in June vs a 322,000 loss in May, driving the official U.S. unemployment rate to 9.5 percent, its worst level in 26 years. If you include part-time and discouraged workers, 16.5 percent of America’s work force is now jobless! Every single job created after the prior recession has been wiped out.

Unemployment remains a major hurdle, Treasury official says

The U.S. Treasury is concerned that 40% of those unemployed describe themselves as "permanent job losers," a much higher percentage than in previous recessions, said Alan Krueger, assistant Treasury secretary for economic policy. Employment will continue lagging behind production, he said, and the weak job market "poses severe challenges" for economic recovery. Reuters (20 Jul.)

Unemployment claims reach 554,000 in U.S.

The number of initial claims for unemployment benefits in the U.S. climbed by 30,000 last week, bringing the total to a seasonally adjusted 554,000, the Labor Department reported. A government official said the increase was slightly exaggerated by an unusual pattern in auto-industry layoffs. The New York Times/Reuters (23 Jul.)

Job worries undercut U.S. consumer optimism

Consumer confidence in the U.S. declined for the second month in a row in July, The Conference Board said. The research group's Consumer Confidence Index slid from 49.3 in June to 46.6 this month. "Consumer confidence, which had rebounded strongly in late spring, has faded," said Lynn Franco, director of The Conference Board Consumer Research Center. USA TODAY/The Associated Press (28 Jul.)

13)
Consumer confidence unexpectedly plunged by nearly 10 percent last month The consumers whose spending used to account for 70 percent of the entire U.S. economy. And with 70% of our economy dependent on consumer spending, where is the recovery going to come from?

Let’s take a quick look at what is really happening out there for the consumer... in the first three months of 2009, delinquencies on home equity loans, home equity line of credit and credit cards exploded to new, all-time record highs — and delinquencies on auto loans surged a mind-numbing 48 percent from the end of 2008. As a reflection of consumer confidence you can also factor in that retail sales dropped 4.9% in June, due in part to deep discounting. That headline figure may not sound too bad, but double- digit sales declines were common among many.

All department stores that reported June sales posted declines. The new frugality is affecting the entire retail spectrum, from low-end Target (down 6.2%) to high-end Neiman Marcus, where sales were off 20%. Interestingly, sales of televisions were up 50% year-over-year, suggesting the return of the cocooning phenomenon.

Meanwhile, the “consumer effect” on the default rate on Corporate “junk” bonds has almost quadrupled to 9.5 percent from 2.4 percent a year earlier, according to Fitch Ratings.

Banks continue to struggle with troubled loans

Results from Wells Fargo, U.S. Bancorp, KeyCorp and SunTrust Banks show that while they are performing well in some areas, they are still struggling with increases in troubled loans to businesses and consumers. All four banks reported steep increases in loan losses. The reports indicate the financial industry is not done working through issues related to the financial crisis. The Wall Street Journal (23 Jul.)

U.S. household leverage, as measured by the ratio of debt to personal disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades, leverage proceeded to more than double, reaching an all-time high of 133% in 2007. That dramatic rise in debt was accompanied by a steady decline in the personal saving rate. The combination of higher debt and lower saving enabled personal consumption expenditures to grow faster than disposable income, providing a significant boost to U.S. economic growth over the period. In the long-run, however, consumption cannot grow faster than income because there is an upper limit to how much debt households can service, based on their incomes.

Beginning in 2000, however, the pace of debt accumulation accelerated dramatically... Between 2000 and 2007 the total U.S. credit market debt increased at five times the rate of nominal gross domestic product. Rising debt levels were accompanied by rising wealth.

In the last 18 months, the ratio of debt to disposable income has only eased to 128%, which means that it will take at least a decade to rebuild balance sheets enough to resume spending at pre-crisis levels. It's going to be a long hard slog even if the stimulus works according to plan. The full brunt of the credit collapse may be behind us, but please, the other two shocks, namely deflating labor markets and deflating home prices, are very much still front and center.

Belt-tightening consumers slash discretionary spending

Companies that make and sell consumer discretionary items such as toys and motorcycles are taking a particularly harsh beating as unemployment continues to rise. Analysts said sales cannot go up as long as consumers' income is going down. BusinessWeek (19 Jul.)

14)
U.S. deficit reaches record $1 trillion and counting

With three months left to go in the budget year, the U.S. government's deficit has hit an all-time high of $1 trillion. The Congressional Budget Office predicted that by the end of the year, the deficit will be 13% of the country's GDP. That compares with a recent high of 6% of GDP in 1983 during the Reagan administration and 30.3% in 1943, when the U.S. spent a huge amount of money to fight World War II. The Associated Press (13 Jul.)

Here are some key statistics regarding the debt burden of the US:

 US official debt is $11.3 trillion. This represents an astronomical 80% of our 14 trillion GDP.

 Unfunded national debt that is not accounted for is well north of $50 trillion. That includes $10.5 trillion for Social Security promises, $39.5 trillion for Medicare and Medicaid promises and $8.4 trillion for prescription drug coverage.

 Household debt is over 100% of US GDP. It was only 40% in the severe recession in the mid 70s.

 Alarms go off when nations have budget deficits that exceed 5% of their GDP. The US is heading towards a 13% deficit for fiscal 2009. Perennial defaulters like Mexico and Argentina have 2.9% and 3.6% deficits respectively. This is a good point to remind you that US GDP as well as tax receipts are plummeting.

 More than half of this year’s national budget has to be borrowed. A choking $1.85 trillion is on the auction block.

 The global demand for US debt instruments has fallen off a cliff. The Fed-Treasury complex is now buying our own debt in a desperate end game strategy.

 Rising interest rates will make government sponsored debt even more impossible to pay.

That means that when the music stops on this Fed orchestrated mythical musical ride, the downside momentum could be dramatic. Keep your powder dry because the stimulus still isn’t enough.

Have you heard that:

U.S. House leader requests an open mind about second stimulus

Though he agreed that it is too early to give up on the original economic stimulus, and that U.S. House Majority Leader Steny Hoyer said the nation should be open to another round. The increase in unemployment is slowing down, but "it's not where it ought to be," he said. Reuters (07 Jul.)

That's a tacit admission that the $787-billion package enacted in February is failing to get the job done.


Out of the blue:

Food stamp bonanza: Over 10% of America now enrolled
Nationwide, enrollment in the program surged in March to about 33.2 million people, up by nearly one million since January and by more than five million from March 2008. In a recent research report, Pali Capital Inc. estimated that food-stamp spending will increase between $10 billion and $12 billion this year from $34.6 billion in 2008.



Quotes of the month:

One,
Bill Gross, managing director at the giant bond investment firm Pimco, used his own colorful language to describe the recent past — and provide a vision of the future:

"U.S. and many global consumers gorged themselves on Big Macs of all varieties: burgers to be sure, but also McHouses, McHummers, and McFlatscreens, all financed with excessive amounts of McCredit created under the mistaken assumption that the asset prices securitizing them could never go down. What a colossal McStake that turned out to be...

The fact is that American consumers have suffered a collapse in wealth of at least $15 trillion since early 2007.

Two,
TARP Special Inspector General Neil Barofsky is unhappy with Treasury Secretary Geithner. In testimony before the House Committee on Oversight and Government Reform, Mr. Barofsky criticized the Treasury for lack of transparency and offered a headline grabbing estimate of the U.S. government's potential maximum cost from the financial crisis: $23.7 trillion.

Three:
"We want to get to the bottom of what the Federal Reserve's been doing, and what they're getting away with." And, "It's a real contest between those of us in America who believe in freedom and the free market versus those who would socialize our country." – Ron Paul



Facts of the month:

“In 20 years, China’s cities will have added 350 million people—more than the entire population of the United States today.” - by McKinsey Global Institute

50 million Americans are already on antidepressants!

Note to readers:
One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. In reference to my sources this month, they include in no particular order: Gregory Spear's Market Commentary; DailyWealth Reader; Tom Dyson/The Daily Crux; Money and Markets/Claus Vogt, Nilus Mative, Martin Weiss, Mike Larsen; Investorsdailyedge.com; Bloomberg; Reuters; The Wall Street Journal; Russell McDougal, DDS; Mike Whitney; Doug Casey; Ted Peroulakis; Financial Times; Reuters; and Business Week.

July - 2009 Economic Brief

Recovery called into question by exploding U.S. debt
Worries about the U.S. government's skyrocketing debt are prompting doubt about a turnaround for the economy. Government bonds have come under heavy selling pressure, driving up yields. A recovery could be derailed by increased borrowing costs for consumers and businesses, economists said. Financial Post (Canada)/Reuters (28 May.)

Industrial production takes surprise 1.1% drop in U.S.
Output from factories, mines and utilities in the U.S. fell 1.1% in May compared with April, the Federal Reserve said. Economists polled by Reuters had expected a 0.9% decline. Reuters (16 Jun.)

Let’s see, where were we...

In early September 2008, the Bernanke Fed did an abrupt about face, 180 degree turn by a little less than $1 trillion. The percentage increase in the monetary base was the largest increase in the past 50 years by a factor of 10. Now, the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. The amount of currency has increased by 10%, while bank reserves (non-currency) have increased 20 fold.

So, in March, in a desperate attempt to jump-start the credit markets, Bernanke dared go where no other Fed Chairman had gone before. He dropped short-term rates to zero. He committed to buying $300 billion in long term Treasury securities plus another $100 billion in government agency securities.He even promised to buy up to another $750 billion of mortgage-backed securities.

Total new commitments in that one announcement alone: $1.15 trillion.

However, despite the Fed's giant purchases, Treasury Bond prices have continued to plunge instead of rising or stabilizing as Bernanke had hoped.

Total Fed purchases so far: $130.5 billion.

Catch-22

Low interest rates are absolutely crucial to any possible economic recovery stateside while the free market demands higher interest rates to compensate for risk of inflation (e.g. Federal Reserve is buying its own US Treasuries).

And despite the Fed's mammoth mortgage bond purchases, we've just seen a sudden collapse in mortgage bond prices.

Total Fed purchases so far: A whopping $507 billion!

Plus,

The Treasury alone will need to issue a whopping $1.84 trillion in net new Treasury securities this year — just to finance the deficit expected by the Obama Administration.

That excludes any costs for future credit that goes bad (among the trillions that the government now guarantees to save GM, AIG, Fannie and Freddie, the entire banking sector and many other companies) or the hundreds of billions now being demanded by cities and states! Hello, good-bye, California!

California close to paying bills with IOUs
Within a week, California will have to start issuing IOUs to pay its bills, the state's controller said. "Next Wednesday, we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression," Controller John Chiang said. State Treasurer Bill Lockyer said he will draw funds from a reserve account to meet the state's debt-service obligations. Reuters (24 Jun.)

Keep this in context:

The Fed's Flow of Funds Report for the first quarter of 2009, demonstrate, beyond a shadow of a doubt, that the credit market meltdown, which struck with full force after the Lehman Brothers failure last September, actually got a lot worse in the first quarter of this year.

This directly contradicts Washington's thesis (spin) that the government's TARP program and the Fed's massive rescue efforts began to have an impact early in the year. Go figure!

The first quarter brought the greatest credit collapse of all time.

Who is suffering the biggest and most pervasive losses?
U.S. households and nonprofit organizations!

In U.S. households alone, the losses have been massive: $1.39 trillion in the third and fourth quarters of 2007... a gigantic $10.89 trillion in 2008 ... $1.33 trillion in the first quarter of 2009 ... $13.87 trillion in all, by far the worst of all time.

And don’t forget:

The king of off-balance sheet accounting would have to be the U.S. government. You see, the “official debt” doesn’t include the very real obligations our country owes for Social Security and Medicare. Add these and a few other entitlement programs to the equation and the United States’ TOTAL debt is in the neighborhood of $100 trillion.

The Fed’s solution is to step in and buy our own debt, when other countries and institutions are unwilling or unable to do so. But this creates a catch-22. This amounts to nothing more than printing dollars. And the more dollars we print to buy our own debt, the weaker the dollar becomes and the less likely that foreign countries are willing to buy.

The main reasons investors sell — fear of inflation and damage to the U.S. government's credit — are, themselves caused by the Fed's own buying. In other words, the more the Fed buys, the more our bond investors are motivated to sell.

The U.S. is a debt-thirsty (addicted?) nation at a time when the global pool of liquidity is drying up. That is a prescription for much higher Treasury rates down the road and other even more uncomfortable consequences.

For example, more and more of the world markets think about another world currency, other than the US dollar.

U.S. Treasury Secretary Tim Geithner met with Chinese leaders just a couple of weeks ago. His top goal is to reassure them their money invested in U.S. dollars is safe. China holds $740 billion in U.S. government bonds and is just now closely inspecting the merchandise.

U.S. dollar's position shaky
The financial crisis has brought a sense of urgency to the debate over whether the U.S. dollar should play such a dominant role in the world's economy. Brazil, Russia, India and China called for a "more diversified" international monetary system. If the dollar is ousted as the world's reserve currency, it might raise the cost of government borrowing. But it could also usher in a boom for U.S. exporters by making their products more cost competitive. The Washington Post (24 Jun.)

The People's Bank of China — the central bank for 1.3 billion people and America's biggest creditors — has just issued an economic report calling on the world to replace the U.S. dollar as the world's reserve currency ... and for the International Monetary Fund to issue a new, single "super-sovereign currency."

Wall Street should be in a good mood today as it closes the books on one of the best quarters in three generations. Keep in mind, however, that celebrations on the Street never last long.

How do we explain buyers paying high prices for bank stocks that are fundamentally broke?

With investors who ignore the fundamentals, such as the surge we just saw in unemployment, 9.4%, not to mention the already mentioned “DEBT”; and they seem to be easily seduced by Washington and Wall Street spin.

Mass layoffs in May tie March's record high in U.S.Mass layoffs -- at least 50 job losses by a single employer -- grew to 2,933 last month, from April's 2,712, the U.S. Labor Department reported. That is practically a tie with March's figure, which set a record. Yahoo!/Reuters (23 Jun.)

They don’t call this rally a “sucker’s rally” for nothing (although using such a term as “bear market rally” would probably be grounds for dismissal at a mainstream brokerage). It rose on fumes. It certainly didn’t rise on earnings. Take a look at the S&P’s earnings in the past 20 months. They’ve nosedived from $80 to $7 – the biggest drop ever recorded.

According to Ibbotson Associates, of the 74 rolling 10-year periods since 1926 (i.e., 1926-1935, 1927-1936, and so on), U.S. large-cap stocks posted negative returns in just three of them. The first two were 1929-1938 (-0.89% compound annual return) and 1930-1939 (-0.05% compound annual return), and involved the Depression. The third loser decade was the most recent -- and the worst. From 1999-2008, U.S. large-cap stocks "returned" a compound annual average of negative 1.38%.

And how do we explain that by the end of 2008, household debt in the U.S. was $13.8 trillion (which has doubled since the year 2000), nearly equal to our $14.3 trillion GDP – do they spin it as near economic recovery or one heck of a stimulus factor for the economy.

Good News:

In April, 2009, the personal saving rate in the U.S. surged to 5.7 percent, a 15-year high. That represents a massive trend change and has important consequences for the future.

Even the Baby Boomer Generation, some 78 million strong, have realized that planning on rising stock and real estate prices to meet their future needs has led to huge losses. They've suddenly realized that consumption and indebtedness are not the way to prosperity.

And, the $64,000 question is: If we reduce consumer debt we also preclude a sustainable profit recovery for the banks (the economy and the stock market). What to do?

For its efforts, the government has bought a rally of nearly 40 percent in the S&P 500 since the March lows.

While stock prices have been enjoying what I see as just another bear market bounce ... the U.S. bond market has been crumbling under the weight of Washington's increased spending and interest rates on the rise.

The problem is:
No government, even one run amuck with spending and money printing, can replace $13.87 trillion in losses by households.

If interest rates continue to increase, any hope for economic recovery could be cut off at the knees ... the ultimate outcome could be soaring borrowing costs for consumers and businesses alike.

Oil remains the key wild card. If oil prices level off, the inflationary bullet may be dodged. If they continue to rise, stagflation could certainly follow.

U.S. consumer confidence loses bit of ground
The Conference Board's sentiment index, an indicator of consumer confidence in the U.S., edged down last month. Economists who anticipated a modest move toward greater optimism were caught off guard. Consumer confidence was still higher than the record low in February. Bloomberg (30 Jun.)

Food for thought:

Grain shortage sets U.S. up for soaring food prices
The stage is set for rising food prices and grain shortages in the U.S., triggered by depleted stocks of corn and soybeans, analysts said. "The dynamics for higher food prices are already in place, but they are being masked by problems in the larger economy," said Greg Wagner, senior commodity analyst at AgResource. Los Angeles Times/The Associated Press (10 Jun.)


Note to readers: One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. In reference to my sources this month, they include in no particular order: Gregory Spear's Market Commentary, DailyWealth Reader, The Daily Crux, Money and Markets, Investorsdailyedge.com, Moody’s, Bloomberg, The New York Times, The Associated Press, Financial Times, The Globe and Mail (Toronto), Financial Week, International Herald Tribune, Reuters, The Washington Post, The Wall Street Journal, Martin Weiss, Sharon Daniels, Russell McDougal, Jon Herring, Claus Vogt, and Andrew Gordon.

June - 2009 Economic Brief

Investments soar as investors ignore the economy!

The economy sank at an annual rate of -6.1 percent in the first three months of 2009 ... after plunging -6.3 percent the previous quarter — that's the WORST back-to-back contraction in 50 YEARS.

Yale professor Robert Shiller looks at a 10-year trend in "normalized" earnings for the S&P 500 Index, after adjusting for inflation. In March, his normalized P/E ratio fell to 13, its lowest level since 1986! But wait, that still isn't dirt-cheap.
That's because, at the end of previous secular bear markets in the 1940s, 1970s, and early 1980s the normalized P/E ratio frequently fell below 10 ... sometimes even lower.

After the market's nine-week rebound rally, the normalized P/E ratio is back up to 15.6 today ... that's close to its historical average, but again it's certainly not cheap.

Don't lose sight of the severity of this economic crisis. The recession is currently in its 17th month. Already, it's the longest recession since WWII — even worse than the previous record holders — the recessions in 1973-75, and 1981-82.

GDP already fell at an annual rate of -6.1 percent last quarter alone! The previous record decline was -1.9 percent in 1982.

The consumer economy's apparent strength is misleading because it is fueled by lower taxes and transfer payments from the government. And yet the market has been on a tear with the S&P 500 climbing to old highs, and guess -- just guess -- where the bulk of those gains have come from? Why, from financial stocks, of course, go figure…

If a bank is earning a positive interest spread, it's making money. It's as simple as that.

And right now, the banking industry in general is earning interest spreads so wide, they're close to breaking all-time highs due to the government’s help!

Keep in mind that during America's first Great Depression, stocks staged rallies of +25 percent to +30 percent on four different occasions, but with each rally attempt coming from a lower level, while the overall market trend continued to spiral downward.

Our apparent willingness to prop them up into perpetuity has yet to be seriously challenged, which explains the financials rally. Rumors of profitability have been greatly exaggerated (thanks in part to mark-to-dream-on accounting), but when the U.S. taxpayer is your compulsory patron, it is, as the kids used to say, all good.

However, the rally appears to be overdone. Most of it is built on the banks beginning to rebound with the government’s help. That’s absurd.
The last I checked, the same problems that are at the core of the crisis not only still exist, but are worsening...

 Consumers have purged 20 percent of their net worth since the second quarter of 2007, in addition to the biggest decline in consumer credit ever recorded, a decline of 80 percent! This represents a massive contraction of bank loans and credit, sabotaging attempts to revive credit flows and stimulate the economy.
Reason: These banks must build capital quickly, and the only realistic way to do so is by cutting back on their lending.

 The housing market, which fueled the crisis, is still printing new lows and foreclosure rates are still rising aggressively. About 22% of homeowners carry mortgage balances that are greater than their houses are worth. Home foreclosure filings skyrocketed 32 percent to a new all-time record high in April, making the March-April period the worst two-month surge in foreclosures ever with a record 682,000 homeowners receiving notices.

The big picture: Housing starts, the best measure of the industry's health, peaked at an annual pace of 2.3 million units in early 2006.
Now, they're running at barely more than a 0.5 million units.
That's a decline of 77.6 percent — three-quarters of America's largest single industry wiped out.

Following on the heels of the subprime debacle, a huge wave of Alt-A and option-ARM resets are in the pipeline. They will soon start showing up as huge credit losses. We are not even one-third of the $3.8 trillion of total losses thought to occur across all mortgage types including commercial. So there's more than twice as much pain ahead as behind. Ouch.

 Unemployment is still rising, during April, joblessness in the U.S. likely reached its highest level in 25 years, economists said. For the fifth consecutive month, employers slashed 600,000 or more jobs, bringing the unemployment rate to 8.9%, 23 million people. Who is going to pay for social security and Medicare?

 The problem, of course, is that we have fewer people working and paying taxes while the cost of providing benefits is skyrocketing. Meanwhile, politicians keep TALKING about solving this problem somehow. Yet they aren't actually DOING anything. Republicans. Democrats. It doesn't matter. They're all complicit!

 While our trade balance has swung from a massive deficit to a smaller deficit over the past seven months, it hasn't been because of stellar exports. Rather, it's been because our imports are plunging,

 Chrysler and GM filled for bankruptcy, data released recently showed U.S. auto sales fell nearly 34 per cent in May from a year earlier and car manufacturing consumes around half the global supply of metals,

 US Treasury approves capital infusions for six insurers – (told you so),

 So far, 32 banks have failed since January 1, more than the 25 that failed in all of 2008,

 The combined monetary and fiscal stimulus to combat the recession, the banking crisis and all the other aftermaths of the burst bubble already add up to 30 percent of Gross Domestic Product.

That's a new record by a HUGE margin:

• In 1974 it was 4 percent
• In 1982 it was 2.8 percent
• And in 2001 this figure was 7.2 percent

And time is passing — which makes all of the aforementioned problems dramatically more threatening.

Here is the situation:
The facts:

• Congress cannot raise taxes without sinking the economy even faster.

• The Treasury can't borrow the money without driving interest rates through the roof for everyone.

• And the Federal Reserve can't print the money without destroying global confidence in the U.S. dollar and credit markets, gutting the economy even more.

“The explosive rise of the U.S. budget deficit and debt burden will lead to serious inflation down the road”, “A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, at some point, it’s going to inflate its way out of the burden of that debt,” and “Every country that has denominated its debt in its own currency and has found itself with uncomfortable amounts of debt relative to the rest of the world, in the end they inflate,” says billionaire and Obama supporter Warren Buffett.

• While the S&P 500 is up for the year, only three of its ten sectors are in positive territory. The Technology and Materials sectors are up the most at 19.4% and 18.5%, while Consumer Discretionary has been the third best at +11.3%...

• A strange thing happened this year, for the first time since 1983, the Treasury ran a DEFICIT in April, a huge shift from a year earlier, when Treasury recorded a SURPLUS of $159.3 billion, so, we've ALREADY dug a budget hole that's more than five times as deep as the one in 2008!.

Each of these — singly or in combination — will sabotage the same bailouts they're seeking to finance.


Let’s talk about gold and money supply:

The U.S. government has learned from experience and has taken Volcker's advice. Given the U.S. dollar's role as the world's reserve currency, the U.S. government has the most to lose if the market chooses gold over US currency and erodes the government's stranglehold on the monopolistic privilege it has awarded to itself of creating "money."

So the U.S. government intervenes in the gold market to make the dollar look worthy of being the world's reserve currency when of course it is not equal to the demands of that esteemed role. The U.S. government does this by trying to keep the gold price low, but this is an impossible task.

For example, until the end of the 19th century, approximately 40 percent of the world's money supply consisted of gold, and the remaining 60 percent was national currency. As governments began to usurp the money-issuing privilege and intentionally diminish gold's role, the US currency's role expanded by the mid-20th century to approximately 90 percent. The inflationary policies of the 1960s, particularly in the United States, further eroded gold's role to 2 percent by the time the last remnants of the gold standard were abandoned in 1971.

So how does the U.S. government manage the gold price?
They recruit Goldman Sachs, JP Morgan Chase, and Deutsche Bank to do it, by executing trades to pursue the U.S. government's aims.

How did the gold cartel come about?

There was an abrupt change in government policy around 1990. It was introduced by then-Federal Reserve Chairman Alan Greenspan to bail out the banks back then, which, as now, were insolvent. Taxpayers were already on the hook for hundreds of billions of dollars to bail out the collapsed "savings and loan" industry, so adding to this tax burden was untenable. Greenspan therefore came up with an alternative.

Banks could generate the needed profits through the Federal Reserve's steepening of the yield curve, which kept long-term interest rates relatively high while lowering short-term rates. To earn this wide spread, banks leveraged themselves to borrow short-term and use the proceeds to buy long-term paper. This mismatch of assets and liabilities became known as the carry trade.

The Japanese yen was a particular favorite to borrow. The Japanese stock market had crashed in 1990 and the Bank of Japan was pursuing a zero-interest-rate policy to try reviving the Japanese economy. A U.S. bank could borrow Japanese yen for 0.2 percent and buy U.S. T-notes yielding more than 8 percent, pocketing the spread, which did wonders for bank profits and rebuilding the bank capital base.
And right now, the banking industry in general is earning interest spreads so wide, they're close to breaking all-time highs.

Right now, the spread between the two-year note and the 10-year note is 2.32%. The spread has only been higher than this three other times in American history. In 1992, it reached 2.65% and in 2003, it set an all-time high at 2.74%. Finally, last November, it peaked at 2.61%.

In other words, right now, with the yield curve at 2.32%, the banking industry is earning record interest income. Take Bank of America as an example. It takes money in from depositors. Depositors can get their money back whenever they want. If the bank does tie their money up, it's usually for less than a year. These depositors receive the lowest interest rates in the market. I just checked at my local branch, and right now Bank of America pays 1.9% on a one-year CD.

The carry trade was a gift to the banks from the Federal Reserve, and all was well provided that the yen and gold did not rise against the dollar, because this mismatch of dollar assets and yen or gold liabilities was not hedged. Alas, both gold and the yen began to strengthen, which, if allowed to rise high enough, would force marked-to-market losses on those carry-trade positions in the banks. It was a major problem because the losses of the banks could be considerable, given the magnitude of the carry trade.

So the gold cartel was created to manage the gold price, and all went well at first, given the help it received from the Bank of England in 1999 to sell half of its gold holdings. Gold was driven to historic lows, as noted above, but this low gold price created its own problem. Gold became so unbelievably cheap that value hunters around the world recognized the exceptional opportunity it offered and demand for physical gold began to climb.

As demand rose, another more intractable and unforeseen problem arose for the gold cartel.

The gold borrowed from the central banks had been melted down and turned into coins, small bars, and monetary jewelry that were acquired by countless individuals around the world. This gold was now in "strong hands," and these gold owners would part with it only at a much higher price. So where would the gold come from to repay the central banks?

In short, the banks were in a predicament. The Federal Reserve's policies were debasing the dollar, and the "canary in the coal mine" was warning of the loss of purchasing power. So Greenspan's policy of using interventions in the market to bail out banks morphed yet again.

The gold borrowed from central banks would not be repaid after all, because obtaining the physical gold to repay the loans would cause the gold price to soar. So beginning this decade, the gold cartel would conduct the government's managed retreat, allowing the gold price to move generally higher in the hope that, basically, people wouldn't notice. Given gold's "canary in a coal mine" function, a rising gold price creates demand for gold, and a rapidly rising gold price would worsen the marked-to-market losses of the gold cartel.

So the objective is to allow the gold price to rise around 15 percent per year while enabling the gold cartel members to intervene in the gold market with implicit government backing in order to earn profits to offset the growing losses on their gold liabilities. The gold cartel's trading strategy to accomplish this task is clear. The gold cartel reverse-engineers the black-box trend-following trading models.

Just look at the losses taken by some of the major commodity trading managers on their gold trading over the last decade. It is hundreds of millions of dollars of client money lost, and the same amount gained for the gold cartel to help offset their losses from the gold carry trade -- all to make the dollar look good by keeping the gold price lower than it should be and would be if it were allowed to trade in a market unfettered by government intervention.

As I see it there are only two outcomes. Either the gold cartel will fail or the U.S. government will have destroyed what remains of the free market in America.

Total demand for gold in Q1 ’09 rose 38 percent year on year.

One measure of inflation- the Consumer Price Index (CPI) has recently turned positive. Deflation is out—Inflation is starting.

There are a lot of reasons why investors and institutions buy gold. It has no counterparty risk. It’s the premier hedge against inflation. And it’s a safe haven in a sea of financial and political turmoil.

But there is really only one reason why the price is going up… because the demand for the metal is significantly outpacing the supply.

Besides scrap gold and individuals selling their holdings into the market, the other primary source of supply are sales of bullion from the holdings of central banks. For a number of years, central bank sales and leasing have accounted for about 1,500 metric tons per year. This has bridged a serious supply gap and has helped the banking establishment keep a lid on rising gold prices.

Just now, it appears becasue there is no public accounting of central bank coffiers, that the central banks are running out of ammo (gold to sell) and it appears that the tide has turned. The central banks of Brazil, Russia, India and those in the Middle East have all stated a policy of increasing their gold reserves. Not surprisingly, China has also. The Director of China’s Central Bank recently stated:

“Reducing reliance on the dollar and maintaining greater diversification in foreign exchange reserves is the only way to reduce the risk. As a result, an increase in our country’s gold reserves is necessary.”

Russia added 90 metric tons to their reserves in December and January. Ecuador added 28 metric tons in January. Remember Ecuador, in December ’08 it defaulted on its IMF loan, now look who is coming home for dinner.

Considering that the world’s entire gold production in 2008 amounted to only 2,400 metric tons, the potential impact of central banks going from selling 1,500 metric tons to becoming net buyers can’t be overstated.

A short time ago, it was revealed China had nearly doubled its gold reserves, from a game-theory perspective, China has to buy gold and rattle its sword. Last month North Korea set off an underground nuclear device. Apparently, China’s President Hu Jintao finds North Korea’s President Kim useful in the short-term for keeping Japan and South Korea off-balance and in extracting concessions from the United States.

North Korea can continue to defy the international community as long as it has Beijing's support. So we don't have a North Korea problem. We have a China one.
Remember: The first phase was the debt disaster. The second phase was the collapse in the economy. Now, in the third phase, Treasury bonds and the U.S. dollar are getting hit hard, largely due to foreign selling.


Out of the blue:

Friedman, former president of the powerful NY Fed, (he's also a director of Goldman) buys 52,600 shares of stock in Goldman Sachs, and he's accused of a conflict of interest. Friedman quits - but where does he quit? Why I'll be damned, he quits his Fed job - and chooses to remain a Goldman director. What a surprise!

It's now obvious that the Fed and the Treasury want, above all, to save the banks. Everything else is secondary. It's also increasingly obvious that the bankers own the nation and that Goldman Sachs runs the nation and the banks. The whole thing is so flagrant that my head spins. And what Goldman doesn't control, the Pentagon controls.

Rising gold means that the dollar is being devalued - it takes more of a weak dollar to buy an ounce of gold. I expect the "dollar-bugs" to do everything they can to halt the rise in gold. The Fed does not want its massive creation of dollars to be advertised via a surging gold price, and so it goes.

Note to readers: One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. In reference to my sources this month, they include in no particular order: Gregory Spear's Market Commentary, DailyWealth Reader, The Daily Crux, Money and Markets, Investorsdailyedge.com, Moody’s, Bloomberg, The New York Times, The Associated Press, Financial Times, The Globe and Mail (Toronto), Financial Week, International Herald Tribune, Reuters, The Washington Post, InvestmentNews, CBS News, The Toronto, Rick Pendergraft, Business Week, The Wall Street Journal, Martin Weiss, Sharon Daniels, , Financial Post, Mike Larson, Bryan Rich, Claus Vogt, James Turk of Freemarket Gold & Money Report, Sharon Zimmerman, Richard Russell of the Dow Theory Letters, Porter Stansberry, Dan Ferris of Extreme Value.