Tuesday, August 9, 2011

Pointed Fingers Fail To Stop Gold's Step Onto The Hyperbolic Launch Pad

I refuse to chart or comment on Silver at this time. 

Did anybody catch the President's "statement" on the debt downgrade yesterday afternoon?  Is it just my imagination, or did the losses in the equity markets accelerate as he spoke, and plunge after he finished speaking?

Don't shoot the messenger Mr. President.  The folks over at Standard and Poors did not double the US debt.  You will have accomplished that astonishing feat just in your short, but far to long, four years in office come your exit from the White House in January 2013.  Go to the mirror Mr. President, go to the mirror.

For those of you that missed the President's scripted blah-blah, he said nothing you haven't heard before.  And for purely entertainment value, and to thumb his nose at "that ratings agency" the President suggested that we need to spend more money on infrastructure and extend the Social Security tax cuts.

The President [the entire US Government] just doesn't get it.  Standard and Poors is not the problem...THE DEBT IS THE PROBLEM.  Deal with it...and quit pointing fingers.  The debt problem begins in Washington, and it must end in Washington.

Occasionally, we all run across an editorial that says exactly what we are thinking.  I found one of those yesterday written by John Hayward for the Human Events web site while I was searching for the text to the President's statement.  Mr. Hayward nails it...America has no faith in the President's "leadership". 

"This is not the behavior of a man who has "faith in the American people."
by John Hayward
Obama was over 45 minutes late for his statement about America's credit rating downgrade, after hiding from the media for an entire weekend. Considering that the speech contained, very literally, nothing he hasn’t said before, the delay is both puzzling and insulting. It’s odd he was willing to suffer the hit for making everyone wait to hear what amounted to a “greatest hits” tape from his debt ceiling performance.

You don’t really need to hear much more than the President’s opening line: “On Friday, we learned that the United States received a downgrade by one of the credit rating agencies, not so much because they doubt our ability to pay our debt if we make good decisions, but because after witnessing a month of wrangling over raising the debt ceiling, they doubted our political system’s ability to act.”

On the contrary, you won’t see any complaints about “a month of wrangling” in statements from S&P. Their downgrade action is entirely based on their doubt that the American government can achieve fiscal solvency. It’s certainly true that they don’t “doubt our ability to pay our debt if we make good decisions,” because if they doubted that, we’d be a lot lower than AA+, wouldn’t we?

“The markets, on the other hand, continue to believe our credit status is AAA,” said Obama… even as the markets dropped an incredible thirty points over the course of his ten-minute statement. To support Obama in the past, you had to abandon memory and common sense. To support him now, you have to ignore what’s happening right before your eyes.

From there, the President lurched into all the tired demands and assertions – you can’t really call them “arguments” – he’s been making for the past month. His focus-group-tested code phrase for tax increases, “balanced approach,” made an appearance. There were various references to problems that existed “when I took office” and the hard time America has been having for “the last two and a half years,” part of the continuing attempt to paint Obama as a helpless bystander who just arrived in the Oval Office yesterday, and can’t believe what George Bush left in the fridge.

He complained about “a debate where the threat of default was used as a bargaining chip.” The one and only politician who did that, repeatedly, was Barack Hussein Obama. He threatened default, and the collapse of supposedly rock-solid entitlements like Social Security, on a regular basis. He didn’t admit he’d been lying about the threat of default until his last press conference before Congress made a debt-ceiling deal without him.

Let’s revisit those remarks, shall we? President Barack Obama, speaking on July 29, 2011: “If we don’t come to an agreement, we could lose our country’s AAA credit rating… not because we didn’t have the capacity to pay our bills – we do – but because we didn’t have a AAA political system to match.” But now he’s back to whining about “default” being used as a bargaining chip by people other than himself.

The President tried to breathe more life into the moribund talking point that his economic failures are the result of global events beyond his control, such as turmoil in the Middle East and the tsunami in Japan.

“Our challenge is the need to tackle our deficits in the long term,” said the man who began the debt-ceiling debate by demanding trillions in new debt immediately, with absolutely no conditions. You’d almost think his Party wasn’t the gang that tabled the only realistic deficit-destroying proposal, the Cut, Cap, and Balance Act, without a proper vote.

“Last week, we reached an agreement that will make historic cuts to defense and domestic spending, but there’s not much further we can cut in either of those categories,” claimed Barack the Mad. You read that right. The man who blew government spending into the stratosphere thinks “there’s not much further we can cut” after a deal that merely slows the rate of spending increase by $2.4 trillion over a decade. We haven’t actually “cut” anything yet.

Besides this puny reduction in the rate of debt increase, Obama thinks the only two things we need to do are raise taxes on the rich, to “ask those who can afford it to pay their fair share,” and complete some “modest adjustments to health care programs like Medicare.” This is nothing he hasn’t been saying for weeks, just as the “hard pivot to job creation” he went on to extol involves things he’s been doing all along, like paying huge amounts of unemployment insurance and snipping a little off the Social Security taxes paid by workers.

Amusingly, Obama paused to compliment “Republicans and Democrats on the bipartisan fiscal commission that I set up” for their “good proposals,” all of which he completely ignored. He also expressed his hopes for the great deficit-fighting work of the “bipartisan Super Committee,” which he just sabotaged by making it politically impossible for committee Democrats to avoid demanding the kind of tax hikes they’ll never get. There was also a funny promise to “stay on it and get the job done” from a man whose days are entirely consumed with recreation and re-election fundraisers, to the point where he vanishes from public for days at a stretch.

From there on in, the statement was a lot of the usual boilerplate about how everyone else has to give up their politics, self-interest, sacred cows, and so forth. There was not a word of contrition, not a hint of responsibility personally accepted by the President, whose attitude can best be summarized as the frustration of a benevolent dictator forced to work in the messy kitchens of democracy.

After a while, Obama couldn’t help himself any more, and blasted out a geyser of new spending proposals, including his beloved “infrastructure” slush funds. It is truly a mystery why credit analysts think America will have trouble controlling those deficits!

The President also threw in some bromides about how he “still has faith in the American people.” That’s why he doesn’t think you can be trusted to manage your own health care! It’s also logically inconsistent with the rest of his argument. If our problem is not government spending – which he just said cannot be “cut” any further – but rather the greedy unwillingness of rich people to pay more in taxes, the only possible conclusion is that middle-class Americans are helpless babes who can’t survive without the titanic government programs Obama, and his predecessors, have put in place. The only reason we can’t cut spending is that America will starve without all that lovely government cheese. Our credit is in the tank because heartless millionaires won’t pay for it.

How can anyone possibly square that dismal, dead-end socialist mindset with “faith in the American people?”

Obama literally fled from the podium without taking any questions, or even looking back over his shoulder. Clearly he senses that what remains of the American people’s faith in him has eroded beyond recovery.

Jim Sinclair stated recently that $1764 Gold would be the "key number in gold":

From Eric King, KingWorldNews.com
July 15, 2011
When Sinclair was asked about the action in gold he stated, “Gold at $1,764 is as important as gold at $524.90, and above $524.90 the gold market went into a runaway. It’s the exact same setup at $1,764, but having said that $1,764 should bring in some significant supply.

However, a move above $1,764 would be the equivalent of $524.90 in the sense that you would go from the runaway that was born at $524.90, into a hyperbolic market. The key to all of this is $1,764 and you will go above that level, but what that does is lock in five figures on the price of gold. A move above $1,764 brings into focus prices as high as $12,000, so we are are approaching the most critical milestone in the entire gold bull market.”

Sinclair continues:

“The Republicans want to raise the debt ceiling, but not enough to take the US through the next election. When Obama walked out of the meeting two days ago it was just on that point where he slammed his chair into the table and walked out. It’s being talked about as if that were standard procedure, as if that was the way things are, and in truth it is the way things are.

The debt crisis has resolved itself unto a political platform and the political platform is not in the economic best interest of the nation, but rather in the best interest of the timing of another election and as a result of that the market (in gold) yesterday broke to a new high. This situation could be one of the catalysts to take out $1,764. It will be reasonable to assume that every effort will be made not to allow gold to get through that price.

When it gets through that level gold will start jumping $100 to $200 a day. $1,764 should put up the biggest battle of the entire bull market. The number where confidence is lost is $1,764. Through that level you trigger Martin Armstrong and Alf Fields maximum numbers which will be $10,000 to $12,500, therefore expect that price level ($1,764) to be defended vigorously.

Jim Sinclair interviewed by James Turk
James Turk, Director of The GoldMoney Foundation, talks to Jim Sinclair, host of http://www.jsmineset.com/, about his successful gold price predictions, US debt problems, how to ride the trend and the second phase of the gold bull. It's a gear change from arithmetic to exponential growth as public perceptions about the safety of the US dollar changes. The debt ceiling debate is a wake up call for people all over the world. The video was recorded on August 5 2011 at the GATA conference in London.

"...therefore expect that price level ($1,764) to be defended vigorously."

And so it is...  At 9:50AM est, Gold is now $42 off it's overnight All-time high at $1779, and $14 below the price as the CRIMEX opened this morning.  Oddly enough, the US Dollar is down 0.40 at 74.44.  Silver is dead money in a rigged market.

Stock index futures surged on Tuesday, indicating a rebound from the previous session's nosedive as investors looked to a Federal Reserve statement for clues on how it may combat a market meltdown linked to fears of a new recession.

I have to believe that the "rebound" in stocks has more to do with the weak Dollar this morning, AND a bit of a goose by the Plunge Protection Team.  Cries for QE3 will likely fall on deaf ears at the hapless Fed.  However, don't be surprised by a bold statement from our money printing Chairsatan. 

One possible move he could announce is that, effective "soon", the Fed will stop paying banks interest on their reserves kept at the Fed in the hopes that forcing this money into the system will jump start the economy...it will jump start inflation...and a renewed rise in commodity prices, and likely a strong rally in stocks...that money won't see the hands of Americans.

Another possible announcement would be a "cap on interest rates".  This would be QE3 "undercover".  They might possibly even announce a move to "Permanent Zero" on the Fed Funds Rate.

By Edward Harrison

14 June 2011
The crucial passage pertaining to quantitative easing in a zero interest rate environment is below. Bernanke stated:

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure–that is, rates on government bonds of longer maturities. There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time–if it were credible–would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

The Fed's policy-setting panel needs something to reassure markets, but what's left?
The Federal Open Market Committee will be forced to confront the global financial panic that sent the Standard & Poor's 500 down a Satanic 6.66% Monday.

And the apocalyptic selling worsening in Asia early Tuesday, with South Korea's Kospi plunging over 8% and Hong Kong's Hang Seng losing 7% while Japan's Nikkei 225 falling back to levels last seen when it faced nuclear meltdown following the March earthquake and tsunami.

As dire as the declines in these market indices are, an even greater concern for the Federal Reserve's policy-setting panel has to be the collapse in the common and preferred stocks of major U.S. banks. Bank of America common (BAC) was in free-fall most of Monday, ending down more than 20%, while Citigroup (C) lost over 16%. Overall losses among the banks were in double-digits Monday as the SPDR KBW Bank exchange-traded fund (KBE) that tracks the Keefe, Bruyette & Woods bank index fell 10.5%.

After such a stunning slide in all risk assets in the past week, the FOMC surely has had to rip up the rough draft of the policy statement it might have scribbled for Tuesday's meeting. Of course, the world will be watching with high anxiety when the panel's statement is released around 2:15 PM EDT.

In one sense, the FOMC has been freed from one constraint by the current crisis. The plunge in oil and other commodity prices means that the rise in inflation has indeed proven to be "transitory," as Bernanke & Co. had contended. West Texas crude was down another $5 to $76 a barrel during overnight trading in Asia.

The surge in commodities followed QE2, as the Fed's program to purchase an additional $600 billion in Treasury securities came to be known. Given that experience and accusations from abroad that the U.S. central bank was trying to debase the dollar with QE2, the hurdle facing a possible QE3 is high.

Indeed, that may be behind the ferocity of the global decline in risk assets. Buyers of stocks, high-yield bonds, commodities and currencies of emerging markets and commodities producers long have assumed there was a safety net under them. That was dubbed the "Bernanke put," which was the successor to the "Greenspan put," which were options that paid off in the form of monetary easing whenever markets got into trouble.

Ever since Greenspan flooded the financial system with liquidity during the October 1987 stock market crash (which took place just months into his first term as Fed chairman), markets have been treated to repeated doses of that elixir, with usually the desired results.

It was especially potent during the 1998 crisis that followed the Russian debt default that threatened the collapse of the Long Term Asset Management hedge fund. The Greenspan Fed responded by lowering interest rates, which boosted the equity and credit markets.

Moreover, the drop in yields provided a huge boost to housing and consumer spending through lower mortgage rates. Home-building got a shot in the arm while homeowners got the opportunity to refinance their mortgages, giving them more spending power on home improvements, autos or vacations. Of course, that was importantly aided by Fannie Mae and Freddie Mac, which could readily issue their own debt securities—rated triple-A—to purchase mortgages and mortgage-backed securities.

Now, by contrast, the Fed already has its key policy rate, overnight federal funds, targeted at virtually zero. Fannie and Freddie are under federal conservatorship, and few homeowners can refinance given so many of their loans exceed the depressed value of their properties. Anyone willing and able to buy a new house can choose among the millions for sale or foreclosed upon.

Absent QE3, that leaves relatively-minor options for the FOMC Tuesday. The central bank could change the timing for ending the reinvestment of principal payments in its portfolio or extend the maturity of its reinvestments. The Fed could also lower the rate it pays on banks' excess reserves.

Finally, the Fed could also announce an explicit target for longer-term Treasury note yields, as I discussed in Up and Down Wall Street in this week's print edition of Barron's.

Treasury note yields experienced a decline as stunning Monday as the plunge in stock prices, sliding back to levels not seen since the later stages of the crisis of 2008-09. In direct defiance of S&P's cut in its rating of the U.S. government to AA+, Treasuries rallied furiously, which sent the 10-year benchmark yield down more than 20 basis points (one-fifth of a percentage point) to 2.34%. In Asian trading Tuesday, the yield fell further, to 2.28%. So, it's hard to see how the Fed could push Treasury yields much lower.

The main option left to Bernanke & Co. is to emphasize the "extended period" that short-term interest rates will stay "extraordinarily low" will be really, really extended. Or it could put a date on the extended period. As things stand, the fed-funds futures market puts the first increase in the key rate to 0.5% all the way out to September 2013, or more than two whole years away.

The collapse in bank stocks and Treasury yields are signals of distress in the global financial system. While both trends have accelerated violently in the past week, they have been underway for weeks now amid the mounting signs of economic slowdown, especially in the U.S.

But with the Fed having few policy options and fiscal stimulus out of the question following the debt-ceiling fight that is supposed to tighten policy, the markets may fear that the U.S. government is out of ammunition. Meanwhile, European efforts to contain its sovereign debt crisis have not inspired confidence. In Asia, China still has be on inflation watch.

The markets are screaming we have huge problems. There don't seem to be any ready answers. And that's the scariest part.

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