Monday, June 1, 2009

Gold Hits ALL-TIME Monthly High

“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

Bond markets defy Fed as Treasury yields spike
By Ambrose Evans-Pritchard
The US Federal Reserve may soon be forced to launch fresh blitz of quantitative easing whatever the consequences for the US dollar, or risk seeing economic recovery snuffed out by the latest surge in long-term borrowing costs.

Yields on 10-year Treasury bonds have risen relentlessly since March when the Fed first announced its plan to buy $300bn (£188bn) of US government debt directly, a move that briefly forced rates down to nearly 2.5pc, a level thought to be the Fed’s implicit target.

Yields have jumped to 3.69pc – after spiking as high as 3.74pc on Wednesday – pushing up the standard 30-year mortgage loan to 5.08pc and lifting the borrowing cost for corporations.

"The Fed is going to have to consider doubling its purchases of Treasuries," said Ashraf Laidi, from CMC Capital Markets. "We could be nearing the end-game for the US dollar but the Fed has little choice at this point. We’re in a vicious circle where any policy aimed at supporting the US economy must be at the expense of the dollar."

Fed May Buy More Assets to Bolster Balance Sheet
May 28 (Bloomberg) -- The Federal Reserve may step up asset purchases to prevent its balance sheet from contracting until policy makers are convinced an economic recovery has taken hold, Fed officials and analysts said.

Demand for some of the Fed’s emergency programs has waned as the grip of the credit crunch loosens, with loans to banks shrinking 48 percent since Jan. 1. The main tool to keep the central bank’s holdings from falling from the current $2.08 trillion would be more purchases of Treasuries, said analysts including former Fed Governor Laurence Meyer.

Until now, policy makers’ balance-sheet decisions have been driven by the emergency liquidity needs of banks, bond dealers, money markets and failing financial institutions. U.S. central bankers are now transitioning to a period where economic data and their implications for forecasts will play the key role.

“You wouldn’t want policy to reverse course dramatically or ramp up dramatically unless the outlook changed substantially,” John Weinberg, research director at the Federal Reserve Bank of Richmond, said in an interview. “It really hasn’t yet.”

Fed officials have said their Treasuries buying isn’t designed to target any specific yield levels. Last week’s release of minutes of the April 28-29 Open Market Committee meeting showed some members were open to bigger purchases to spur a more rapid recovery.

False Confidence
By: John Browne, Senior Market Strategist, Euro Pacific Capital, Inc.
Last week, it was reported that consumer confidence has seen an unexpected lift. In response, the sluggish stock market saw a manic 196-point rally.

This mania overrode losses from the week's other big news: Great Britain was put on negative credit watch by Standard & Poor's; the U.S. markets tanked on expectations of a similar downgrade domestically; and, Case-Shiller reported an unrelenting slide in home prices. In other words, the economic decline continues.

So, why are consumers so confident? They are being deceived by "free money" into believing in the power of socialism.

Since the start of the crisis, the Fed has held interest rates to an artificially low level, greatly helping borrowers who can obtain credit. Also, the Administration has made it clear that it will not allow a major bank failure, even if accounting rules have to be changed to give the appearance of solvency. Including guarantees, the entitlement-based stimulus packages have sprayed trillions of dollars into the economy, with minimal oversight.

None of these policies aid recovery, nor do they allow resources to be allocated more efficiently. Instead, they prolong economic dislocation, increase the influence of the federal government, and drag America deeper into debt.

It is true that the financial collapse that threatened does appear to have been averted by "officially" hiding and avoiding the problem of toxic assets. But the lesson from Japan, which did the same, is that avoidance is no cure and will only allow the wounds to fester.

Rising U.S. bond yields may spark Credit Crisis II
NEW YORK (Reuters) - The global financial crisis may morph into a second, equally virulent phase where borrowing costs rise again, hobbling an embryonic economic recovery, debilitating cash-strapped banks, and punishing investors all over again.

Early warnings signs of this scenario include surging government bond yields, a slumping U.S. dollar, and the fading of the bear market rally in U.S. stocks.

Optimists hope that a fragile two-month rally in world stock markets, a rise in U.S. Treasury yields from record lows during the depths of the crisis in late 2008, and some less scary economic data all signal that a recovery is around the corner.

But gloomy analysts insist that thinking is delusional.

Treasury Bonds: In the Eye of the Storm
by Bryan Rich, Money and Markets
In normal environments — when the global economy is stable, the financial system is stable and advanced economies are growing — higher rates are a recipe for a stronger currency. That means the U.S. dollar would benefit from such an aggressive move in interest rates, as investors seeking higher yields flock to the Treasury market and the U.S. dollar. The climb in interest rates would typically be associated with a central bank that is attempting to cool off inflationary pressures from an expanding economy.

That’s certainly not the case now …

Yes, interest rates are rising. The yield on the 10-year Treasury note leaped from 2.45 percent to 3.75 percent in just 10 weeks. But it’s not growth that’s driving yields on U.S. government debt … it’s inflation fears! Therefore, the dollar has been under pressure.

The U.S. government is adding trillions of dollars in new debt. And according to the IMF, the debt level in the U.S. is expected to surge from 63 percent of GDP in 2007 to nearly 100 percent of GDP by 2010.

The Fed has bought about $500 billion of debt to expand the money supply and force interest rates (particularly mortgage rates) lower, a feat that was going well until last week. Now mortgage rates are back above 5 percent, and billions of dollars worth of work by the Fed has been erased.

Even with manipulated mortgage rates, which went as low as 4.8 percent from 6.5 percent just nine months ago, the number of mortgage delinquencies and foreclosures hit record levels in the latest report. Now prime fixed-rate foreclosures are outpacing subprime.

This inflation scare and climbing interest rate scenario puts increased pressure on an already fragile domestic and global economy and increased pressure on the Fed. Moreover, a continued deterioration in the U.S. housing market is:

-Not good for the U.S. consumer,

-Not good for export-driven global economies,

-Not good for the global financial system.

Rather, it prolongs a problem that is at the core of the financial and economic crisis and exposes financial markets to more risk — just when the general sentiment is getting more optimistic.

All of the economists polled by the National Association for Business Economics predict the recession to end by the first quarter of 2010. It’s this type of optimism that is feeding the risk appetite of investors. And it’s this type of optimism that creates increased vulnerability in financial markets to a negative surprise.

The Second Crash -On the Way and Unstoppable
Doug HornigEditor, BIG GOLD
Now consider that the base cause for all that dislocation was the subprime sector. And how big is that? Not very. Subprime mortgages account for only about 15% of all home loans. Their influence has been way out of proportion to their numbers, because of derivatives. Here's the good news: the subprime meltdown has about run its course. These loans were resetting en masse in 2007 and the first eight months of '08. Now they're pretty much done.

And the bad news? No one in the mainstream media seems to be asking what should be a pretty obvious question: What about loans other than subprime? Truth is, the banks didn't just trick up their subprime loans. ARMs were the order of the day - across the board.

from the beginning of 2007 through September of 2008, subprime loans (the gray bars above) were resetting like crazy. Those are the ones people were walking away from, sending a shockwave from defaults and foreclosures smack into the middle of the economy. Now they're gone.

The ARM market got very quiet between December 2008 and March 2009, hitting a low that won't be seen again until November of 2011. Small wonder a few "green shoots" have poked their heads above ground. But in April, resets began to increase and will reach an intermediate peak in June. After that, they tail off a little, going basically flat for the next ten months.

It's not until May of 2010 that the next wave really hits. From there to October of 2011, the resets will be coming fast and furious. That's 18 months of further turmoil in the housing market, and the beginning is still nearly a year away! (Although the months in between are likely to be no picnic, either.)

While it isn't subprime ARMs that are resetting this time, neither are they prime loans. Those eligible for prime loans wisely tended to stay away from ARMs in the first place, as indicated by the relatively small space they take up on each bar.

No, the next to go are Alt-As (the white bars), Option ARMs (green) and Unsecuritized ARMs (blue). Alt-As are loans to the folks who are a small step up from subprime. Unsecuritized loans are a 50-50 proposition; either the borrowers were good enough that they weren't thrown into the CDS pool, or they were so risky no one would insure them.

Those two are bad enough. But Option ARMs are the real black sheep, loans with choices on how large a payment the borrower will make. The options include interest-only or, worse, a minimum payment that is less than interest-only, leading to "negative amortization" - a loan balance that continually gets bigger, not smaller. Imagine what happens with those when the piper calls.

Once the carnage begins, will it be as bad as the subprime crisis? That's the $64K question. Perhaps not. For one thing, subprime loans were a much larger chunk of the market when they started going south. For another, there's been a lot of refinancing as interest rates dropped; that should help ease the default rate. And the government has massively intervened, with measures designed to prop up those who would otherwise lose their homes.

On the other hand, we're in a severe recession, which wasn't the case when the subprime crisis started. More people will be unable to meet payments. And the housing market has continued to decline, pressuring both marginal homeowners and banks that can't sell foreclosed properties.

But make no mistake about it, the second crash is coming. It can't be prevented, no matter what desperate measures Obama and his hapless financial advisors come up with. All we can hope for is that, with a little luck, it won't be as severe as the first one. But it will last longer. We aren't even in the middle of the woods yet, much less on the way out.

Silver Rises to Best Month Since 1987; Gold at Three-Month High
May 29 (Bloomberg) -- Silver climbed the most in a month in 22 years and gold rose to a three-month high in New York and London as a weaker dollar increased demand for precious metals as an alternative investment.

The U.S. Dollar Index, heading for its sharpest monthly drop this year, fell on speculation that gains in equities and signs of a global economic rebound will spur demand for higher- yielding assets. Precious metals typically move inversely to the U.S. currency. Gold jumped the most for a month since November.

“Extreme dollar weakness is adding to the momentum,” Pradeep Unni, an analyst at Richcomm Global Services in Dubai, said today in a note. “Ascending oil prices, concerns of inflation and fears of massive U.S. debt have certainly been supporting” both metals, he said.

Commodities were headed for the biggest monthly rally in 34 years, led by energy, as the slumping dollar boosted demand for raw materials as a hedge against inflation. The 19-contract Reuters/Jefferies CRB Index climbed as much as 1.2 percent, extending a rally to the highest since Nov. 11. The index neared a 14 percent rise for the month, the most since July 1974.

Crude Oil Caps Biggest Monthly Gain Since 1999 on Dollar Drop
May 29 (Bloomberg) -- Crude oil rose, capping its biggest monthly gain in a decade, as the dollar weakened against the euro, bolstering the appeal of commodities.

Oil climbed above $66 a barrel to a six-month high as the dollar declined beyond $1.41 against the euro for the first time this year, making raw materials such as oil and gold an attractive alternative investment. Prices also gained as U.S., and Asian indicators pointed to a global economic recovery.

“The devaluation of the dollar is leading to the revaluation of energy and commodities in general,” said John Kilduff, senior vice president of energy at MF Global in New York. “This is a monetary-based rally. The market is focused on the future and ignoring the fundamentals of the present day crude-oil supply and demand picture.”

The U.S. currency had its biggest monthly decline against the euro this year. The dollar dropped 1.4 percent to $1.4134 versus the single European currency.

Confidence among U.S. consumers rose this month to the highest level since September. The Reuters/University of Michigan final index of consumer sentiment increased to 68.7, more than forecast, from 65.1 in April.

“This rally is based more on hope than on fact,” said Adam Sieminski, the chief energy economist at Deutsche Bank AG in Washington. “The move has been more tied to rising consumer sentiment than market fundamentals.”

Prices are also rising because of declining U.S. inventories. Crude-oil supplies fell 5.41 million barrels to 363.1 million last week, an Energy Department report showed yesterday. It was the biggest decrease since September. The drop left inventories 27 percent greater than the five-year average, up from a 23 percent surplus a week earlier.

U.S. gasoline stockpiles dropped 537,000 barrels to 203.4 million last week, the lowest since December, according to the report.

“The drop in U.S. inventories is evidence that the OPEC production cuts are starting to bite,” said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts. “There’s some optimism about the economy, which is driving the oil market. It’s important to keep in mind that demand has shown absolutely no sign of recovery.”

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