Sometimes, Doing Nothing Is Doing A Lot

“If all the effort to bring down the COMEX gold & silver futures markets this past December, by taking delivery of the metal, were just focused on silver - the goal of much higher silver AND GOLD prices would have been achieved for the following reasons: 1. Both COMEX inventories for gold and silver were depleted over 45% - but the COMEX silver market is much smaller (in USD$) than COMEX gold and would have been easily exceeded. 2. There is no Fort Knox or New York basement full of the stuff to replenish COMEX inventories. 3. The shutting down of base metal mines due to low prices will greatly effect silver inventories (70% of its annual mine supply). 4. The gold-silver ratio is at near historic highs - making it much more undervalued. 5. There are numerous new industrial and medical uses for silver that will increase consumption. This makes silver the obvious choice to focus on.

When the COMEX silver inventories are depleted and the contract defaults, it will cause the price to rapidly rise. Gold will follow for the same reasons - because the paper price for each will be proven invalid.”
– Charles Rapp

I have no idea who Charles Rapp is. I stumbled on this quote this evening, and it made sense to me... Unlike the markets this week... they don't make much sense at all. That is why we focus on the big picture. The consequences...the consequences of the foolish actions of the world governments in their vain attemts to correct this long overdue correction in world financial markets. That is what we focus on. And those consequences are going to play a major role in the eventual explosion upward in the prices of Precious Metals, Oil, and ALL Commodities...in the price of EVERYTHING.

The IMF says it may need another $150 billion to fight the worldwide slowdown. Chickenfeed, really. This thing has gotten so big, $150 billion won’t even be noticed.

The World Bank says global trade is shrinking – for the first time in 25 years. And here, is where we pick up the trail. With so many clues...so much data – so much noise! – it’s easy to get lost. But here we have a lead we can work with. Let us begin here.

World trade is shrinking. Across borders, at least, people are buying and selling less. Why would they do that?

We were afraid you would ask that. Because the answer requires more time than we have this morning. So we will simplify. Economies naturally expand and naturally contract. In an expansion, world trade increases. In a contraction, it diminishes. Typically, the big increases in global trade correspond with the rise of imperial powers – armed forces large enough to protect trade routes...guarantee the safety of merchants...and enforce a uniform, reliable commercial code. Trade expanded greatly during the Roman Empire...then contracted sharply when it fell. The Mongol Empire too created a huge free trade area in Eurasia. Then, the British and other European powers expanded their sphere trade along the shipping lanes...throughout most of the world...until they were rolled back from much of Eurasia by the advance of other hostile empires – the Soviet Union and China.

The last major boom in world trade came with the Reagan Administration. The free-marketers in the ’80s – both in England and America – lowered taxes and reduced barriers to commerce. Then, a remarkable thing happened – the Soviet Union collapsed, leaving its member states and client countries free to enter into trade with the West. China also realized that its rice bowl would be fuller if it too began selling to the West, rather than threatening it.

That Golden Age of ebullient world trade is now over. It could, of course, be nothing more than a temporary setback to system of imperial finance that is otherwise in good shape – a mere runny nose and sore throat...nothing to worry about. But the noise we hear sounds more like a death rattle than a head cold.

But the quacks are at work, busily making the situation worse.

Looking at the essentials of the economic situation, we see it in 3D:

A natural Deflation of asset prices in the financial world...

...leading to a natural Depression in the economic world....

...with an army of public officials Determined to turn things around.

Their approach is the old ‘hair of the dog that bit him’ technique. The world has had too much credit; they propose to give it even more. With $10 trillion in “stimulus” efforts all over the planet, they’re not giving only a hair of the dog; they’re throwing in the whole damned kennel.

These efforts are not going to work. Why not? Because you can’t help an obese man by giving him another helping of dessert. And you can’t cure an alcoholic by offering him free drinks.

If the feds were paying attention, they should listen up here:

The cure for a slump is a slump.

A real correction corrects. Cold turkey. Rehab. Debts are paid off, worked off, or written off. Prices fall to the point where they make sense again. Consumer items become affordable; an ordinary person can buy a house. An ordinary investor can buy a stock...or an apartment building...and get a decent return on his money. An ordinary businessman can make a profit from operations; he doesn’t have to count on stock options and rising share prices in order to make a living.

The way to cure a correction, we repeat, is to let it do its work. But that’s not going to happen.
-Bill Bonner, The Daily Reckoning

The bond bubble is an accident waiting to happen
"Get out of Treasuries. They are very, very expensive," said Mohamed El-Erian, the investment chief at the Pimco, the world's top bond fund, in a Barron's article last week.

It is lazy to think that China, Japan, the petro-powers and the surplus states of emerging Asia will continue to amass foreign reserves, recycling their treasure into the US and European bond markets.

These countries are themselves bleeding as exports collapse. Most face capital flight. The whole process that fed the bond boom from 2003 to 2008 is now going into reverse.

Woe betide any investor who misjudges the consequences of this strategic shift.

Russia has lost 27pc of its $600bn reserves since August. The oil and metals crash has left the oligarchs prostrate. China's reserves fell $15bn in October. Beijing has begun to fret about an exodus of hot money – disguised as foreign investment in plant. The exchange regulator is muttering about "abnormal" capital flows out of the country.

China's $1,900bn stash of foreign bonds is a by-product of holding down the yuan to boost exports.

This mercantilist ploy is no longer necessary, since the currency is weakening. Beijing needs the money at home in any case to prop up the Chinese economy – now in trouble. Even Japan has slipped into trade deficit.

Clearly, the US and European governments cannot rely on Asia to plug the $3,500bn hole in their budgets this year.

Asians are just as likely to be net sellers of their bonds. Which implies that central banks may have to "monetize" our deficits.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4218210/The-bond-bubble-has-long-since-burst-investors-ignore-this-at-you-peril.html

Obama presses lawmakers to OK new bailout funds
WASHINGTON (AP) -- Tested before taking power, President-elect Barack Obama privately delivered a pre-inauguration veto threat to fellow Democrats on Tuesday, saying they would not deny him use of the remaining $350 billion in federal bailout funds.

Obama coupled his threat with a promise to revise elements of the original bailout program that have drawn widespread criticism, pledging that billions will go toward helping homeowners facing foreclosure. Several Democrats said his commitments, to be made in writing, would be enough to prevent an embarrassing pre-inauguration drubbing for the president-elect when the Senate votes this week.
http://biz.yahoo.com/ap/090113/obama_economy.html

"Those who control our politicians and our media ultimately have control over the stimulus that is used to shape and control the psychological desires of the masses, which they manipulate for the calculated purpose of effecting emotional mass reactions, which are the expected behavioral responses anticipated by those who wrote the script."
-Anthony Wile