Friday, February 12, 2010

Chip Away The Stone

Gold again today thumbed it's nose at a rising Dollar. Shrugging off yet another early morning CRIMEX take down, Gold fought back to close the day near unchanged and end UP $32 on the week. Could a real "flight to quality" be taking wing in the face of mounting global sovereign debt uncertainty?

Are Gold investors finally wising up to the false hopes of the US Dollar and US Treasuries as the "safe-haven" of choice as the deterioration of the global fiat money system accelerates? Have Gold investors finally sparked the necessary disconnect between Gold and the US Dollar?

The Dollar – The Ultimate Opportunist?
By: Andy Sutton
It should not be lost on even the most casual of observers that the US Dollar is dead. How can I say this when it is in the middle of yet another ‘rally’? And aren’t the folks in Washington telling us how strong the Dollar is more and more vapidly and with greater frequency? The fact of the matter here is that the Dollar has, for quite some time now, not been able to rally itself based on its own merits. Remember that currencies are essentially a zero-sum game. Their value is measured in terms of other currencies. One goes up, another must go down. Taking a look at recent Dollar rallies, they’ve happened essentially because bad things have happened in Euroland or elsewhere, whether it is the latest debt crisis with the PIGS (an unfortunate acronym, but who wants to be called a BRIC anyway?) or the massive liquidation of 2008. These were not exhibits of the Dollar’s strength, but rather of a mental model that still hasn’t adjusted to the fact that the Dollar’s run is over. Add to that the lack of an available substitute and voila – instant dollar ‘strength’.

Think of it this way: if our currency were strong for fundamental reasons, say for example gold backing, genuine budget surpluses free of accounting chicanery, trade surpluses, and similar positives, then countries wouldn’t be sneaking around backrooms around the globe forging agreements to sidestep it. Foreigners wouldn’t be twisting their brains trying to figure out how to get out from under their pile of US Treasuries without upsetting the apple cart. Put mildly, a wheelbarrow full of plutonium would be received better in most financial centers these days than one filled with US Dollars.

Forget Greece, The US Almost Had A Failed Treasury Auction
By: Graham Summers
While most of the investment world focuses on the various "senior officials" (none of whom seem to have actual names or positions) commenting on whether Greece will or will not be bailed out/ receive an emergency loan/ offered moral support, etc, a far more significant debt story is emerging in the US.

On Wednesday the US offered $16 billion worth of 30-year Treasuries (US debt that will mature in 30 years). Before we get into the details of how much of a disaster the auction was we're going to do a brief review of how US debt issuances work.

1) Direct Buyers: folks who buy straight from the Treasury, typically comprising a minor stake in US debt purchases

2) Indirect Buyers: folks who buy LARGE chunks of US debt, typically Foreign Governments

3) Primary Dealers: banks that HAVE to buy US debt to insure an auction doesn't fail. You don't want to see a lot of Primary Dealer purchases as this means that those who can CHOOSE to buy US debt DON'T want to.

On Wednesday, February 10 2010, the US Treasury issued $16 billion in 30-year Treasuries. Here are the buyer data points:

Primary Dealers

Direct Buyers
24% (A RECORD)

Indirect Buyers

First of all, we see Direct Buyers hit a RECORD percentage of purchases. This is extremely bizarre and somewhat disconcerting given that we have no way of know who these buyers are. For all we know they could be the Federal Reserve itself or other US-Government entities buying "off the radar."

Indeed, on that note we know that the US Federal Reserve accounted for 11% of the total purchases. Folks, you're not dealing with a healthy debt auction when the Fed accounts for 10% of purchases.

However, far, FAR more worrisome is the pathetic Indirect Buyer takedown: 28%. Historically this number has been more around 40% (Tyler at ZeroHedge notes that the average Indirect purchase of the last four long-term Treasury auctions was 39.9%). To see such a MASSIVE drop off in Indirect Buyers (40% down to 28%) is a MAJOR warning sign that Foreign Governments are no longer willing to buy long-term US debt.

This auction was a very small step away from a failed auction. To see Primary Dealers buying so much (remember they HAVE to buy it) and Indirect Buyers so little, only confirms what I've been saying for months, that the US is entering a Debt Spiral: a situation in which it must issue more and more debt (while rolling over trillions of old debt) at the very time that fewer and fewer investors are willing to lend to the US for any lengthy period of time (more than ten years).

Greece is Irrelevant Compared to What's Unfolding in the U.S
By Dave Kranzler, The Golden Truth
It just boggles my mind that the whole world, especially the mainstream media in this country, is completely - no, tragically - focused on the possible collapse of tiny Greece, when the real story is unfolding right under our nose in the U.S. Keep in mind as you read this that Greece's GDP is roughly 3% of total EU GDP.

We all know about California's problems. Right now that State is staring at a $21 billion budget deficit - that forecast is probably too optimistic - and California already is over $6 billion in the hole on its unemployment insurance fund and is borrowing from the Feds to fund payments. Many States are now borrowing from the Government to fund unemployment claims. California represents 13% of total U.S. GDP, is the seventh largest economy in the world and has well over $500 billion in total debt outstanding (largely muni paper). Compare that to Greece, which has a little over $400 billion in debt and is insignificant in terms of global economic output. Yes,. Greece will default on its debt if it isn't bailed out, but what about California?

How about this piece of news which hit the wires yesterday afternoon after the stock market was safely closed: the New Jersey Governor declared a "fiscal emergency" because the latest budget proposal now has an $11 billion deficit, up from an $8 billion forecast deficit as recently as November, and up from the deficit in the current year which is projected to be $2.2 billion. Here's the Reuters link: NJ To Take a Dirt Nap? Last year New Jersey ranked 7th in relative economic output by State.

How about Pennsylvania? In a little-reported event last week, the State Government of PA is contemplating a Chapter 9 bankruptcy filing. Pennsylvania ranks 6th in economic output. New York is running toward the brick wall of insolvency. NY ranks 3rd in economic output. Ditto Illinois, which ranks 5th. Same for North Carolina, which ranks 9th. Michigan, Ohio, Nevada...

Anyone now think Greece looks problematic in the grand scheme of economic problems? And this analysis does not address the Federal Government debt swamp. Let me just say that anyone who believes Obama's forecast of $1.6 trillion for the next fiscal year is doing way too many bong hits. That budget deficit projection does not include an accounting calculation of the Government guaranteed entitlement payouts from all of the long term legacy psuedo-welfare programs like Social Security, Medicare, etc. From a financial accounting standpoint, that calculation needs to be taken into account annually, similar to the way it is required for all businesses. It also does not include several $100 billion in "off-budget" military expenditures. And the amount of total Treasury debt outstanding currently should include, but does not, some calculation that takes into account all of the recent guarantees issued by the Treasury in the last year which back trillions in banking system liablilities. Included in this number would be the $6 trillion of FNM/FRE debt being guaranteed, $600 billion in FHA mortgage paper, and the $1.25 trillion in mortgage paper purchased by the Fed. There are several other financial guarantee programs that will require billions in funding this year, like FDIC.

Anyone see any problems here? When you stack all of the above up against Greece, or even an aggregate of the so-called PIIGS + the UK, I think I'd rather have the EU problems than the catastrophic Debt Bubble getting ready to explode in the U.S. Make no mistake about it, Bernanke will soon be forced to seriously crank up his electronic printing press and dispatch a whole fleet of B-52 bombers to implement his infamous cash drop on a collapsing empire. It's exactly this predicament that is causing gold to move inexorably higher, making all those who forecast gold's price demise and lack of value look like complete idiots.

Think the PIGS Are in Trouble? These 7 U.S. States Could Be Heading for Something Worse
By Gregor Macdonald
The inevitable coming of the sovereign debt panic finally engulfed Europe this week as the derisively (or perhaps affectionately) named PIGS spilled their slop on the continent. But Portugal, Ireland, Greece, and Spain are hardly worthy of so much attention. In truth, they are little more than the currently favored proxies among the leveraged speculator community (cough) for the larger problem of all sovereign debt. Indeed, the credit default swaps on these smaller European satellite states were not alone this week in making large moves higher. UK sovereign risk rose strongly, and so did US sovereign risk. With a downgrade warning from Moody’s to boot.

Notable among three of the PIGS are their relatively small populations, and small contributions to either world or European GDP. While Spain has a population over 45 million, Portugal and Greece have populations roughly equal to a US state, such as Ohio–at around 10 million. And Ireland? The Emerald Isle has a population similar to Kentucky, at around 4 million. While the PIGS are without question a problem for Europe, whatever problems they present for Brussels are easily matched by the looming headache for Washington that’s coming from large US states such as California, Florida, Illinois, Ohio, and Michigan.

I’ve identified seven large US states by four criteria that are sure to cause trouble for Washington’s political class at least for the next 3 years, through the 2012 elections. These are states with big populations, very high rates of unemployment, and which have already had to borrow big to pay unemployment claims. In addition, as a kind of kicker, I’ve thrown in a fourth criteria to identify those states that are large net importers of energy. Because the step change to higher energy prices played, and continues to play, such a large role in the developed world’s financial crisis it’s instructive to identify those US states that will struggle for years against the rising tide of higher energy costs

The seven states to make my list are California, Florida, Illinois, Ohio, Michigan, North Carolina, and New Jersey. Each has a population above 8 million people. Each has had to borrow more than a billion dollars, so far, to pay claims out of their now bankrupt unemployment insurance fund. Also, each state currently registers broad, underemployment above 15% as indicated by the U-6 measure for the States. And finally, each state is a large net importer of either oil, natural gas, electricity, or all three of these energy sources.

A Greek crisis is coming to America
By Niall Ferguson
It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate.

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect

For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.

Even according to the White House’s new budget projections, the gross federal debt will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.

by Egon von Greyerz – Matterhorn Asset Management
When we look at the world economy today, wherever we turn we see a wall of risk. And sadly this is an insurmountable wall with risks that are totally unprecedented in history. There has never before been a potentially catastrophic combination of so many virtually bankrupt major sovereign states (US, UK, Spain, Italy Greece, Japan and many more) and a financial system which is bankrupt but is temporarily kept alive with phoney valuations and unlimited money printing. But governments will soon realise that they are not alchemists who can turn printed paper into gold. The consequences of the global financial crisis are potentially catastrophic.

As the Austrian economist von Mises said: “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 the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

In our view, governments like the US and the UK and many others will not abandon further credit expansion. They are committed to printing increasing amounts of worthless paper money in order to finance the growing deficits and the rotten financial system. Therefore there is no chance of Quantitative Easing ending but instead it will accelerate in 2010 and after. The consequence of this will be a hyperinflationary depression in many countries due to many currencies becoming worthless. No economy in the world, including China, will avoid this severe economic downturn which is likely to have a major impact on the world economy for many, many years to come.

Is Gold Poised to Go Higher or Lower? [video chart]

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