Tuesday, June 2, 2009

The "Worst" Is Yet To Come

"Everyone wants to live at the expense of the state. They forget that the state wants to live at the expense of everyone."
- Frederic Bastiat

“The long consolidation of the gold price over the last year or so appears to have been completed. At $930 we suddenly saw short-term speculators, driven by the Technical [chart] picture and the buckling of the $, jump in boots an' all. They bought and bought over the last three weeks adding enormously [50 tonnes and more] to the net long-term speculative position in gold and silver on COMEX.

As we approach the four figure barrier [$1,000] we have no doubt that these short-term players will pause again and then the big question has to be asked. "Will gold break up and out to higher levels in a new bull phase, or will it tumble back to $850 as some believe?" Silver will follow gold in a more dramatic way.

Long-term investors have openly been small buyers of late and they are the ones that really have driven these markets. They are more than capable of buying 100 tonnes a month should they believe that the long-term macro-economic and currency scene warrants it. They hold over 1,300 tonnes at present, a quantity that is larger than Switzerland's holdings and are the fifth largest holders of gold after the four largest central bank holdings of gold. If they perceive that the levels of uncertainty and soundness of the monetary system are suspect, then gold will evolve back into a role it has not seen for 35 years but was part of the fabric of life for the previous 6,000 years.

If they believe that a recovery will help us all to 'live happily ever after' then they will hold back and the gold price will drop back to $850 or less.

Gold is like the thermometer in an ailing patient and the question is, "Will a real recovery take place" or "is the sickness incurable?"

Silver is the long-shadow of gold and was expected to outperform gold and has with its rise of 26% in the last month. Gold has reflected the fall in the U.S.$ with its 10% rise. However, silver as the 'poor man's gold' still promises a better run than gold due to the weight of investment it is attracting, in the west through the Silver Trust [SLV] and in India. If that continues and 'official selling' of silver stops there is little to refrain the silver price. However, it will be volatile, very volatile, so it needs to be watched carefully, very carefully.

Which way will they go now? The answer lies in the answer to the question, "have the monetary authorities repaired the monetary system properly?”

- Julian D.W. Phillips, http://www.goldseek.com/email/lt/t_go.php?i=1635&e=MjAwNTg=&l=-http--www.goldforecaster.com/

Dollar continues plunge against euro, pound
NEW YORK (AP) — The dollar continued its plunge to multimonth lows against the euro and the pound Monday as better-than-expected readings on manufacturing, consumer spending and construction spending drove investors to riskier assets.

The economic data suggested the economy's decline is moderating, but did not yet show a rebound. Personal spending was down slightly in April, personal incomes were flat and U.S. manufacturing activity contracted for the 16th straight month in May,
although at a slower pace.

Hope of an economic recovery has pushed the dollar down as investors trade it in for foreign equities and bonds. Further, continued worries over U.S. deficits and debt loads added to investors' wariness on the greenback.

Also Monday, General Motors Corp.'s filed for Chapter 11 bankruptcy protection, the fourth-largest in U.S. history. The filing was not shocking, but served as a reminder of the government's heavy involvement in corporate America following last year's market crash and economic tumble.

The stock market
shrugged off falling Treasury prices and surging yields, which last week caused investors to worry that interest rates on consumer loans such as mortgages could go higher.

A drop in U.S. oil inventories pushed oil prices to a new high for the year above $68a barrel. Investors are betting that increased demand for goods will jump-start a demand for oil. They also often buy crude as a hedge against a dropping dollar. Gold, another commodity, is also used as a hedge against inflation, and gold prices have risen precipitously in recent weeks, breaking above $978 an ounce in New York on Monday.


The news "story" posted above is but one example of many similar stories posted on the Internet yesterday espousing strong economic data bolstering optimism the worst of the global recession was past. Yeah, right...

Boldly highlighted in red are several examples of "financial media BS" used to spin bad news into a bowl of cherries in a bed of rose petals. "Better-than-expected" [BTE] is the phrase that seems to pop up almost daily in countless financial media "story's" about the economy. It's code word for "hold your nose and swallow this steaming bowl of bull shit". Less bad is not good people, pure and simple.

America's largest company slips into bankruptcy, and Wall Street cheers? Interest rates are rising by leaps and bounds, and Wall Street cheers? Manufacturing CONTINUES TO FALL, and Wall Street Cheers? Consumer spending FALLS, and Wall Street cheers? How is any of this "better-than-expected" bad news representative of economic growth? "Hoping" for growth isn't going to turn the economy around.

GM's bankruptcy only guarantees continued growth in unemployment as the filing ripples through the ENTIRE auto industry. Rising interest rates are toxic relative to economic growth. Rising interest rates combined with continued weakness in manufacturing and consumer spending is nothing but negative for corporate profits. Poor corporate profits means lower tax receipts for the government, and fewer new jobs for the public. Fewer jobs equals even lower tax receipts for the government. Falling tax receipts equals higher deficits for the government. Higher deficits equals more Treasury auctions of debt nobody wants to buy which means even higher interest rates, and even lower corporate profits, and higher unemployment. It's called an economic death spiral. You can thank the US Federal Reserve.

Exploding debt threatens America
John Taylor, Financial Times
“Standard and Poor’s decision to downgrade its outlook for British sovereign debt from ’stable’ to ‘negative’ should be a wake-up call for the US Congress and administration. Let us hope they wake up.

“Under President Barack Obama’s budget plan, the federal debt is exploding. To be precise, it is rising - and will continue to rise - much faster than gross domestic product, a measure of America’s ability to service it. The federal debt was equivalent to 41% of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82% of GDP in 10 years. With no change in policy, it could hit 100% of GDP in just another five years.

“‘A government debt burden of that [100%] level, if sustained, would in Standard & Poor’s view be incompatible with a triple A rating,’ as the risk rating agency stated last week.

“I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis. To understand the size of the risk, take a look at the numbers that Standard and Poor’s considers. The deficit in 2019 is expected by the CBO to be $1,200 billion. Income tax revenues are expected to be about $2,000 billion that year, so a permanent 60% across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?

“Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100% increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82%. A 100% increase in the price level means about 10% inflation for 10 years. But it would not be that smooth - probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.

“The fact that the Federal Reserve is now buying longer-term Treasuries in an effort to keep Treasury yields low adds credibility to this scary story, because it suggests that the debt will be monetised. That the Fed may have a difficult task reducing its own ballooning balance sheet to prevent inflation increases the risks considerably. And 100% inflation would, of course, mean a 100% depreciation of the dollar. Americans would have to pay $2.80 for a euro; the Japanese could buy a dollar for Y50; and gold would be $2,000 per ounce. This is not a forecast, because policy can change; rather it is an indication of how much systemic risk the government is now creating.

“Why might Washington sleep through this wake-up call? You can already hear the excuses.”


Geithner tells China its dollar assets are safe
Timothy Geithner moved today to reassure the Chinese Government that its huge holdings of dollar assets were safe as he reaffirmed his faith in a strong US currency.

Mr Geithner, in China on his first visit as US Treasury Secretary, sought to allay concerns that Washington’s growing budget deficit would fan inflation which, in turn, would undermine the dollar and US bonds.

“Chinese assets are very safe,” Mr Geithner said, answering a question after his opening address at Peking University this morning.

His answer was greeted with laughter by the students, who question the wisdom of China spending huge amounts of money on US bonds instead of improving domestic living standards.

Mr Geithner reiterated that the Obama Administration would cut its huge fiscal deficits and stood behind the strong dollar.

“We have the deepest and most liquid markets for risk-free assets in the world," he said. "We’re committed to bringing our fiscal deficits down over time to a sustainable level.

“We believe in a strong dollar … and we’re going to make sure that we repair and reform the financial system so that we sustain confidence.”

Yeah, right...and a broken clock is right twice a day. The students reaction to Turbo Tim's Pinocchio imitation tells the whole story. Nobody, outside of the USA, believes a word out of this little rat finks mouth. If the US were so dedicated to their "strong Dollar policy" why is the Fed printing money 24/7 and debasing the currency? Of course we all know by now that the "strong Dollar Policy" is the suppression of the price of Gold. The US may still be commited to that via their "gold cartel" at the CRIMEX, but not likely for much longer...the rest of the World appears ready to put the kibosh on that little scam. Debasing the Dollar hardly seems supportive of suppressing the price of Gold then, does it?

Turbo Tim's last quote says it all, "sustain confidence". Sustaining confidence is job #1 at the Treasury and Fed. And be it by hook or by crook, so be it. Never forget, the first three letters of confidence spell CON. And with the aid of the "U.S." financial media, the talking heads at the Treasury and the Fed have become the World's most prolific con men.

Geithner Says China Has Confidence in U.S. Economy
June 2 (Bloomberg) -- Treasury Secretary Timothy Geithner said China, the biggest holder of U.S. Treasuries, has expressed confidence in the U.S. economy and the Obama administration’s actions to fight the recession.

Chinese officials expressed “justifiable confidence in the strength and resilience and dynamism of the American economy,” Geithner said in an interview with state media in Beijing today. He said there will be enough demand for record sales of U.S. debt.

Yu Yongding, a former central bank adviser who acted as the interviewer for the China Daily newspaper, told Geithner: “I worry about details. We will be watching you very carefully.”

When asked by Yu whether there will be sufficient demand for all the debt the U.S. will be selling this year, Geithner responded “I believe there will be.”

Geithner cited a “very sophisticated understanding” in China of why the U.S. is running up budget deficits in the short-term while also pledging to rein in borrowing over the medium term. He reiterated the U.S. commitment to cut spending and pull back government aid to the financial system once stability returns.

“We have a strong, independent central bank which is committed to keep inflation stable and low over time, we’re committed to a strong dollar, we have the deepest, most liquid Treasury markets in the world and we will do everything that is necessary to try to make sure we’re sustaining confidence in U.S. financial markets, not just in the United States but around the world.”

If Geithner said the Chinese have confidence in the US Economy you can bet they really told him to "blow it out his ass". Geithner is a master at telling the blathering "U.S." financial media exactly what they want to hear. You can be sure that nothing he stated above is true. The guy has little credibility as most of what he has claimed in the past has been proven to be be pure bullshit once tested by time.

Geithner says global recession losing force
Treasury Secretary Timothy Geithner (pictured left) said Monday that the global recession seemed to be losing force but that it will be critical for the United States and China to institute major economic reforms to put the world on a more sustained footing. Geithner said that a successful transition to a more balanced and stable global economy will require substantial changes to economic policy and financial regulation around the world and especially in the world's largest and third largest economies. ... Geithner had told reporters on his way to Beijing that he wanted to foster the same kind of working relationship with China that the United States has enjoyed for decades with major European economic powers.
- AP

Free-Market Analysis: Secretary Timothy Geithner is over in China proclaiming that things are getting better. But in order for them to get better still, there must be "substantial changes to economic policy and financial regulation around the world." We wonder what he means by this.

To have an American Treasury Secretary travel to China to urge the Chinese government to provide more benefits to its citizens is truly ironic. America's culture used to be based on individualism and self-responsibility. But there is not apparently any sense under this administration that American citizens are endowed with their rights by anything other than the state. The thrust of the Obama administration, such as it is, seems purely economic. Their first and last order of business is to sustain a central banking money monopoly that allows the international financial system to survive. In this case, the administration is willing to stand side-by-side with a communist state in order to reorganize the world's financial engine. There is no sense here that the economic crisis will be solved by individual entrepreneurship (human action) - only by nudging the massive ship of the state toward further monetary expansion.

In our opinion this is a desperate strategy. China is a fairly shaky state and there at least 300-400 million impoverished people who scratch a living off the land and want something more. In fact, they remain disaffected and angry. It is this population that the Chinese leaders fear and are racing to palliate with urban employment. In order to turn its consumerism inward, China will have to rev up its money production even more.

From our point of view, there is a good chance that China's massively leveraged banks will collapse under the strain. Geithner has traveled to China to plead with his new good friends to re-inflate the global bubble. Knowing the way he operates, he has probably even indicated that China's US$1 trillion or so in Treasuries will be stabilized if the US can export successfully to an increasingly successful and widespread middle class. The world's further prosperity depends on the Chinese now - or that is what we are led to believe, reading between the lines of this AP story.

Federal Reserve puzzled by yield curve steepening
The Federal Reserve is studying significant moves in the U.S. government bond market last week that could have big implications for the central bank's strategy to combat the country's recession. But the Fed is not really sure what is driving the sharp rise in long-dated bond yields, and especially a widening gap between short and long term yields. - Reuters

Dominant Social Theme: It is a conundrum, apparently. A puzzle to even the brightest monetary minds ...

Free-Market Analysis: Oh, Mama! Once again top central bankers grapple with the deepest problems of high finance - and admit the struggle is a most difficult one. Are we supposed to empathize? It is all so complicated, apparently. More data is doubtless needed; more analyses should be conducted; more discussions are necessary. In the meantime, the collective head-scratching will continue. Here is how the Reuters article (excerpted above) presents the options:

Do rising U.S. Treasury yields and a steepening yield curve suggest an economic recovery is more certain, meaning less need for safe haven government bonds and a healthy demand for credit? If so, there might be less need for the Fed to expand the money supply by buying more U.S. Treasuries. Or does the steepening yield curve mean investors are worried about the deterioration in the U.S. fiscal outlook, or the potential for a collapse in the U.S. dollar as the Fed floods the world with newly minted currency as part of its quantitative easing program. This might be an argument to augment to step up asset purchases. Another possibility is that China, the largest foreign holder of U.S. Treasury debt, has decided to refocus its portfolio by leaning more heavily on shorter-term maturities.

So ... apparently, the big fellows at the US Fed and Treasury can't figure out why bond prices are souring. Is it because people feel giddy about the economy and seek more exciting options? Or is it because buyers are frightened that bonds represent a broken economy, given that each American household is now some US$500,000 in debt?

What are these people smoking (besides expensive cigars)? Do American central bankers (and their colleagues) really believe Treasuries are in less demand because people are growing more optimistic? And even if there are those who do believe this, where's the evidence? An onrushing commercial mortgage crisis plus a potential unraveling of literally hundreds of trillions in derivative bets - along with increasing hesitancy among the Chinese and Japanese to buy more American debt - would seem to mitigate against warm feelings any time soon.

Ugh! Gas hits $2.50
Drivers already feeling the recession's pain suffer as the average price of a gallon rockets more than 50% since the start of the year.

NEW YORK (CNNMoney.com) -- The price of gas, rising for the 33rd straight day, has reached $2.50 a gallon, motorist group AAA reported Sunday.

The spike of more than 20% in a month is hitting Americans in their wallets and causing concern among some experts.

The jump in one of consumers' staple purchases comes at a fragile time for the economy. Recently some measures of housing, spending and credit have hinted that the most severe parts of the recession may be easing.

At the same time, gas has jumped in price as the American auto industry is on the verge of a dramatic reshaping amid plummeting vehicle sales.


I'm certain the financial media will eventually find a way to tell us that rising gas prices are "good for the economy". The effect, doubtless, "better-than-expected"...

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