April - 2010 Economic Brief

Review:



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

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

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

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

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

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



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

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

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

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


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


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

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





Country Deficit % of GDP

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

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

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

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

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

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

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

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

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

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


JOBS:

Absolutely stunning inter-active unemployment map:

See what 30 million unemployed look like.



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


BONDS:

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

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




BANKS:

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

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

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

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

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

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

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

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

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

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

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


REAL ESTATE:

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

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

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


POLITICS and TAXES:

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



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

Possible War strategy

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


USX DOLLARS:

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

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

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

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





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

What’s going on?

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

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


REGULATORY SUPERVISION:

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

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

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


GOLD:


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

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


QUOTES OF THE MONTH:

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

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

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

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

Population...



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

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

March - 2010 - Economic Brief

REVIEW:

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



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

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

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

How does that make you feel?

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

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

Avoiding big losses should be your number one investing priority.

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

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

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



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

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

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

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


DEBT:

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

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

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

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

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

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

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

And guess who is at the party?

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

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

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

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



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

So, what’s going on?

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

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

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

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

Are you unknowingly bailing out Greece?

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

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

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

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

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

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

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



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

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

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

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

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

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


JOBS:

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

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


Chart via Bianco Research

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

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

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

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

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

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

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

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















BONDS:

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

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

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

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

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

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


BANKS:

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

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

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

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


REAL ESTATE:

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

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

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

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

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

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

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

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

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



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

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

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

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


POLITICS and TAXES:

State of the Union Address

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

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

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

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

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

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



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

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

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

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


REGULATORY SUPERVISION:

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

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

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

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

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

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

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

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


GOLD:

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

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



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

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

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

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

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













QUOTES OF THE MONTH:

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

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

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

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

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

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

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

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


Note to readers:

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

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

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

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.