February - 2010 Economic Brief
REVIEW:
Right now the U.S. dollar is making every attempt to rally... and probably getting some help doing it. This will certainly influence the price of our favorite metal while this is happening... but will only delay the inevitable. In the first decade of the new millennium, between the last day of 1999 and the last day of 2009, investors in the S&P 500 LOST about 24% of their wealth. Over this same decade our favorite metal returned 14.9% against the US dollar.
The initial recovery in the winter stock bear market brings with it a renewal of optimism. Hope that stock prices will recover to new highs, as they’ve always done; hope that the depressed economy will recover and that everyone will be working again, earning big wages which they can spend on frivolous items that they don’t re¬ally need; hope that the recovery will bring back the stupendous values in real estate; hope that everything will be as it was once; hope that the leaders can deliver all that they’ve promised. As I write this the headlines say the US economy just posted an annualized GDP growth of 5.4% in the 1st quarter of 2010; what they don’t say is any thing about the $389 billion deficit also created in the first quarter of the 2010 fiscal year. This is far from reassuring in my view. That’s way too much hope and way too little realism.
That’s the game you get when you play for Team Bush or Obama – with direct hiring and spending, continuing to buy mortgages and other loans to suppress interest rates, forgiving the bad debts of banks, or changing accounting rules so that banks can postpone reckoning day. And that’s just for starters, all of it packaged nicely in the name of the public good.
At some point, interest rates will have to begin rising to attract new buyers to help pay for all this deficit spending. You may not have noticed but Treasury bond rates have had a significant move off recent lows.
The sharp sword of Damocles hangs by a horse hair above our heads as any sharp loss in confidence on the part of our international creditors would likely lead to a currency crisis that would drive the value of the dollar quickly lower, at the same time that it drives interest rates higher. Of course, the higher those rates ratchet, the more it will cost the U.S. government to carry its massive debt.
I’m sorry, nobody likes a bear. Most people have too much money invested in stocks. They can’t afford to lose money and they don’t like peo¬ple telling them that they are going to lose. They are linked together in a common interest. Almost everyone has a vested interest in being bullish, the investment crowd refuses to listen to anyone who tries to temper its ardor for the stock market.
Is a rising stock market a life-long entitle¬ment, providing for the constant enrichment of all investors?
Recently, we’ve already seen two Dow stocks decline more than 93%. Citicorp fell 93.9% and General Motors 98.2%. Both compa¬nies were unceremoniously dumped from the index.
Charles Kindleberger, in the latest edition of Manias, Panics and Crashes, published in 2005, P. 64, says, “Speculative manias gather speed through expansion of money and credit.”
In his book, A Short History of Financial Euphoria, John Kenneth Galbraith, P. 20, says, “All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment.” The debt bubble that accompanied the recently concluded twin financial and real estate manias is unprecedented.
These great speculative bubbles are self perpetuating. As the value of the underlying assets increases, so does credit. The constant rise in values attracts a corresponding increase in credit (debt). Moreover, the more speculative prices increase, the more moths are drawn to the flame.
What have the first 10 years of this new millennium taught us?
1. The market is for losers: S&P is down 23%, Dow is down 7.5%, Nasdaq is down 42%. I am sorry for any investor whose future is tied to such indexes. At least if you had burned the money in the fireplace you would have kept warm.
2. Cheer up, you could have done worse. Ten years ago, the brightest brains in the business were telling you to buy AOL, Lucent, Qualcomm, MCI WorldCom. Today, you would be down 66-80%.
Most people believe that stock prices have just begun a new bull market in anticipation of a burgeoning economy. We know better(don't we?)the economy can’t recover until debt has been expunged.
DEBT:
Worldwide government spending in this recession is historically unprecedented. In the U.S. alone, monetary measures and fiscal stimulus packages so far total about 30% of GDP. To put that in perspective, the Roosevelt administration spent about 8% of GDP to fight the Great Depression.
This is an election year. Expect politicians to keep spending recklessly to keep the economy afloat.
The U.S. government is facing a staggering amount of unfunded liabilities in 2010... around $3.5 trillion to be exact. The only way the government can make the interest payments on this debt (a good deal of which has been acquired in the past 12 months) is by printing money.
This money printing will continue to debase the dollar... and will drive our creditors to demand higher and higher rates of interest. You see, what most people don't understand about the huge bull market in stocks over the last 30 years is that it was mostly funded by debt and powered by falling interest rates.
See "Markets at a Glance" by David Franklin, the co-author of this Sprott Asset Management reports, he is interviewed: http://watch.bnn.ca/#clip250810
It is inevitable that the complex web of debt instruments and inter-dependencies that humanity invented to prolong its growth phase by stealing from the future will be a prime focus for a sharp reversal, as we have already reached the point where additional debt provides less than no benefit. This is other wise known as “look out below” for the anticipated fallout, translated, huge correction in the markets.
As complexity increases, (AKA debt instruments) it eventually becomes a liability.
The most important thing to understand about financial and eco¬nomic cycles is that they are just like their counterparts in the natu¬ral world. They are as predictable as are the tides, the moon phas¬es, the annual seasons and, yes, a human lifetime. Like a human lifespan, financial and economic cycles follow a similar path from birth to death. The Long or Kondratieff Wave follows this path over 60 or 70 years, which is typically a meaningful human lifetime. In the cycle, spring is the birth of the economy. In winter, the economy dies. It dies because it is overcome by too much debt. During win¬ter, most of the debt is purged from the economy, which enables its rebirth in the following spring.
How low will the bear market go? It’ll go a lot lower than the 6,470 points that the Dow reached in early March 2009 because this is the Long Wave winter bear market, which follows the huge autumn bull market. This autumn bull market was two and a half times bigger than its predecessor of 1921-1929. The bear market which followed caused the Dow to decline by 90%. Considering the difference in size be¬tween the two respective bull markets we expect that this bear market would be bigger in percentage terms than its 1929-32 counterpart.
Déjà vu?
Wall Street Journal, Friday July 11, 1930 quoted in www.newsfrom1930.blogspot.com as saying, “During the depression, industrialists have been cutting costs and increasing efficiency. This will increase profit margins when the recovery comes.”
In March 2009, at the bottom of the initial leg of the bear market with the S & P down 56% from its peak, dividend yields had risen to 3.5%, indicating that dividends had not been cut. At the same time, the price-earnings ratio stood at 23.77, which was higher than they were at the stock market peak in October 2007.
And today? Well, PEs have risen to a mind boggling 144.81%, reflecting a crash in earnings. The truth is that companies are paying out three times more in dividends than they are earn¬ing. This cannot continue long. If earnings don’t recover in short order, dividends will have to be cut and by as much as 75%.
We can assess value in another way. We know that at bear market bottoms, dividend yields typically reach 6% or even 7%. They are currently just below 2%. To reach a 6% yield, the S & P 500 would have to fall to about 375 points 65% below where it stands at present. This assumes no cut in dividends, which as we have just discussed, is a virtual impossibility.
The response to the first crash in prices to a bubble (Tulips, Mississippi, South Sea) was no different than that employed by the central banks today. They created even more money believing that that was the solution to the problem. It wasn’t.
“We can’t solve problems by us¬ing the same kind of thinking we used when we created them. “ Albert Einstein
The world has changed as we know it. In the current cycle, spring started in 1949 with the Dow at 161 points and it ended in 1966 with the Dow at 995 points. Buying stocks in the Kondratieff summer leads to losses. Summer began in 1966 with the Dow at 995 points and ended in 1982 with the Dow bottoming at 777 points. Buying stocks in the autumn amasses huge gains because in this Kondratieff sea¬son a massive speculative bubble always develops. Thus, buying stocks in 1982 with the Dow at 777 and selling them at the end of autumn in January 2000 with the Dow at 11,750 points would have led to a gain of 1500%. However, buying stocks in the Kondratieff winter leads to huge losses, as between 1929 and 1932, if you can buy the idea of cycles, be forwarned.
JOBS:
Overall it was a disappointment and a decline of 86,000 jobs (with revisions of -1,000) when the country needs a net gain of 100,000 new jobs just to keep up with population growth. This is not yet a recovery.
Bottom line: The hoped-for fast recovery is not happening. In my view, we are still in a recession with continuing negative employment, even if not at the rate of decline that was so disastrous a year ago. In fact, so far this January, there is a total of 482,000 new jobless claims.
U.S. employers cut 85,000 jobs in December, report shows
The rate at which the U.S. cuts jobs has slowed considerably in recent months, but net layoffs still reached 85,000 in December, the Labor Department said. Officially, the unemployment rate held at 10%, but experts said that number is probably misleading. Economists said many discouraged workers have given up searching for a job and are probably no longer counted in the statistics. The Washington Post (09 Jan.)
Actually it is much worse, based on its separate household survey, the government reported that the job losses in December were 589,000 — over SIX times more.
So which of the two figures better reflects the true number of jobs lost last month — 85,000 or 589,000 jobs? According to John Williams' Shadow Government Statistics, it's clearly the latter. http://www.shadowstats.com/ And as you can see above in the chart, this is just a sad detail and a wake up call to it’s duration!
If you include ALL workers who have given up looking for a job (as the government used to before the Clinton administration changed the definition, just like the Obama administration changed the definition of pandemic in 2009), Williams estimates that the TRUE, all-inclusive unemployment rate is now close to 21.9 percent!
And most shocking of all, we are suffering this chronic high unemployment despite the greatest government stimulus of all time.
The big problem: Instead of going into job creation as intended, most of this Washington funny money is flowing into other assets, including U.S. stocks. This helps explain why so many stocks can continue rising despite the economic malaise.
In a related article, the AP reported that the string of ten consecutive months in falling credit was a record and the absolute drop in total dollars loaned from October to November was the largest drop in credit since the government began tracking the data in 1943, and despite the greatest government stimulus of all time.
The data is certain to raise the question of how the American economy will sustain a recovery since consumer spending (and credit) is still over two-third of GDP. Industrial production and exports have begun to recovery from the depths of the recession in the first and second quarters of 2009. But, the consumers still appear to be in deep trouble.
Consumer credit use is not likely to reverse its decline anything soon. December unemployment figures made two things crystal clear. The first is the businesses are still firing people. The other is the more people have stopped looking for jobs entirely.
I noticed too that health spending growth slowed down to 4.4 percent in 2008, the slowest rate of growth in 48 years. The dental growth rate also declined but not as dramatically nor as low as reported in the journal Health Affairs. www.healthaffairs.org
Here's another graph offered with no commentary... as none is needed.
The number of Americans filing for personal bankruptcy rose by nearly a third in 2009, a surge largely driven by foreclosures and job losses. Overall, personal bankruptcy filings hit 1.41 million last year, up 32% from 2008, according to the National Bankruptcy Research Center.
Chapter 11 commercial bankruptcies spiked 50% in 2009Chapter 11 business bankruptcies in the U.S. jumped 50% last year compared with 2008, according to Automated Access to Court Electronic Records. Petitions for Chapter 11 to reorganize or liquidate topped 15,000. Filings for Chapter 7 liquidation were up 38%. In 2009, 207 publicly traded companies filed for bankruptcy, the third-highest number since 1980, according to BankruptcyData.com. Bloomberg (06 Jan.) , Reuters (05 Jan.)
Analysis: U.S. is increasingly locked into long-term unemployment
There seems to be little hope of escape from a truly jobless recovery, given the dismal rate of job creation in the U.S., according to The Economist. The population grew by almost 30 million between December 1999 and December 2009, but at the end of that period, only 400,000 more Americans had jobs. "Without job growth, household indebtedness will linger as a problem, depressing spending and hiring," according to The Economist. "Joblessness is a trap the American labour force may not soon escape." The Economist (14 Jan.)
BONDS:
The causes of the bond market troubles are equally obvious:
There was a return to foreign investment in long-term securities, but net foreign flow into the US is negative.
We have...
1. The biggest and most permanent federal budget deficits in our country's history — $1.4 trillion of red ink in fiscal 2009 and AT LEAST another $7 trillion in deficits over the next decade.
2. The biggest government borrowing binge of all time. Just in the last week of the year, the Treasury Department borrowed $44 billion with the sale of 2-year notes, $42 billion with 5-year notes and $32 billion in 7-year notes, for a total of $118 billion — a new record. Expect more of the same throughout 2010.
3. The most inflationary monetary policy of all time, including a sudden, record-smashing DOUBLING of the nation's monetary base in 2009.
And most ominous of all...
• The U.S. Federal Reserve has tossed its traditional rulebook in the trashcan. It has opened its credit window to brokerage firms, guaranteed trillions of junk credit of the private sector and bought up over a trillion in junk mortgages.
• The U.S. Treasury has bailed out the nation's largest and most outrageous risk-takers — not only institutions like Fannie Mae, Freddie Mac, Citigroup, Bank of America, AIG, and GM ... but, indirectly, also high-rollers like Goldman Sachs and JPMorgan Chase.
Pimco becomes more averse to risk
Pacific Investment Management Co. is scaling back its exposure to U.S. and U.K. government bonds, corporate debt, and mortgage-backed securities, according to an outlook for 2010 from the company. "This all leaves us with portfolios that appear, more than at other times, to be hugging the benchmarks with no bold positioning," portfolio manager Paul McCulley wrote. "We're making a very active decision to run light on risk." Bloomberg (04 Jan.)
BANKS:
BIS invites bank CEOs, central bankers to meet in Basel
The Bank for International Settlements is inviting leading central bankers and heads of major financial institutions to Basel, Switzerland, this weekend to discuss concerns about "excessive risk-taking." The BIS' invitation cites fears that "financial firms are returning to the aggressive behavior that prevailed during the pre-crisis period." The BIS also identified specific proposals, including reducing return-on-equity targets for banks, that it is considering. Financial Times (tiered subscription model) (06 Jan.)
Mitchell Glassman, the man in charge of shutting down banks for the FDIC, recently had to say in testimony in front of Congress…
"While the economy is showing signs of improvement, recovery in the banking industry tends to lag behind other sectors. We expect to see the level of failures continue to be high during 2010.”
REAL ESTATE:
• On Christmas Eve, the Treasury Department announced it will remove the limits on any and all aid to Fannie Mae and Freddie Mac for the next three years.
The intended consequence was to allay investor concerns that these two mortgage giants will exhaust the available government bailout funds.
Treasury officials know that an estimated 3.9 MILLION U.S. homes went into foreclosure last year...and, they know that they can expect more of the same in 2010. So they're literally pulling all stops to funnel funds into this market.
Thus, in this scam the Fed is free to print up all the money it needs to buy mortgages, and thus keep mortgage rates low, confident that no matter how smelly the paper is that it buys, you and your progeny will stand behind the loss. Meanwhile the nation’s monetary base continues to balloon. If there is a bright spot to this, other than that it confirms us in our inflation expectations, it is that the desperation evident in these actions portends that the Fed and the Treasury are running out of rope.
So on the surface it appears housing may be stabilizing somewhat. But if you dig a little deeper you’d find… not so much.
First of all, the slightly improved sales figures and marginal rise in prices likely have much to do with the first-time home buyer tax credit and the move-up/repeat home buyer tax credit, both of which were recently extended through April 30, 2010.
Second, the Census Bureau’s report was statistically insignificant. The margin of error (with a 95% confidence interval) on these figures is +/- 12%. And now this just in, despite the government’s tax credit for purchasers, sales of existing homes in December fell by 17%.
As you know, the portfolios of the nation’s financial institutions are littered with CMBS paper – which means yet more bank failures. If there is one thing Mr. Market likes to see less of, it’s bank failures… and she’ll really dislike it when the already busted FDIC itself has to be bailed out and it will.
On the commercial side, the Silicon Valley is beset by the biggest office property glut since the dot-com bust, leaving the U.S. technology hub with empty high-rises and office parks that make it impossible for landlords to sustain average rents.
More than 43 million square feet (4 million square meters)—the equivalent of 15 Empire State Buildings—stood vacant at the end of the third quarter, the most in almost five years, according to CB Richard Ellis Group.
Almost 3 million U.S. homes received foreclosure notice in 2009The number of U.S. homeowners behind on their mortgage payments reached an all-time high in 2009, with nearly 3 million households receiving at least one foreclosures notice, according to RealtyTrac. Nationwide, 2,824,674 properties, or one of every 45, were in default, a 21% increase compared with 2008. "As bad as the 2009 numbers are, they probably would have been worse if not for legislative and industry-related delays in processing delinquent loans," RealtyTrac CEO James Saccacio said. CNNMoney.com (14 Jan.) , Reuters (14 Jan.)
Mammoth Manhattan apartment complexes are handed back to lenders
Tishman Speyer Properties and BlackRock Realty decided to give New York apartment complexes Stuyvesant Town and Peter Cooper Village, which have a combined 11,227 units, to their lenders. The $5.4 billion purchase from MetLife in 2005 was the biggest real estate transaction in U.S. history. Since November, the owners have tried unsuccessfully to renegotiate debt secured by the property. The New York Times (25 Jan.)
Existing-home sales in U.S. post biggest monthly decline on record
A sharp drop in the sale of previously owned homes in the U.S. during December fueled fear that the housing recovery is faltering. From November to December, seasonally adjusted sales plummeted 16.7%, the National Association of Realtors said. It marked the biggest decline since the group started collecting the data 42 years ago. Mark Zandi, chief economist at Moody's Economy.com, said the statistic highlights the point that "the housing market is on government life support." Los Angeles Times (26 Jan.)
And the FDIC is already bankrupt in that the Deposit Insurance Fund (DIF) is a negative $8 billion. And it is probably much worse than that, if its undoubtedly self-serving accounting were corrected.
Foreclosure filings – default notices, scheduled foreclosure auctions, and bank repossessions – hit 2.8 million properties in 2009, a 21% rise from 2008 and an astounding 120% increase from 2007. And the estimated 1,000,000+ backlog of delinquent loans looming over the market ensures that the housing crisis is far from over.
“The foreclosure crisis isn’t letting up. Between 3 and 3.5 million homes are expected to enter some phase of foreclosure this year.” Rick Sharga of RealtyTrac
POLITICS and TAXES:
Over the most recent 12 months for which there is data (through November 2009), individual income taxes are down 22.4% from the previous 12 months, corporate income taxes are down an astounding 56.5%, and total tax receipts have fallen 17.6%.
Looks like all that money the government is spending will have to come from somewhere else, i.e., the hidden tax known as inflation.
Democrats To Seek $1.9 Trillion Increase In Borrowing Cap-Sources Senate Democrats are to seek an increase to the federal government's borrowing limit by $1.9 trillion lifting the total amount the U.S. government can owe to $14.294 trillion, several congressional aides said Wednesday. WASHINGTON -(Dow Jones)
USX DOLLARS:
Who controls the price of money? The price of money is set completely by the federal government. It's in the hands of the Federal Reserve's Open Market Committee. They can move the value of the dollar in any direction they choose, literally overnight.
So for them to pretend that the catastrophic fall in the exchange value of the dollar since 2002 – that's about when the bear market in the dollar started – is out of their hands or in some way not their responsibility is ludicrous. Only the fact that the American people have no real understanding of money allows this charade to continue.
So let's just be clear about this. The exchange value of the dollar, which largely controls the price of gold, is completely under the control of the Federal Reserve. So if the current administration actually desired to have a strong dollar, they could have a strong dollar overnight. If the Fed were to come out and lift the Fed funds rate to 3.5%, the dollar would go to beyond parity with the euro overnight.
Instinct might tell you to want to short the dollar, hmm. But then if you look at the other major currencies; the Euro, the Yen, and the British Pound, they might be worse. So, choosing one of these currencies is like choosing your favorite dental procedure. As you probably know if you have been following my blog I think gold is better than holding cash, especially now, where both earn no yield.
Here’s the rub!
The Fed’s can't raise rates for a couple of reasons. First of all, they can't do it because they can't afford an increase to their own borrowing costs. They're borrowing record amounts of money in every monthly Treasury funding.
They also can't do it because it would have a catastrophic effect on the ability of the U.S. banks to repair their balance sheets. The banks have to be able to borrow money from the federal government at a very low rate of interest so they can make a wide profit margin by lending out money for mortgages and credit cards and those things. So the death of the dollar is being orchestrated directly to allow for the repair of the banks' balance sheets.
When a bank gets closed, its deposits end up with another bank. The system never really shrinks. The debts and the obligations are just passed around and eventually they're socialized by the issuance of more paper money.
What we have in our system today is not really capitalism. What we really have is a crony form of socialism where all of the risks are socialized and all of the profits are privatized.
So if you're wondering what the hell has happened to your standard of living, you really have two enemies: Number 1 – the federal government, who is robbing you blind by destroying the value of your savings. And Number 2 – big corporate America, namely the banks and the investment firms, whose livelihoods depend on the socialization of their risks.
The thing to remember is that one can't survive without the other. The federal government needs the investment community to go along with the huge deficits it's running and to help finance its debts. The investment community in turn requires the federal government to socialize their risks.
OK, What is a currency?
The answer is that a currency is a government substitute for money.
This originated in the practice of private banks to issue bank notes. You would d take your gold to a bank, and the bank would issue you a paper note attesting to the gold you had on deposit. Why would they do this? Because it’s more convenient to carry a paper in your pocket than a large amount of gold. That’s how this started, with bank notes that represented real money in storage.
And then, as governments took over the function of banking with their central banks so every country has a central bank now and they, too, can printed up bank notes (currencies) that represented gold on deposit. After a while, people seemed to forget that the currency only represented value and had no intrinsic value of its own, and governments were able to stop backing their currencies with anything at all.
That’s how the modern financial world works; its entirely based on nothing masquerading as something of value.
Gold's Rate of Appreciation Against 23 World Currencies
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average
Switzerland franc -4.1% 5.0% 3.9% 7.0% -3.0% 36.2% 13.9% 22.1% -0.3% 20.3% 10.1%
Denmark krone 1.3% 7.7% 5.8% -0.2% -2.2% 35.5% 10.2% 18.8% 10.9% 20.3% 10.8%
euro/DEM euro 1.1% 8.1% 5.9% -0.5% -2.1% 35.1% 10.2% 18.8% 11.0% 20.4% 10.8%
Canada dollar -2.1% 8.8% 23.7% -2.2% -2.0% 14.5% 22.8% 11.5% 31.1% 5.9% 11.2%
New Zealand dollar 10.8% 8.9% -0.9% -4.4% -4.2% 25.1% 19.3% 19.5% 40.5% -1.5% 11.3%
Norway krone 3.6% 4.5% -3.6% 14.9% -4.0% 31.0% 13.5% 14.6% 36.0% 2.8% 11.3%
Australia dollar 11.2% 11.3% 13.5% -10.5% 1.4% 25.6% 14.4% 18.1% 33.0% -3.6% 11.4%
China yuan -5.7% 2.5% 24.8% 19.5% 5.2% 15.2% 18.8% 22.9% -1.0% 24.0% 12.6%
Singapore dollar -2.1% 9.3% 17.2% 17.1% 1.1% 20.4% 13.3% 23.1% 6.0% 21.0% 12.6%
Thailand baht 5.0% 4.3% 21.8% 9.7% 3.0% 24.9% 8.2% 7.4% 24.6% 19.0% 12.8%
Sweden krona 4.7% 13.5% 3.7% -1.0% -2.5% 40.7% 5.8% 24.2% 29.1% 12.6% 13.1%
Malaysia ringgit -5.7% 2.5% 24.7% 19.6% 5.2% 17.6% 14.7% 23.2% 10.3% 22.9% 13.5%
Japan yen 5.5% 17.4% 13.0% 7.9% 0.9% 35.7% 24.0% 23.4% -14.0% 27.1% 14.1%
Hong Kong dollar -5.4% 2.4% 24.7% 19.1% 5.4% 17.9% 23.2% 31.8% 5.2% 24.0% 14.8%
USA dollar -5.7% 2.5% 24.7% 19.6% 5.2% 18.2% 22.8% 31.4% 5.8% 23.9% 14.9%
Taiwan dollar -0.4% 8.1% 23.7% 17.1% -1.7% 22.1% 22.1% 30.8% 6.9% 20.9% 15.0%
UK pound 1.8% 5.4% 12.7% 7.9% -2.0% 31.8% 7.8% 29.7% 43.7% 12.1% 15.1%
South Korea won 5.2% 6.2% 12.6% 20.2% -8.6% 15.3% 13.1% 32.3% 42.7% 14.3% 15.3%
India rupee 1.3% 5.8% 24.0% 13.5% 0.0% 22.8% 20.5% 17.4% 30.5% 18.4% 15.4%
Brazil real 1.7% 21.4% 91.0% -2.2% -3.5% 3.9% 12.3% 9.6% 37.9% -6.8% 16.5%
South Africa rand 15.9% 62.4% -10.8% -6.7% -11.3% 32.5% 36.6% 28.1% 43.5% -1.9% 18.8%
Mexico peso -4.3% -2.4% 42.0% 28.9% 4.4% 12.7% 24.8% 32.9% 34.0% 17.0% 19.0%
Sri Lanka rupee 8.8% 15.2% 29.7% 19.6% 13.5% 15.6% 29.3% 32.9% 10.0% 25.5% 20.0%
The best currency compared to gold is the Swiss franc, but even this venerable national currency lost 10.1% per annum on average for the past ten years. Gold held on January 1, 2009, was worth 24% more than the dollars in your wallet by New Year’s Eve. The top gold stock of 2009 gained 82%.
REGULATORY SUPERVISION:
In a recent article that explained the cause of hyperinflation (http://www.fgmr.com/december-23-2009-what-causes-hyperinflation.html), that being the “huge bank excess reserves...have funded the Fed’s purchase of US government debt, putting...the US dollar on the road to hyperinflation.” But these huge reserves are not providing enough deposit currency, given the massive, ongoing deficits being racked-up by the US government. In short, the Federal Reserve needs more money.
So the Federal Reserve is proposing a regulatory change (http://www.federalreserve.gov/newsevents/press/monetary/20091228a.htm) that would allow banks to deposit money with it and earn interest income on those deposits. These deposits will be separate and distinct from the reserves that banks leave at the Fed. They would be time deposits, in contrast to the overnight tenor of reserves, and therefore would earn the banks a higher rate of interest. Even their name is different. They are not reserves, but a “term deposit facility”.
It has been evident for some time that the Fed would require new gimmicks to come up with the deposit currency it needs to fund its growing purchases of US government paper. This point is neatly captured by Reuters announcing this new Fed facility: “At the height of last year's financial meltdown, the Fed had been discussing going to Congress to request the authority to issue its own bills. The term deposit facility achieves a similar purpose, but can be undertaken within the Fed's existing authority and does not require congressional approval.”
(http://www.reuters.com/article/idUSN2816062120091228?type=marketsNews)
Side-stepping congressional authority like this is further evidence that the Federal Reserve sees itself as unaccountable to the general public – as if not identifying who received the Federal bailout money was not enough proof of this point already. But the Fed’s devious maneuver here illustrates something much more important, namely, the reason the Federal Reserve exists.
Despite what Fed officials may declare in testimony before Congress, the Federal Reserve does not exist to fight inflation, provide full employment or achieve any of the other laudable goals attributed to it. The Federal Reserve exists solely to provide the US government with all the dollars it wants to spend, even if it has to side-step congressional authority to do it.
There is of course a biting irony in that conclusion, given that Congress is part of the US government. And Congress is as much to blame for the government’s horrific deficits and fiscal madness as the president or anyone else in Washington. So why would the Fed need to side-step Congress?
It is because central banks like to operate in the dark. That is why they meet behind closed doors and resist public scrutiny, as evident from their current effort to stop Ron Paul’s bill to audit the Fed. (http://www.youtube.com/watch?v=2zZeIfx2g6M) But we shouldn’t be surprised by the Federal Reserve’s conduct. Learn more here. (http://goldmoney.com/documents/barbarous-relic.pdf)
Now some news from the Gold Anti-Trust Action Committee, Inc... GATA has brought suit against the U.S. Federal Reserve Board, seeking a court order for disclosure of the central bank's records of its surreptitious market intervention to suppress the monetary metal's price. More on this later on... keep reading!
Sen. Dodd free to press hard for financial reform
The decision by U.S. Sen. Christopher Dodd, D-Conn., to retire at the end of his term frees him to reach for a sweeping overhaul of the financial regulatory system, Capitol Hill lobbyists said. Business and consumer groups said they expect Dodd, chairman of the Senate banking committee, to focus on financial reform as his legacy. "The political forces associated with his re-election are now off the table, so I think it makes it easier to achieve a bipartisan bill," said Scott Talbott, chief lobbyist for the Financial Services Roundtable. Los Angeles Times (07 Jan.)
For another turn of the “rules”... a typical investor in a money market seeks minute investment risk, no volatility, and instantaneous liquidity, or redeemability. These are the three pillars upon which the entire $3.3 trillion money market industry is based.
Yet new regulations proposed by the administration, and specifically by the ever-incompetent Securities and Exchange Commission, seek to pull one of these three core pillars from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7. A key proposal in the overhaul of money market regulation suggests that money market fund managers will have the option to "suspend redemptions to allow for the orderly liquidation of fund assets." so, the next time there's a market crash, and you try to withdraw what you thought was "absolutely" safe money... good luck to you!
Howe vs. Bank for International Settlements:
Reginald H. Howe, partner in Golden Sextant Advisors and litigator in the first gold price-fixing case, Howe vs. Bank for International Settlements, has just analyzed the latest precious metals derivatives report from the BIS and finds that they exploded in the six months ending last June 30. The gold and silver derivatives, Howe remarks, have lost any relation to possible gold production and again raise the question of whether real metal can be delivered against the claims that have been sold. Howe's commentary is headlined "Precious Metals Derivatives: Louder Music, Fewer Chairs," and you can find it at the Golden Sextant Internet site linked here.
Lawmakers, insiders debate reinstating Glass-Steagall
Although experts and financial industry insiders said reinstating the Depression-era Glass-Steagall Act will not help prevent a repeat of the financial crisis, the idea is gaining support in the U.S. Congress from liberals as well as conservatives. The idea also has the support of former Federal Reserve Chairman Paul Volcker and a few other powerful insiders, and the financial industry is not dismissing the proposal or other populist efforts. The Politico (Washington) (04 Jan.)
Fed's suppression of AIG bailout details raises tough questions
Source: U.S. lawmakers and securities lawyers are looking into how to respond to news that the Federal Reserve Bank of New York told American International Group not to make public in securities filings some details of its bailout. One concern is whether federal securities laws were violated when AIG followed the instructions. Rep. Darrell Issa, R-Calif., brought the information to light after obtaining e-mail correspondence between AIG and the New York Fed. CNBC (07 Jan.) , The New York Times (07 Jan.) , The Washington Post (08 Jan.)
SEC files second lawsuit against BofA regarding Merrill Lynch takeoverThe U.S. Securities and Exchange Commission filed another lawsuit against Bank of America, saying shareholders were kept in the dark about huge losses at Merrill Lynch when the bank took over the firm. The SEC sued again after a judge refused to let it add charges to an existing lawsuit against the bank. Reuters (12 Jan.)
SEC, FDIC say regulators played a role in causing crisis
The heads of the Securities and Exchange Commission and the Federal Deposit Insurance Corp. said weaknesses in the U.S. regulatory system, combined with shortcomings by their own agencies, played a part in bringing about the financial crisis. "Not only did market discipline fail to prevent the excesses of the last few years, but the regulatory system also failed in its responsibilities," said FDIC Chairwoman Sheila Bair. Her statement was included in written testimony to the Financial Crisis Inquiry Commission. The Washington Post (15 Jan.)
Corporations and unions are free to contribute as much as they want to our campaigns. If they want to play, they’re going to have to pay… and big! -- A divided U.S. Supreme Court struck down decades-old restrictions on corporate campaign spending, reversing two of its precedents and freeing companies to conduct advertising campaigns that explicitly try to sway voters. [Bloomberg]
GOLD:
Clearly the advice to shift out of stocks and into gold and gold shares was correct. This is best evidenced by the Dow/gold ratio, which measures the price of the Dow divided by the price of an ounce of gold.
The ratio reached its peak in July 1999, when it took 44 ounces of gold to buy the Dow Jones Industrials. Today, the Dow is worth about 9 ounces of gold. The Dow/gold ratio reaches extreme highs or extreme lows around the changes in the Kondratieff seasons.
In 1932, at the bottom of the winter bear market, the ratio stood at 2. There was a huge demand for physical gold but the price of gold was unchanged at $20.67, because it was then pegged to the US dollar. Without this peg the price of gold would have risen sub¬stantially, based on this demand. This winter, gold is not priced at a fixed rate to the dollar. We’ve already seen what has happened to the gold price during the initial stages of this financial crisis, but things are going to get a lot worse, which means that the price of gold is going much higher.
"China becomes world's biggest gold buyer in 2009". The first paragraph reads as follows... "World Gold Council (WGC) data reveals that for the first time in 21 years the world's central banks have been net buyers of gold and China has been the biggest buyer this year, adding 454 tonnes to bring its central bank reserves to 1,054 tonnes."
OK, all this sounds good, but the first thing you have to know about gold is the price of gold in dollars is completely at the whim of the chairman of the Federal Reserve. (That’s why GATA is suing the Fed.) So if you think you're going to see a steady, consistent rise in the price of gold, you're fooling yourself. It's not going to happen.
The government can't allow the price of gold to move too far, too fast. It just can't afford for that to happen. It can't afford for there to be a real lack of confidence in the dollar. They need the value of the dollar to fall and they're happy to see the price of gold go higher, but they don't want it to happen too fast.
From the ringside seat of activity of the COMEX comes this insight from Rick Akerman, “...that the interests of certain parties for a successful [U.S. Treasury] auction would not be met if gold’s recent robust recovery continued.”
That’s the rub that keeps pressure on the keeping gold prices low, but how long can they hold back the rising tide of interest rates?
Now, if you asked what gold price would signal there's an eminent collapse of the dollar. I would not look to the price of gold to make that assumption. What I would look to is the silver-to-gold ratio.
The silver-to-gold ratio has always been an indicator of a monetary crisis. The last time there was a real monetary crisis in the United States was in the late 1970s, and the silver-to-gold ratio peaked at about 16, meaning it would only take 16 ounces of silver to buy one ounce of gold. Right now, the silver-to-gold ratio is around 60, which tells you we're not at any real crisis level yet.
If you do the math right now, you'll find that silver is very undervalued relative to this historic 16:1 ratio.
On another note, there's no run like a bank run and no rush like a gold rush, but both together on a worldwide scale would be as unprecedented as the current global fiat (free floating trust) monetary system. We have the latter, (gold rush) and the figures on OTC gold and silver derivatives warn that the final resolution of the intricacies of a plot, the great gold market deception and manipulation, may well arrive with the former (bank run/credibility of the U.S. government).
You say, ha, no way, but there are 450 banks likely to fail in 2010, (remember last year there were 140 banks that failed) is yours one of them? You already know that FDIC is bankrupt; don’t you want to get yours while you can? Start walking and if you see others going in the same direction with you, start running. Why?
Because, this gold market dénouement means that the actual weight of gold and silver represented by derivatives on the precious metals has grown so large relative to all reasonable measures of physical supply that more and more questions and doubts are being raised about not only the integrity of the price discovery mechanisms for these metals, and also the reliability of many paper claims to the physical delivery of them. Want to learn more? http://www.goldensextant.com/commentary35.html#anchor17538
Question: What do a bank run and a gold run have in common?
Answer: Creditability of the USG
Run on banks?
140 banks failed last year here in the US. Their bad assets have been absorbed by larger banks backed by the Federal Government and your children’s future tax dollars, sort of “born-beholden-baby” generation, the ‘BBB’ generation. How do you like that moniker for your grand kids?
Weimar Germany entered its quintessential hyperinflation with its ratio of government borrowing to spending at 60%. In the U.S. today, that ratio has now crossed the 40% line – meaning the U.S. government is now borrowing over 40 cents of every dollar it spends – putting us in dangerous territory, indeed. And the U.S. isn’t in the worst shape of the world’s many sovereign deadbeats.
It’s happening here, but it’s also happening everywhere.
Vietnam, well, the government of Vietnam "has ordered all gold trading floors to close by the end of March, putting an end to a business which turns over $1bn a day but which the government feared was spinning out of control." Gold imports were creating havoc with the national currency [the dong] and accelerating the trade deficit. Vietnam is one of the world’s largest gold consumers. The Vietnamese buy a similar amount of gold per head as the Germans, who have a GDP per capita more than 40 times greater. (http://www.ft.com/cms/s/0/724c92ec-f6d6-11de-9fb5-00144feab49a.html?nclick_check=1)
But the appetite for gold has put significant pressure on the dong and was a key factor in forcing the government to devalue the currency by more than 5 per cent at the end of November.
Bombay Bullion Association 'revised' their gold import numbers for 2009. From just over 200 tonnes, the number has been changed to 300-350 tonnes... and 2008 numbers were revised a bit higher as well. Does anybody over there know what the real number is? Creditability, transparency check needed, hello.
As you well know, dear reader, Iceland was one of the first countries to go down the drain when its house-of-cards banking system imploded in 2008. Since then, Britain [and other countries] have been trying to get savings account holders lost deposits back. Well, that didn't work out as planned... and the Dutch government is livid. The story is "New Episode in Icesave Saga"... and the link to this story is here.
http://www.rnw.nl/english/article/new-episode-icesave-saga
Without doubt, this is a harbinger of things to come at quite a few banks throughout the world in small countries such as this. The problems in the EU aren’t just with Greece, Italy, and Spain; Britain and France are being downgraded, and its going to get much worse.
ECB indicates EU will not rescue Greece
Juergen Stark, chief economist at the European Central Bank and a member of its inner council, said Greece's financial issues do not meet the treaty terms required to trigger an EU rescue. Under the terms, rescues are limited to nations that face substantial challenges "beyond their control." "The treaties set out a 'no bailout' clause, and the rules will be respected. This is crucial for guaranteeing the future of a monetary union among sovereign states with national budgets. Markets are deluding themselves if they think that the other member states will at a certain point dip their hands into their wallets to save Greece," Stark told Italian newspaper Il Sole 24 Ore. Telegraph (London) (06 Jan.)
The impending global crisis no one is talking about – Japan
The government said early Wednesday that gross domestic product shrank 4% in the first quarter from the previous quarter, worse than the fourth quarter's 3.8% decline, and marking the fourth consecutive quarter of contraction. The latest reading translates into an annualized contraction of 15.2%, the worst performance since 1955.
And now, dear reader another must read, "Why gold will keep going up for years", by John Embry, Chief Investment Strategist at Sprott Asset Management ... and the link to the GATA release is here. http://www.gata.org/node/8281
Time a fun story now to cheer you up, a reward of $50,000 is being offered for information leading to the recovery of eight gold ingots stolen from an unidentified individual.
These gold ingots were part of the treasure recovered from the S.S. Central America, which sank in a hurricane in 1857 off the coast of North Carolina.
QUOTES OF THE MONTH:
"Sprott Says S&P 500 Index Will Plunge Below March Low..."The Standard & Poor’s 500 Index will collapse below its March lows as an expected rebound in economic growth fails to materialize” - Eric Sprott.
“Every seed is awakened and so is all animal life. It is through this mysterious power that we too have our being and we therefore yield to our animal neighbors the same right as ourselves, to inhabit this land.” -Sitting Bull
"We're in a bear market that will last 15 or 20 years" - Eric Sprott, Sprott Asset Management, December 2009
In November 2008, Queen Elizabeth II asked the London School of Economics (LSE) why nobody saw the current financial crisis coming. - Eight months later, this LSE’s response was published in the London Observer.
“In summary, Your Majesty, the failure to foresee the timing, extent, and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.… It is difficult to recall a greater example of wishful thinking combined with hubris.”
“2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.” – Eric Sprott & David Franklin
http://www.sprott.com/Docs/MarketsataGlance/12_2009_MAAG.pdf
“Gold Is Money and Nothing Else” - J P Morgan said when he was
asked about the role of gold in the financial system by a U.S. congressional subcommittee in 1913.
"If the American people ever allow private banks to control the issuance of their currencies, first by inflation then by deflation, the banks and corporations that will grow up around them will deprive the people of all their prosperity until their children will wake up homeless on the continent their fathers conquered."- Thomas Jefferson
“In old-style 19th Century capitalism, I owned my company, I made a mistake, I bore the consequences. Today, (at) most of the big companies you have managers who, when things go well, walk off with a lot of money. When things go bad the shareholders bear the costs,” - Nobel laureate, Joseph Stiglitz
A PBS program entitled Bill Moyer's Journal. Moyers sits down with Bill Black, the former senior regulator who cracked down on banks during the savings and loan crisis of the 1980s. Black offers his analysis of what went wrong and his critique of the bailout... and it's ugly!!! If you've never seen this before, and it's definitely worth your time... and the link is here... http://www.youtube.com/watch?v=Rz1b__MdtHY
Another must watch video. It's an interview from ABC News that's posted over at yahoo.com. The gentleman being interview is Herb Kay, New York Times best selling author and President of HK Turnaround.
http://cosmos.bcst.yahoo.com/up/player/popup/?rn=289004&cl=17810664&src=finance&ch=289021
"monetary LSD" -- borrowing a phrase used by a French economic minister during the 1970s to describe the floating exchange-rate system that followed the end of the gold standard.
"The human race has only one really effective weapon, and that is laughter. The moment it arises, all your irritations and resentments slip away and the sunny spirit takes their place." – Mark Twain
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” - Ludwig von Mises
“Never, in my 35 years of market observation, have I witnessed a more blatant manipulation. Make no mistake, this deliberate sell-off [in silver] is the handiwork of JPMorgan. This sell-off would not be possible were it not for their large concentrated short position. More upsetting is the apparent complicity of the CFTC in allowing the illegal manipulation of the silver market. The CFTC's probable involvement undermines the very concept of market integrity.” - Ted Butler, 26 January 2010
"Fear the Boom and Bust" a Hayek vs. Keynes Rap Anthem” – Check it out: http://www.youtube.com/watch?v=d0nERTFo-Sk
“The real decisions that impact the capital markets are being made in Washington. And they're sometimes being made by politicians who don't really have a clue about how the industry works, or what unintended consequences their actions may have. If that doesn't scare you, I don't know what will.” - Mike Larsen
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:
James Turk, Ed Steer, Buzz Holling, Bob Prechter, Richard Band, Porter Stansberry, Ian Gordon, Martin Weiss, Doug Cassey, Bob Irish, David Galland, Chris Powell, Chris Wood, Bud Conrad, Corey Boles, John Embry, Mike Larsen, chinamining.org, Business News Network, goldmoney.com, Financial Times in London, longwavegroup.com, Journal Health Affairs, Washington Post, Reuters, Boomberg, Economist, CNN Money, and the LA Times.
