Nine weeks ago, the Chinese government admitted to the mainstream media that it had added 14.6 million ounces of gold reserves from 2003 through 2009. For years before that disclosure, several of us non-mainstream media members had reported this activity to smaller audiences.
It wasn't until about June 9 that the mainstream media was told that the Chinese government was planning to purchase an additional huge quantity of gold. The information became public when U.S. Rep. Mark Kirk (R-Ill.) was interviewed on Fox News by Greta Van Susteren.
Kirk accompanied Treasury Secretary Timothy Geithner on his trip to China in May. While the Chinese were laughing at Geithner during his speech at Beijing University for claiming that the U.S. dollar was strong (By the way, laughing at a speaker is a major social no-no in China, a sign that Geithner's comments were not respected at all!), Kirk was engaged in a private conversation with lesser Chinese officials. In this non-public discussion, Kirk was told that the Chinese were extremely concerned about the likely near term decline in the U.S. dollar because of the explosion of government debt. As part of the reaction to this concern, the Chinese government had established another reserve to stockpile petroleum and was planning to purchase another $80 billion of gold (about 85 million ounces at today's price level).
Kirk's revelation about the Chinese plan to purchase another $80 billion of gold was the very last comment in the interview. This extraordinary news received almost no coverage until last week when multiple hard-asset Web sites picked up the interview.
This information is not fresh news, even though the mainstream media did not report it until Kirk's interview. For instance, I discussed the substance of it in the April 28 edition of this column. Let me repeat the relevant paragraph for you:
"By the way, the way the Chinese government operates is not open and direct. Changes in policy are signaled by speeches or papers by lesser officials. And [as] has been shown repeatedly, when the Chinese government issues a statement that it is considering something such as purchasing gold, they really mean that they have already been actively doing it. It is entirely possible that China's central bank gold reserves are much higher than they now confirm."
So, when the Chinese, by their indirect method, disclosed that they plan to purchase another $80 billion of gold, you can just about guarantee two facts. First, the Chinese are already buying this gold. Second, the amount of gold planned to be purchased is larger than they stated.
How much is 85 million ounces of gold in relation to anything? The potential International Monetary Fund (IMF) gold sale that has been bantered about since 2002 as a means to knock down the price of gold is less than 13 million ounces. Annual worldwide gold mine production is roughly 60 million ounces. The Central Bank Gold Agreement, covering governments, central banks, and official organizations such as the IMF that hold about 80 percent of the world's official gold holdings, limits annual sales to 16.1 million ounces.
How can the Chinese accumulate this much more gold without the spot price rising significantly? The simple answer is that this is not possible. The price of gold is going to have to rise by a lot, much faster than mainstream financial experts want us to believe. The price will not rise in a straight line, but the longer you wait for any 'pullback' to offer a buying opportunity, the greater your risk that you might not be able to purchase anywhere close to current gold price levels.
This past weekend, I attended the International Paper Money Show in Memphis, Tenn. I was surprised how many dealers, whose livelihood does not involve trading gold at all, told me that they regularly read this column and have personally laid in a good stash of physical gold for their own protection.
By Patrick A. Heller
June 30, 2009
Read Entire Article
Tuesday, June 30, 2009
Debasing the Currency is Leading to Financial Collapse . . . Just As It Has for Thousands of Years
George Washington Blog
In a fascinating 22-page study of money and currency, Christopher Weber shows that every government - from Athens, to pre-collapse Rome, to the Islamic countries in the Middle Ages - which stuck to the Greek standard of coins has been stable and prosperous.
Specifically, the Athenian Drachma contained 65.6 grains of silver. Even after Greece declined as a superpower, its currency remained stable.
The Roman Denarius, Byzantine Bezant, and Islamic Dinar all copied the Drachma, using around 65.6 grains of gold or silver in their coins.
For the many centuries the Romans, Byzantines, and Islamic rulers left this precious metal content alone, they had stable and prosperous money supplies and nations.
But after the Romans and Byzantines started to whittle down the precious metal content of their coins - and after the Muslims started issuing paper money - their currency went down the drain, their prosperity plummeted and their empires collapsed.
This may all sound like ancient history, except that Weber points out that:
The US dollar has been depreciating for generations. Seventy years ago it was first devalued from $20.67 a gold ounce to $35. Then 35 years ago the devaluation started gaining strength. The dollar has lost over 90% of its gold value since August 15, 1971.
History is repeating . . . Sound money is again being trashed, which is causing the collapse of the American empire.
Read Entire Article
In a fascinating 22-page study of money and currency, Christopher Weber shows that every government - from Athens, to pre-collapse Rome, to the Islamic countries in the Middle Ages - which stuck to the Greek standard of coins has been stable and prosperous.
Specifically, the Athenian Drachma contained 65.6 grains of silver. Even after Greece declined as a superpower, its currency remained stable.
The Roman Denarius, Byzantine Bezant, and Islamic Dinar all copied the Drachma, using around 65.6 grains of gold or silver in their coins.
For the many centuries the Romans, Byzantines, and Islamic rulers left this precious metal content alone, they had stable and prosperous money supplies and nations.
But after the Romans and Byzantines started to whittle down the precious metal content of their coins - and after the Muslims started issuing paper money - their currency went down the drain, their prosperity plummeted and their empires collapsed.
This may all sound like ancient history, except that Weber points out that:
The US dollar has been depreciating for generations. Seventy years ago it was first devalued from $20.67 a gold ounce to $35. Then 35 years ago the devaluation started gaining strength. The dollar has lost over 90% of its gold value since August 15, 1971.
History is repeating . . . Sound money is again being trashed, which is causing the collapse of the American empire.
Read Entire Article
Exit Ahead? Not So Fast
By RANDALL W. FORSYTH
THE FEDERAL OPEN MARKET COMMITTEE supposedly is discussing an "exit strategy" at its policy meeting that ends Wednesday. That presumes that its destination is anywhere in sight.
Notwithstanding the so-called green shoots that appear to be popping up in various series of economic statistics, other numbers show things to be withering, if not rotting outright. What's more these data are not seasonally adjusted or otherwise fudged. They're tax receipts, and nobody pays taxes on phony, phantom jobs or earnings.
According to Trim Tabs, income-tax withholdings in the past four weeks are down 6.1% from a year ago; in the last two weeks, they're down an even bigger 8.1% from last year. That marks a sharp deterioration from May, when income-tax withholdings were off "only" 4.8% from a year ago.
"The deterioration in growth since May indicates wage declines and job losses have accelerated," according to note to TrimTabs' clients.
Meanwhile, "other" taxes were down 39.5% year-on-year, down from 33.6% in May. Corporate income taxes were down 35% from a year ago in the latest four weeks after having been down 12.3% year-on-year in May.
TrimTabs' numbers corroborate the dismal numbers on state personal tax revenues, which were down 26% in first four months of the 2009 from a year earlier.
According to the Nelson A. Rockefeller Institute of Government, 34 of 37 states that submitted data reported declines. Arizona, one of the epicenters of the housing collapse, saw the biggest drop, a stunning 55%. The Nos. 2 and 3 states were South Carolina and Michigan, with declines of 38.6% and 34.4%, respectively. California, whose massive budget woes are front and center, had the fourth-highest decline, at 33.8%
Not only do plunging tax revenues tighten the fiscal vise on the federal, state and municipal coffers, they provide unambiguous confirmation of the truly dire straits of the economy.
These numbers, of course, are at odds with the surge in the stock market, which had lifted the averages by about a third from those March lows. Now, however, equities appear to be rolling over, which could be nothing more than profit-taking to nail down wins ahead of the end of the second quarter.
But the advance also seems to be losing steam in bourses abroad as well as in commodities, which suggests much of the surge was liquidity-driven, not unlike last summer's spike in crude oil prices to $147 a barrel. We'll see.
ONE BOURSE THAT HAS HAD an "official" bear market appropriately enough is Russia. The RTS index, which is denominated in dollars, fell another 2.9% Tuesday, bringing its decline since June 2 to 21%.
Read Entire Article
THE FEDERAL OPEN MARKET COMMITTEE supposedly is discussing an "exit strategy" at its policy meeting that ends Wednesday. That presumes that its destination is anywhere in sight.
Notwithstanding the so-called green shoots that appear to be popping up in various series of economic statistics, other numbers show things to be withering, if not rotting outright. What's more these data are not seasonally adjusted or otherwise fudged. They're tax receipts, and nobody pays taxes on phony, phantom jobs or earnings.
According to Trim Tabs, income-tax withholdings in the past four weeks are down 6.1% from a year ago; in the last two weeks, they're down an even bigger 8.1% from last year. That marks a sharp deterioration from May, when income-tax withholdings were off "only" 4.8% from a year ago.
"The deterioration in growth since May indicates wage declines and job losses have accelerated," according to note to TrimTabs' clients.
Meanwhile, "other" taxes were down 39.5% year-on-year, down from 33.6% in May. Corporate income taxes were down 35% from a year ago in the latest four weeks after having been down 12.3% year-on-year in May.
TrimTabs' numbers corroborate the dismal numbers on state personal tax revenues, which were down 26% in first four months of the 2009 from a year earlier.
According to the Nelson A. Rockefeller Institute of Government, 34 of 37 states that submitted data reported declines. Arizona, one of the epicenters of the housing collapse, saw the biggest drop, a stunning 55%. The Nos. 2 and 3 states were South Carolina and Michigan, with declines of 38.6% and 34.4%, respectively. California, whose massive budget woes are front and center, had the fourth-highest decline, at 33.8%
Not only do plunging tax revenues tighten the fiscal vise on the federal, state and municipal coffers, they provide unambiguous confirmation of the truly dire straits of the economy.
These numbers, of course, are at odds with the surge in the stock market, which had lifted the averages by about a third from those March lows. Now, however, equities appear to be rolling over, which could be nothing more than profit-taking to nail down wins ahead of the end of the second quarter.
But the advance also seems to be losing steam in bourses abroad as well as in commodities, which suggests much of the surge was liquidity-driven, not unlike last summer's spike in crude oil prices to $147 a barrel. We'll see.
ONE BOURSE THAT HAS HAD an "official" bear market appropriately enough is Russia. The RTS index, which is denominated in dollars, fell another 2.9% Tuesday, bringing its decline since June 2 to 21%.
Read Entire Article
Monday, June 29, 2009
Rising National Debt Raises Prospects of Inflation
Inflation is as dead as the Wicked Witch of the West in a waterfall. The consumer price index has actually fallen 1.3% in the past 12 months. So why is everyone so worried about soaring prices?
In a word: debt. The government owes the world $11.4 trillion — $37,000 for every person in the U.S. In the next fiscal year, the government will add $1.8 trillion to the deficit.
The government could simply print more dollars to pay off our debts with cheap currency — a tempting but inflationary solution. Politicians wouldn't have to ask citizens to pay for the government's services, and citizens wouldn't have to think about the actual cost of what they demand — until, of course, the currency collapses, interest rates soar and the economy craters. Some on Wall Street are betting on just that scenario. Universa Investments — linked to Nassim Nicholas Taleb, author of Wall Street's biggest book, The Black Swan: The Impact of the Highly Improbable— is adding strategies that will soar if inflation takes off. Respected hedge fund adviser 36 South Investment Managers is raising $100 million for a fund that will bet on soaring price increases. And Marc Faber, editor of the Gloom Boom & Doom Report, a newsletter, predicts that U.S. inflation will someday match Zimbabwe's — that would be 236 million percent a year.
If inflation does hit, it won't be this year, barring a major jump in oil prices or a drastic change in government philosophy. You don't get inflation in an economy that's as slack as this one. And, many economists say, the Federal Reserve has many tools to contain inflation once the economy turns around. But one thing the Fed doesn't have is the ability to control federal spending. And that, ultimately, could be the thing that pushes the inflation rate higher.
Not now
If you're worried about inflation rearing its ugly head soon, relax. Inflation just isn't going to happen in this economy. "A lot of the worries about immediate inflation are examples of financial illiteracy," says David Wyss, chief economist for Standard & Poor's. "You won't get inflation until the economy gets back, and that's at least five years out."
FIND MORE STORIES IN: Great Depression | Harvard University | Ben Bernanke | International Monetary Fund | Federal Reserve System | Standard & Poor's | Kenneth Rogoff | Marc Faber | Nassim Taleb
The ultimate cause of inflation is an unwarranted increase in the money supply. The key word here is "unwarranted."
A normal inflationary spiral starts when the central bank increases the money supply even as the economy is rising. It's like piping oxygen into your barbecue. When the Federal Reserve increases the money supply, generally through lower short-term interest rates, businesses can easily borrow and expand. As companies prosper, they pay higher wages to attract new employees and retain old ones. Employees, in turn, spend more — which increases demand, and prompts companies to raise prices.
If the central bank doesn't step in and raise rates to cool off the economy, it can set off a wage-price spiral. And at the very worst, it can trigger hyperinflation, when the government prints more and more money, devaluing it to the point where a wheelbarrow is more valuable than a wheelbarrow full of cash.
To get to inflation, however, you need a humming economy, and the economy is barely breathing. For employees to demand higher wages, unemployment needs to be less than 5%; it's 9.4% now and widely expected to break above 10% this year. For demand to outstrip supply, factories have to be running at full capacity. Factories ran at 68.3% of capacity in May, the lowest since the Fed started keeping statistics in 1967.
"In this environment, we anticipate that inflation will remain low," Fed Chairman Ben Bernanke said in testimony on June 3. "The slack in resource utilization remains sizable, and notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued. As a consequence, inflation is likely to move down some over the next year relative to its pace in 2008."
But later
The government's plan is to fight the sour economy now by spending money, and worry about the debt problem later. "If that's the price to keep from having the second Great Depression, it's a bargain," say Ken Goldstein, economist at The Conference Board.
Even ardent supporters of the government's plan, however, worry that massive U.S. debt could be inflationary. Every day, for example, the U.S. needs to borrow $15 billion to fund the deficit, says Axel Merk, portfolio manager of the Merk Hard Currency fund. "Someone has to buy all that," he says. More important, the U.S. has to repay it.
Inflation is a tempting choice to pay the nation's staggering debt, especially because the alternatives are to raise taxes or cut spending. Already, some economists are suggesting letting inflation take some of the bite out of government spending.
Kenneth Rogoff, chief economist at the International Monetary Fund, gently told Bloomberg News that a bit of inflation might be a good thing. "I'm advocating 6% inflation for at least a couple of years," said Rogoff, now a professor at Harvard University. "It would ameliorate the debt bomb and help us work through the deleveraging process."
The effects of inflation are cumulative. After five years of 6% inflation, $1 trillion would be worth $734 billion, a 27% drop. Even a 2% inflation rate would be a cumulative devaluation of 81% over 30 years.
And, at least initially, a bit of inflation would be welcome. "If you have debt, you love inflation," says Merk. Workers would get bigger raises, home prices would increase, and 30-year fixed-rate mortgage payments would remain the same.
Not-so-good long view
But any sustained burst of inflation would have some ugly long-term effects:
•Higher interest rates.The Federal Reserve typically raises short-term interest rates to cool off the economy and tamp down inflation. Even if inflation remains tame, the Fed will eventually have to return short-term rates to normal — about 3% to 5%.
Other interest rates would rise, too. Bond traders, for example, loathe inflation, which eats away at the spending power of bonds' fixed interest payments. When inflation looks likely, bond traders demand higher bond yields — and higher long-term rates can also act as a brake on the economy, raising payments on everything from corporate borrowing to home loans.
•A lower dollar. The value of the dollar on the international currency exchanges is another measure of inflation. If foreign investors think the U.S. is inflating its currency, they will demand more dollars in exchange for other currency — say, the euro or the yen.
By John Waggoner, USA TODAY
Read Entire Article
In a word: debt. The government owes the world $11.4 trillion — $37,000 for every person in the U.S. In the next fiscal year, the government will add $1.8 trillion to the deficit.
The government could simply print more dollars to pay off our debts with cheap currency — a tempting but inflationary solution. Politicians wouldn't have to ask citizens to pay for the government's services, and citizens wouldn't have to think about the actual cost of what they demand — until, of course, the currency collapses, interest rates soar and the economy craters. Some on Wall Street are betting on just that scenario. Universa Investments — linked to Nassim Nicholas Taleb, author of Wall Street's biggest book, The Black Swan: The Impact of the Highly Improbable— is adding strategies that will soar if inflation takes off. Respected hedge fund adviser 36 South Investment Managers is raising $100 million for a fund that will bet on soaring price increases. And Marc Faber, editor of the Gloom Boom & Doom Report, a newsletter, predicts that U.S. inflation will someday match Zimbabwe's — that would be 236 million percent a year.
If inflation does hit, it won't be this year, barring a major jump in oil prices or a drastic change in government philosophy. You don't get inflation in an economy that's as slack as this one. And, many economists say, the Federal Reserve has many tools to contain inflation once the economy turns around. But one thing the Fed doesn't have is the ability to control federal spending. And that, ultimately, could be the thing that pushes the inflation rate higher.
Not now
If you're worried about inflation rearing its ugly head soon, relax. Inflation just isn't going to happen in this economy. "A lot of the worries about immediate inflation are examples of financial illiteracy," says David Wyss, chief economist for Standard & Poor's. "You won't get inflation until the economy gets back, and that's at least five years out."
FIND MORE STORIES IN: Great Depression | Harvard University | Ben Bernanke | International Monetary Fund | Federal Reserve System | Standard & Poor's | Kenneth Rogoff | Marc Faber | Nassim Taleb
The ultimate cause of inflation is an unwarranted increase in the money supply. The key word here is "unwarranted."
A normal inflationary spiral starts when the central bank increases the money supply even as the economy is rising. It's like piping oxygen into your barbecue. When the Federal Reserve increases the money supply, generally through lower short-term interest rates, businesses can easily borrow and expand. As companies prosper, they pay higher wages to attract new employees and retain old ones. Employees, in turn, spend more — which increases demand, and prompts companies to raise prices.
If the central bank doesn't step in and raise rates to cool off the economy, it can set off a wage-price spiral. And at the very worst, it can trigger hyperinflation, when the government prints more and more money, devaluing it to the point where a wheelbarrow is more valuable than a wheelbarrow full of cash.
To get to inflation, however, you need a humming economy, and the economy is barely breathing. For employees to demand higher wages, unemployment needs to be less than 5%; it's 9.4% now and widely expected to break above 10% this year. For demand to outstrip supply, factories have to be running at full capacity. Factories ran at 68.3% of capacity in May, the lowest since the Fed started keeping statistics in 1967.
"In this environment, we anticipate that inflation will remain low," Fed Chairman Ben Bernanke said in testimony on June 3. "The slack in resource utilization remains sizable, and notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued. As a consequence, inflation is likely to move down some over the next year relative to its pace in 2008."
But later
The government's plan is to fight the sour economy now by spending money, and worry about the debt problem later. "If that's the price to keep from having the second Great Depression, it's a bargain," say Ken Goldstein, economist at The Conference Board.
Even ardent supporters of the government's plan, however, worry that massive U.S. debt could be inflationary. Every day, for example, the U.S. needs to borrow $15 billion to fund the deficit, says Axel Merk, portfolio manager of the Merk Hard Currency fund. "Someone has to buy all that," he says. More important, the U.S. has to repay it.
Inflation is a tempting choice to pay the nation's staggering debt, especially because the alternatives are to raise taxes or cut spending. Already, some economists are suggesting letting inflation take some of the bite out of government spending.
Kenneth Rogoff, chief economist at the International Monetary Fund, gently told Bloomberg News that a bit of inflation might be a good thing. "I'm advocating 6% inflation for at least a couple of years," said Rogoff, now a professor at Harvard University. "It would ameliorate the debt bomb and help us work through the deleveraging process."
The effects of inflation are cumulative. After five years of 6% inflation, $1 trillion would be worth $734 billion, a 27% drop. Even a 2% inflation rate would be a cumulative devaluation of 81% over 30 years.
And, at least initially, a bit of inflation would be welcome. "If you have debt, you love inflation," says Merk. Workers would get bigger raises, home prices would increase, and 30-year fixed-rate mortgage payments would remain the same.
Not-so-good long view
But any sustained burst of inflation would have some ugly long-term effects:
•Higher interest rates.The Federal Reserve typically raises short-term interest rates to cool off the economy and tamp down inflation. Even if inflation remains tame, the Fed will eventually have to return short-term rates to normal — about 3% to 5%.
Other interest rates would rise, too. Bond traders, for example, loathe inflation, which eats away at the spending power of bonds' fixed interest payments. When inflation looks likely, bond traders demand higher bond yields — and higher long-term rates can also act as a brake on the economy, raising payments on everything from corporate borrowing to home loans.
•A lower dollar. The value of the dollar on the international currency exchanges is another measure of inflation. If foreign investors think the U.S. is inflating its currency, they will demand more dollars in exchange for other currency — say, the euro or the yen.
By John Waggoner, USA TODAY
Read Entire Article
Competitive Devaluations To Spur On Gold
Source: Richard Russell, Dow Theory Letters, June 25, 2008.
I often quote Richard Russell, the 85-year-old writer of the Dow Theory Letters, in my blog posts. Although I may not necessarily always agree with his views, they are always stimulating and important to consider when piecing together the financial puzzle. His article on competitive devaluations and the implications for fiat currencies and gold bullion makes for particularly interesting reading and the paragraphs below have been excerpted from it.
“Every nation wants to export. The obsession to export has resulted in filling the world with products, things, and merchandise of every kind. There’s a world overflow of products, and the result is deflation. Just too much stuff being manufactured. Buyers from importing nations can’t handle it all. The result is asset deflation.
“One reason why every nation wants to export is to lift employment. Nothing scares politicians like unemployment. Why? Because unemployed workers VOTE just the way employed workers do. The lesson - if you want high employment, learn to export. Exporting creates jobs. China and Asia learned that lesson, and they captured world export markets with the help of one valuable item - low wages - that along with no Social Security, no medical, no pensions, no anything, just plain low wages with none of the extras.
“Ooops, I left something out. What I left out was the big second advantage - cheap currency. Every nation, particularly the exporters, wants a cheap, competitive currency. The US is no exception. Obama tells the world that the dollar is a strong, hard currency, but the dollar has been weak. The administration’s policy is to talk a “hard dollar” but hope for a soft dollar.
“The result of all this is competitive devaluations. Nations no longer devalue their currencies against gold, they simply print oceans of their own currencies, and with that paper they buy dollars, hoping to raise the price of dollars against their own currencies. The result is a growing sea of fiat junk paper.
“The greater the world ocean of fiat paper, the higher gold goes. You see, gold is the secret, unstated world standard of money. Gold can’t be devalued or multiplied out of thin air. So as the various currencies of the world decline in relation to each other, gold stands alone. It can’t be cheapened or devalued or bankrupted. While the currencies of the world decline in purchasing power in relation to each other, they all decline in purchasing power against gold. In other words, as time passes, it requires more of each currency to purchase one ounce of gold.
“In the meantime, the US continues to spend outrageously, not only running up debts for the present but also for the children of the future. The US deficits and national debt will run into the multi-trillions in coming years.
“How will these monster debts ever be paid off? They’ll be paid off by devalued dollars, they’ll be paid off by additional borrowing, they’ll be paid off by inflation, they’ll be paid off with higher taxes and probably a VAT tax, they’ll be handled by projecting them into the future for other administrations to struggle with.
“As they say in New York, ‘all right already, so what do we do about it?’.
“Short and medium term, you want dollars, as many of them as you can save. Long-term you want gold. Somewhere ahead gold will come into its own. I can’t time gold, but I can identify the time when gold is ready to ‘take off’. When gold climbs above 1,004 it will be the signal for the beginning of the third phase gold rush. What I’m saying is forget quick profits in gold, forget timing gold, just own some.
Read Entire Article
I often quote Richard Russell, the 85-year-old writer of the Dow Theory Letters, in my blog posts. Although I may not necessarily always agree with his views, they are always stimulating and important to consider when piecing together the financial puzzle. His article on competitive devaluations and the implications for fiat currencies and gold bullion makes for particularly interesting reading and the paragraphs below have been excerpted from it.
“Every nation wants to export. The obsession to export has resulted in filling the world with products, things, and merchandise of every kind. There’s a world overflow of products, and the result is deflation. Just too much stuff being manufactured. Buyers from importing nations can’t handle it all. The result is asset deflation.
“One reason why every nation wants to export is to lift employment. Nothing scares politicians like unemployment. Why? Because unemployed workers VOTE just the way employed workers do. The lesson - if you want high employment, learn to export. Exporting creates jobs. China and Asia learned that lesson, and they captured world export markets with the help of one valuable item - low wages - that along with no Social Security, no medical, no pensions, no anything, just plain low wages with none of the extras.
“Ooops, I left something out. What I left out was the big second advantage - cheap currency. Every nation, particularly the exporters, wants a cheap, competitive currency. The US is no exception. Obama tells the world that the dollar is a strong, hard currency, but the dollar has been weak. The administration’s policy is to talk a “hard dollar” but hope for a soft dollar.
“The result of all this is competitive devaluations. Nations no longer devalue their currencies against gold, they simply print oceans of their own currencies, and with that paper they buy dollars, hoping to raise the price of dollars against their own currencies. The result is a growing sea of fiat junk paper.
“The greater the world ocean of fiat paper, the higher gold goes. You see, gold is the secret, unstated world standard of money. Gold can’t be devalued or multiplied out of thin air. So as the various currencies of the world decline in relation to each other, gold stands alone. It can’t be cheapened or devalued or bankrupted. While the currencies of the world decline in purchasing power in relation to each other, they all decline in purchasing power against gold. In other words, as time passes, it requires more of each currency to purchase one ounce of gold.
“In the meantime, the US continues to spend outrageously, not only running up debts for the present but also for the children of the future. The US deficits and national debt will run into the multi-trillions in coming years.
“How will these monster debts ever be paid off? They’ll be paid off by devalued dollars, they’ll be paid off by additional borrowing, they’ll be paid off by inflation, they’ll be paid off with higher taxes and probably a VAT tax, they’ll be handled by projecting them into the future for other administrations to struggle with.
“As they say in New York, ‘all right already, so what do we do about it?’.
“Short and medium term, you want dollars, as many of them as you can save. Long-term you want gold. Somewhere ahead gold will come into its own. I can’t time gold, but I can identify the time when gold is ready to ‘take off’. When gold climbs above 1,004 it will be the signal for the beginning of the third phase gold rush. What I’m saying is forget quick profits in gold, forget timing gold, just own some.
Read Entire Article
Friday, June 26, 2009
Faber: 20 Percent Inflation Coming
By: Julie Crawshaw
The numbers will rise so fast because the government "massively" understates the country's inflation rate, Faber said.
To get a true reading he advises ditching core inflation numbers, including the Consumer Price Index.
"It's a lie what they publish," Faber told CNBC.
"If you underweigh education costs, and if you underweigh health care costs, then you come to a totally different result," he said.
Since the creation of the Federal Reserve Bank in 1913, the dollar has lost 95 percent of its purchasing power, Faber said.
“It took 100 years to lose 95 percent (but) I think the next 94-percent loss in purchasing power will happen very quickly,” he said.
In such a volatile market, Faber thinks the safest place to invest is in equities or assets, even real estate.
Read Entire Article
The numbers will rise so fast because the government "massively" understates the country's inflation rate, Faber said.
To get a true reading he advises ditching core inflation numbers, including the Consumer Price Index.
"It's a lie what they publish," Faber told CNBC.
"If you underweigh education costs, and if you underweigh health care costs, then you come to a totally different result," he said.
Since the creation of the Federal Reserve Bank in 1913, the dollar has lost 95 percent of its purchasing power, Faber said.
“It took 100 years to lose 95 percent (but) I think the next 94-percent loss in purchasing power will happen very quickly,” he said.
In such a volatile market, Faber thinks the safest place to invest is in equities or assets, even real estate.
Read Entire Article
Thursday, June 25, 2009
Gold Doesn’t Care If It’s IN-flation or DE-flation
One of the central arguments for financial commentators right now is whether the US is currently facing inflation or deflation. Everyone (at least everyone with a functioning cortex) is aware that the US (and the rest of the world for that matter) will face more difficult times ahead. However, whether it will be an environment of increased inflation or increased deflation is up for debate.
Personally, I have been in the inflation camp for some time now. However, when it comes to investing, it never pays to grow complacent with one’s thinking. So I did some research into how gold performed during inflationary vs. deflationary periods. The results were rather shocking, to say the least.
According to Scott Reamer of Vicis Capital, gold and the dollar index has shown an inverse correlation of -.28 over the last 17 years. Now, a correlation of -1 would be a perfect inverse correlation, meaning that every move the dollar index made would be mirrored to the inverse by gold (the dollar falls 1, gold would rise 1).
As Reamer points out, a correlation of -.28 is not a strong correlation at all. So to claim that gold will spike if the dollar rolls over because the two are inversely related is overly simplistic. A far more reasonable assumption would be to say that should the dollar collapse, gold will rally due to safe haven seeking by investors.
Indeed, it is gold’s status as a safe haven of wealth (the ultimate currency if you will), NOT its inverse relationship to the dollar, that makes it so special. Gold has been the ultimate storehouse of wealth going back thousands of years. But what’s truly remarkable is that it has maintained this quality even during periods of DE-flation.
The ultimate text on this matter is Roy Jastram’s The Golden Constant. I don’t recommend looking for or reading this book because a) it’s out of print b) it’s a very dense read.
To summarize, Jastram performed a study of gold’s performance over a 416-year period in England’s history (from 1560 to 1976). He found that historically, gold has acted like a storehouse of value throughout wars, plagues, and the like. However, what’s most striking is that gold actually INCREASED its purchasing power during periods of DE-flation.
Deflationary Periods in England
Purchasing Power of Gold
1658–1669
+42%
1813–1851
+70%
1873–1896
+82%
1920–1933
+251%
This last point is absolutely extraordinary when you consider that the thought pattern “gold rises in inflation and falls during deflation” is one of the most commonly believed investing mantras out there. Indeed, gold has undergone a seismic shift in the last year, largely due to inflationary concerns.
Consider the following: Global gold demand jumped 38% in the 1Q09. Three years ago, demand for gold as an investment only comprised 10% of global gold demand. Today it’s over 30%. That’s an unbelievable increase in investment demand.
Read Entire Article
Personally, I have been in the inflation camp for some time now. However, when it comes to investing, it never pays to grow complacent with one’s thinking. So I did some research into how gold performed during inflationary vs. deflationary periods. The results were rather shocking, to say the least.
According to Scott Reamer of Vicis Capital, gold and the dollar index has shown an inverse correlation of -.28 over the last 17 years. Now, a correlation of -1 would be a perfect inverse correlation, meaning that every move the dollar index made would be mirrored to the inverse by gold (the dollar falls 1, gold would rise 1).
As Reamer points out, a correlation of -.28 is not a strong correlation at all. So to claim that gold will spike if the dollar rolls over because the two are inversely related is overly simplistic. A far more reasonable assumption would be to say that should the dollar collapse, gold will rally due to safe haven seeking by investors.
Indeed, it is gold’s status as a safe haven of wealth (the ultimate currency if you will), NOT its inverse relationship to the dollar, that makes it so special. Gold has been the ultimate storehouse of wealth going back thousands of years. But what’s truly remarkable is that it has maintained this quality even during periods of DE-flation.
The ultimate text on this matter is Roy Jastram’s The Golden Constant. I don’t recommend looking for or reading this book because a) it’s out of print b) it’s a very dense read.
To summarize, Jastram performed a study of gold’s performance over a 416-year period in England’s history (from 1560 to 1976). He found that historically, gold has acted like a storehouse of value throughout wars, plagues, and the like. However, what’s most striking is that gold actually INCREASED its purchasing power during periods of DE-flation.
Deflationary Periods in England
Purchasing Power of Gold
1658–1669
+42%
1813–1851
+70%
1873–1896
+82%
1920–1933
+251%
This last point is absolutely extraordinary when you consider that the thought pattern “gold rises in inflation and falls during deflation” is one of the most commonly believed investing mantras out there. Indeed, gold has undergone a seismic shift in the last year, largely due to inflationary concerns.
Consider the following: Global gold demand jumped 38% in the 1Q09. Three years ago, demand for gold as an investment only comprised 10% of global gold demand. Today it’s over 30%. That’s an unbelievable increase in investment demand.
Read Entire Article
Latest Schultz Shock: a 'bank holiday'
NEW YORK (MarketWatch) -- The top-performing letter that predicted the Crash of 2008 now predicts a confiscatory Franklin D. Roosevelt-style "bank holiday." But it's surprisingly sanguine about stocks -- in the (very) short term.
HSL's currently recommended allocation:
• 35%-45% Government notes, bills and bonds. (Not U.S.)
• 8%-10% Stocks (non-golds).
• 10%-30% Commodities, via futures, commodity stocks and/or physical assets.
• 35%-45% Gold stocks and bullion.
The Harry Schultz Letter (HSL) was my pick for Letter of the Year in 2008 because it really did predict what it rightly called a coming "financial tsunami." But its performance in 2008 was still terrible, albeit arguably for technical reasons. ( See Dec. 28, 2008, column.)
Now HSL has bounced back big-time. ( See April 13 column.) Over the year to date through May, it's up a remarkable 81.7% by Hulbert Financial Digest count, compared to 4.1% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.
Of course, simple arithmetic dictates that doesn't make up for 2008 -- over the past 12 months, HSL is still down 48.19% versus negative 32.63% for the total return Wilshire 5000. In fact, the damage inflicted by 2008 was so great that HSL is also under water over the past three years, down an annualized 14.89% against a drop of 8.18% annualized for the total return Wilshire 5000.
Still, over the past five years, the letter has achieved an annualized gain of 9.19%, compared to negative 1.26% annualized for the total return Wilshire 5000. This reflects its success in catching the post-millennium hard-asset bull market that caused me to name it Letter of the Year, for more conventional reasons, in 2005. ( See Dec. 29, 2005, column.)
And over the past 10 years, the letter still shows an annualized gain of 3.65%, against negative 0.86% annualized for the total return Wilshire.
In its current issue, HSL reports rumors that "Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen ... within 180 days, but could be 120-150 days."
Read Entire Article
HSL's currently recommended allocation:
• 35%-45% Government notes, bills and bonds. (Not U.S.)
• 8%-10% Stocks (non-golds).
• 10%-30% Commodities, via futures, commodity stocks and/or physical assets.
• 35%-45% Gold stocks and bullion.
The Harry Schultz Letter (HSL) was my pick for Letter of the Year in 2008 because it really did predict what it rightly called a coming "financial tsunami." But its performance in 2008 was still terrible, albeit arguably for technical reasons. ( See Dec. 28, 2008, column.)
Now HSL has bounced back big-time. ( See April 13 column.) Over the year to date through May, it's up a remarkable 81.7% by Hulbert Financial Digest count, compared to 4.1% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.
Of course, simple arithmetic dictates that doesn't make up for 2008 -- over the past 12 months, HSL is still down 48.19% versus negative 32.63% for the total return Wilshire 5000. In fact, the damage inflicted by 2008 was so great that HSL is also under water over the past three years, down an annualized 14.89% against a drop of 8.18% annualized for the total return Wilshire 5000.
Still, over the past five years, the letter has achieved an annualized gain of 9.19%, compared to negative 1.26% annualized for the total return Wilshire 5000. This reflects its success in catching the post-millennium hard-asset bull market that caused me to name it Letter of the Year, for more conventional reasons, in 2005. ( See Dec. 29, 2005, column.)
And over the past 10 years, the letter still shows an annualized gain of 3.65%, against negative 0.86% annualized for the total return Wilshire.
In its current issue, HSL reports rumors that "Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen ... within 180 days, but could be 120-150 days."
Read Entire Article
Wednesday, June 24, 2009
Does Your Freedom Depend on Gold?
By Adam Murdock, MD
Many believe, and rightly so, that gold has intrinsic value. As a result, gold served as the ultimate and most stable form of currency in the 19th century. A gold-backed U.S. dollar permitted unprecedented economic growth in the background of a relatively deflationary economy. However, despite the clear economic advantages to having a gold-backed currency, this is not its most important purpose.
Throughout world history, the greatest threats to the freedom of men and women have most often come from the very individuals that have claimed to be their protectors, namely, their own rulers and governments. And, contrary to popular belief, the situation is no different today.
Over the past few years, the rhetoric from Washington would have us believe that we should be primarily concerned with an attack from Muslim extremists, while in actuality the focus of the "anti-terrorism" departments, such as Homeland Security, has increasingly been on homegrown terrorists. These terrorists, according to recent MIAC and DHS reports, include people with mainline conservative viewpoints, military veterans, supporters of the constitution, and even Ron Paul supporters (1, 2). Due to this shift, a massive spying apparatus involving both public and private elements has been invoked to monitor these individuals.
While these threats to our freedoms are egregious, they pale in comparison to the confiscation of wealth and loss of economic sovereignty coming as a direct result of government intervention in the economy, via the Federal Reserve. In fact, what Osama bin Laden was not able to accomplish from his cave in Pakistan was accomplished right here from within the halls of our very own government. Just look at how a relatively small group of bankers and government officials have profited while single-handedly sinking the U.S. economy. The damage caused by these individuals will dwarf any perceived threat from a small group of cave dwellers. Yet, where is the outcry? Clearly, the horror elicited by seeing the smoke coming from the twin towers is easy to understand, while the mysterious economic policies of the Federal Reserve and our government are not.
Why do I bring these events to your attention? Many of you are already familiar with these threats to our freedoms. However, many of you might not have made the connection that these acts of our government have been made possible because of the American public's faith in paper money instead of gold.
In order to understand the relationship between our freedoms and gold we need to understand the most important aspect of gold. This aspect has nothing do to with inherent aesthetic qualities of gold or the ease with which it can be made into coins. Instead it has to do with supply of gold. Most importantly, the supply of gold is limited and the increase in the yearly gold supply is minuscule compared to the overall supply. Unlike fiat money which inflates with the amount of paper printed, gold cannot be created out of thin air. The inability to be able to create gold is therefore its most important property. By implication this means that the government or Federal Reserve can only increase its spending by increasing its gold supply. In a gold economy, this can only happen by borrowing gold from others or from taxing more gold from the government's constituents. It cannot simply make more of it. As you can see, this limits severely what the government or Federal Reserve can do. This is because most governments can only tax their citizens to a certain degree and foreign governments eventually demand repayment of borrowed money in terms of gold. In fact, this demand for gold by foreign governments was the precise reason that President Nixon officially announced the dropping of the gold-backing of the U.S. dollar in the early 1970s. The reasons President Nixon did this are now clear. The welfare/warfare demands imposed by the government on the U.S. treasury meant that there were far more dollars printed than the deposits of gold. Finally, when foreign governments wised up to the charade and began demanding gold for their dollars, the US government was not able to comply and therefore ended the gold backing.
The consequences of removing the gold-backing have been predictable. It is no surprise that the explosion in social welfare programs, foreign adventurism, and the security state coincides closely with the loosening from the gold backing of the dollar. As I discussed in a previous article, the Bush and Obama administrations have embarked on an aggressive domestic spying agenda which has included enlisting private individuals (3). These threats would have been largely restricted in a gold economy.
Read Entire Article
Many believe, and rightly so, that gold has intrinsic value. As a result, gold served as the ultimate and most stable form of currency in the 19th century. A gold-backed U.S. dollar permitted unprecedented economic growth in the background of a relatively deflationary economy. However, despite the clear economic advantages to having a gold-backed currency, this is not its most important purpose.
Throughout world history, the greatest threats to the freedom of men and women have most often come from the very individuals that have claimed to be their protectors, namely, their own rulers and governments. And, contrary to popular belief, the situation is no different today.
Over the past few years, the rhetoric from Washington would have us believe that we should be primarily concerned with an attack from Muslim extremists, while in actuality the focus of the "anti-terrorism" departments, such as Homeland Security, has increasingly been on homegrown terrorists. These terrorists, according to recent MIAC and DHS reports, include people with mainline conservative viewpoints, military veterans, supporters of the constitution, and even Ron Paul supporters (1, 2). Due to this shift, a massive spying apparatus involving both public and private elements has been invoked to monitor these individuals.
While these threats to our freedoms are egregious, they pale in comparison to the confiscation of wealth and loss of economic sovereignty coming as a direct result of government intervention in the economy, via the Federal Reserve. In fact, what Osama bin Laden was not able to accomplish from his cave in Pakistan was accomplished right here from within the halls of our very own government. Just look at how a relatively small group of bankers and government officials have profited while single-handedly sinking the U.S. economy. The damage caused by these individuals will dwarf any perceived threat from a small group of cave dwellers. Yet, where is the outcry? Clearly, the horror elicited by seeing the smoke coming from the twin towers is easy to understand, while the mysterious economic policies of the Federal Reserve and our government are not.
Why do I bring these events to your attention? Many of you are already familiar with these threats to our freedoms. However, many of you might not have made the connection that these acts of our government have been made possible because of the American public's faith in paper money instead of gold.
In order to understand the relationship between our freedoms and gold we need to understand the most important aspect of gold. This aspect has nothing do to with inherent aesthetic qualities of gold or the ease with which it can be made into coins. Instead it has to do with supply of gold. Most importantly, the supply of gold is limited and the increase in the yearly gold supply is minuscule compared to the overall supply. Unlike fiat money which inflates with the amount of paper printed, gold cannot be created out of thin air. The inability to be able to create gold is therefore its most important property. By implication this means that the government or Federal Reserve can only increase its spending by increasing its gold supply. In a gold economy, this can only happen by borrowing gold from others or from taxing more gold from the government's constituents. It cannot simply make more of it. As you can see, this limits severely what the government or Federal Reserve can do. This is because most governments can only tax their citizens to a certain degree and foreign governments eventually demand repayment of borrowed money in terms of gold. In fact, this demand for gold by foreign governments was the precise reason that President Nixon officially announced the dropping of the gold-backing of the U.S. dollar in the early 1970s. The reasons President Nixon did this are now clear. The welfare/warfare demands imposed by the government on the U.S. treasury meant that there were far more dollars printed than the deposits of gold. Finally, when foreign governments wised up to the charade and began demanding gold for their dollars, the US government was not able to comply and therefore ended the gold backing.
The consequences of removing the gold-backing have been predictable. It is no surprise that the explosion in social welfare programs, foreign adventurism, and the security state coincides closely with the loosening from the gold backing of the dollar. As I discussed in a previous article, the Bush and Obama administrations have embarked on an aggressive domestic spying agenda which has included enlisting private individuals (3). These threats would have been largely restricted in a gold economy.
Read Entire Article
Ron Paul: Obama’s ‘goal’ is economic collapse
By David Edwards and Stephen Webster
Ron Paul, the popular Republican Congressman from Texas, is ripping into the president and Congress for what he sees as their “goal” with round after round of stimulus: complete economic collapse.
“From their spending habits, an economic collapse seems to be the goal of Congress and this administration,” he said in his June 22, 2009, weekly address.
He added that Democrats who voted for the president’s war funding request, which gave an additional $106 billion to military operations in Afghanistan and Iraq — among other, unrelated items — were actually voting in favor of the wars, not just authorization of the president’s agenda.
He called it an affront to everyone who believed a vote for Obama was a vote for a peace candidate.
The president’s insistence on including an additional $108 billion in asset exchange with the International Monetary Fund is merely “buying global oppression,” he said.
Paul added that, “this [bill sent] $660 million to Gaza, $555 million to Israel, $310million to Egypt, $300 million to Jordan and $420 million to Mexico; and some $889 million will be sent to the United Nations for so-called peace keeping missions.”
In other words, the latest U.S. war funding was an “International bailout,” he said.
The legislation’s provisions for the IMF included 100 billion dollars for the New Arrangements to Borrow (NAB), a credit instrument providing the multilateral institution with additional resources to deal with exceptional risks to the stability of the international monetary system.
They also include an expansion of the nation’s special drawing rights by five billion SDRs, adding roughly eight billion dollars to the IMF’s financial firepower.
The 100 billion dollars for the NAB acts as a credit line for the IMF in case member countries need emergency loans that exceed the institution’s resources. As such, the money is not considered an immediate budget expense.
Sen. Jim DeMint (R-SC) had proposed to strip out the IMF funds, but his measure was defeated in May by a vote of 64-30.
Read Entire Article
Ron Paul, the popular Republican Congressman from Texas, is ripping into the president and Congress for what he sees as their “goal” with round after round of stimulus: complete economic collapse.
“From their spending habits, an economic collapse seems to be the goal of Congress and this administration,” he said in his June 22, 2009, weekly address.
He added that Democrats who voted for the president’s war funding request, which gave an additional $106 billion to military operations in Afghanistan and Iraq — among other, unrelated items — were actually voting in favor of the wars, not just authorization of the president’s agenda.
He called it an affront to everyone who believed a vote for Obama was a vote for a peace candidate.
The president’s insistence on including an additional $108 billion in asset exchange with the International Monetary Fund is merely “buying global oppression,” he said.
Paul added that, “this [bill sent] $660 million to Gaza, $555 million to Israel, $310million to Egypt, $300 million to Jordan and $420 million to Mexico; and some $889 million will be sent to the United Nations for so-called peace keeping missions.”
In other words, the latest U.S. war funding was an “International bailout,” he said.
The legislation’s provisions for the IMF included 100 billion dollars for the New Arrangements to Borrow (NAB), a credit instrument providing the multilateral institution with additional resources to deal with exceptional risks to the stability of the international monetary system.
They also include an expansion of the nation’s special drawing rights by five billion SDRs, adding roughly eight billion dollars to the IMF’s financial firepower.
The 100 billion dollars for the NAB acts as a credit line for the IMF in case member countries need emergency loans that exceed the institution’s resources. As such, the money is not considered an immediate budget expense.
Sen. Jim DeMint (R-SC) had proposed to strip out the IMF funds, but his measure was defeated in May by a vote of 64-30.
Read Entire Article
Fading of the Dollar's Dominance
By Anthony Faiola
The days of calling the dollar almighty may be numbered.
Since World War II, when the dollar eclipsed the British pound as the king of world currencies, the United States has reaped the rewards of its monetary strength. The greenback's sense of indestructibility allowed the U.S. government to borrow cheaply and gave rise to an era of rich American globetrotters toting the world's most easily convertible form of cash.
But the financial crisis that started in the United States is dramatically intensifying the debate over the future of the dollar, and whether it can, or should, remain at the top of the financial food chain. Although a meaningful shift away from the dollar is likely to take years or more, some analysts believe that the debate is now reaching a tipping point.
Last week, the leaders of Brazil, Russia, India and China -- whose governments are some of the world's largest dollar holders -- jointly declared the need for a "more diversified international monetary system," sparking a drop in the greenback on world markets. In recent months, China in particular has led a campaign for a new world monetary order, arguing that the financial crisis has exposed profound vulnerabilities in the U.S. economy and financial system. Those flaws, critics argue, show it is simply too risky for the world's central banks to rely largely on the dollar for their global reserves.
At the same time, Beijing has taken unprecedented steps to increase the international role of its own currency, the yuan, to a level commensurate with China's relatively new status as a major economic power. In the coming weeks, the International Monetary Fund -- the institution charged with the monitoring and stability of the global economy -- will issue a vast amount of currency-like assets known as Special Drawing Rights, which some analysts see as a long-term substitute for the hordes of dollar reserves being held by central banks around the world. Some now envision that the dollar will fall from its recent levels of 60 to 65 percent of international reserves to less than 50 percent a decade from now.
Read Entire Article
The days of calling the dollar almighty may be numbered.
Since World War II, when the dollar eclipsed the British pound as the king of world currencies, the United States has reaped the rewards of its monetary strength. The greenback's sense of indestructibility allowed the U.S. government to borrow cheaply and gave rise to an era of rich American globetrotters toting the world's most easily convertible form of cash.
But the financial crisis that started in the United States is dramatically intensifying the debate over the future of the dollar, and whether it can, or should, remain at the top of the financial food chain. Although a meaningful shift away from the dollar is likely to take years or more, some analysts believe that the debate is now reaching a tipping point.
Last week, the leaders of Brazil, Russia, India and China -- whose governments are some of the world's largest dollar holders -- jointly declared the need for a "more diversified international monetary system," sparking a drop in the greenback on world markets. In recent months, China in particular has led a campaign for a new world monetary order, arguing that the financial crisis has exposed profound vulnerabilities in the U.S. economy and financial system. Those flaws, critics argue, show it is simply too risky for the world's central banks to rely largely on the dollar for their global reserves.
At the same time, Beijing has taken unprecedented steps to increase the international role of its own currency, the yuan, to a level commensurate with China's relatively new status as a major economic power. In the coming weeks, the International Monetary Fund -- the institution charged with the monitoring and stability of the global economy -- will issue a vast amount of currency-like assets known as Special Drawing Rights, which some analysts see as a long-term substitute for the hordes of dollar reserves being held by central banks around the world. Some now envision that the dollar will fall from its recent levels of 60 to 65 percent of international reserves to less than 50 percent a decade from now.
Read Entire Article
Tuesday, June 23, 2009
Economist Phelps Says U.S. Wealth May Take 15 Years to Rebound
By Alison Sider and Elliott Gotkine
June 22 (Bloomberg) -- U.S. households may take as long as 15 years to rebuild wealth lost in the recession, said Columbia University professor Edmund Phelps, winner of the Nobel Prize in economics in 2006.
“The only way we’re going to get a healthy, full recovery is over a long period of time, involving households rebuilding their balance sheets and companies in trouble rebalancing their balance sheets,” Phelps said in an interview today with Bloomberg Television. “There’s no silver bullet that’s going to get us into good shape quickly.”
U.S. household wealth fell by $1.3 trillion in the first quarter of this year, with net worth for households and non- profit groups falling to its lowest level since 2004, according to a Federal Reserve report released June 11. Wealth dropped by a record $4.9 trillion in the last quarter of 2008.
Phelps said that economic recovery will be unlikely until producers exhaust their existing inventories.
“When that happens there will be a sigh of relief that we’ve hit bottom,” he said in the interview from Paris. “Then we’ll see a little bounce in consumption demand” and “people won’t be bracing themselves at the prospect of losing their jobs,” he said.
Read Entire Article
June 22 (Bloomberg) -- U.S. households may take as long as 15 years to rebuild wealth lost in the recession, said Columbia University professor Edmund Phelps, winner of the Nobel Prize in economics in 2006.
“The only way we’re going to get a healthy, full recovery is over a long period of time, involving households rebuilding their balance sheets and companies in trouble rebalancing their balance sheets,” Phelps said in an interview today with Bloomberg Television. “There’s no silver bullet that’s going to get us into good shape quickly.”
U.S. household wealth fell by $1.3 trillion in the first quarter of this year, with net worth for households and non- profit groups falling to its lowest level since 2004, according to a Federal Reserve report released June 11. Wealth dropped by a record $4.9 trillion in the last quarter of 2008.
Phelps said that economic recovery will be unlikely until producers exhaust their existing inventories.
“When that happens there will be a sigh of relief that we’ve hit bottom,” he said in the interview from Paris. “Then we’ll see a little bounce in consumption demand” and “people won’t be bracing themselves at the prospect of losing their jobs,” he said.
Read Entire Article
Monday, June 22, 2009
Insiders Exit Shares at the Fastest Pace in Two Years
By Lynn Thomasson and Michael Tsang
June 22 (Bloomberg) -- Executives at U.S. companies are taking advantage of the biggest stock-market rally in 71 years to sell their shares at the fastest pace since credit markets started to seize up two years ago.
Insiders of Standard & Poor’s 500 Index companies were net sellers for 14 straight weeks as the gauge rose 36 percent, data compiled by InsiderScore.com show. Amgen Inc. Chairman and Chief Executive Officer Kevin Sharer and five other officials sold $8.2 million of stock. Christopher Donahue, the CEO of Federated Investors Inc., and his brother, Chief Financial Officer Thomas Donahue, offered the most in three years.
Sales by CEOs, directors and senior officers have accelerated to the highest level since June 2007, two months before credit markets froze, as the S&P 500 rebounded from its 12-year low in March. The increase is making investors more skittish because executives presumably have the best information about their companies’ prospects.
“If insiders are selling into the rally, that shows they don’t expect their business to be able to support current stock- price levels,” said Joseph Keating, the chief investment officer of Raleigh, North Carolina-based RBC Bank, the unit of Royal Bank of Canada that oversees $33 billion in client assets. “They’re taking advantage of this bounce and selling into it.”
Banks Downgraded
The S&P 500 slid 2.6 percent to 921.23 last week, the first weekly decline since May 15, as investors speculated the three- month jump in share prices already reflected a recovery in the economy and profits. Stocks dropped as the Federal Reserve reported that industrial production fell in May and S&P cut credit ratings on 18 U.S. banks, saying lenders will face “less favorable” conditions.
The S&P 500 slid 2.2 percent at 11:06 a.m. in New York after the Washington-based World Bank said the global recession this year will be deeper than it predicted in March.
Insiders increased their disposals as S&P 500 companies traded at 15.5 times profit on June 2, the highest multiple to earnings in eight months, Bloomberg data show. Equities climbed as the U.S. government and the Fed pledged $12.8 trillion to rescue financial markets during the first global recession since World War II.
Executives at 252 companies in the S&P 500 unloaded shares since March 10, with total net sales reaching $1.2 billion, according to data compiled by Princeton, New Jersey-based InsiderScore, which tracks stocks. Companies with net sellers outnumbered those with buyers by almost 9-to-1 last week, versus a ratio of about 1-to-1 in the first week of the rally.
Bear Stearns
“They’re looking to take some money off the table because they think the rally will come to an end,” said Ben Silverman, the Seattle-based research director at InsiderScore. “It’s the most bearish we’ve seen insiders, on a whole, in two years.”
The last time there were more U.S. corporations with executives reducing their holdings than adding to them was during the week ended June 19, 2007, the data show. The next month, two Bear Stearns Cos. hedge funds filed for bankruptcy protection as securities linked to subprime mortgages fell apart, helping trigger almost $1.5 trillion in losses and writedowns at the world’s biggest financial companies and the 57 percent drop in the S&P 500 from Oct. 9, 2007, to March 9, 2009.
Insider selling during the height of the dotcom bubble in the first quarter of 2000 climbed to a record $41.7 billion on a net basis, according to data compiled by Bethesda, Maryland- based Washington Service. The sales coincided with the end of the S&P 500’s bull market and preceded a 2 1/2 year slump that erased half the value of U.S. equities.
Read Entire Article
June 22 (Bloomberg) -- Executives at U.S. companies are taking advantage of the biggest stock-market rally in 71 years to sell their shares at the fastest pace since credit markets started to seize up two years ago.
Insiders of Standard & Poor’s 500 Index companies were net sellers for 14 straight weeks as the gauge rose 36 percent, data compiled by InsiderScore.com show. Amgen Inc. Chairman and Chief Executive Officer Kevin Sharer and five other officials sold $8.2 million of stock. Christopher Donahue, the CEO of Federated Investors Inc., and his brother, Chief Financial Officer Thomas Donahue, offered the most in three years.
Sales by CEOs, directors and senior officers have accelerated to the highest level since June 2007, two months before credit markets froze, as the S&P 500 rebounded from its 12-year low in March. The increase is making investors more skittish because executives presumably have the best information about their companies’ prospects.
“If insiders are selling into the rally, that shows they don’t expect their business to be able to support current stock- price levels,” said Joseph Keating, the chief investment officer of Raleigh, North Carolina-based RBC Bank, the unit of Royal Bank of Canada that oversees $33 billion in client assets. “They’re taking advantage of this bounce and selling into it.”
Banks Downgraded
The S&P 500 slid 2.6 percent to 921.23 last week, the first weekly decline since May 15, as investors speculated the three- month jump in share prices already reflected a recovery in the economy and profits. Stocks dropped as the Federal Reserve reported that industrial production fell in May and S&P cut credit ratings on 18 U.S. banks, saying lenders will face “less favorable” conditions.
The S&P 500 slid 2.2 percent at 11:06 a.m. in New York after the Washington-based World Bank said the global recession this year will be deeper than it predicted in March.
Insiders increased their disposals as S&P 500 companies traded at 15.5 times profit on June 2, the highest multiple to earnings in eight months, Bloomberg data show. Equities climbed as the U.S. government and the Fed pledged $12.8 trillion to rescue financial markets during the first global recession since World War II.
Executives at 252 companies in the S&P 500 unloaded shares since March 10, with total net sales reaching $1.2 billion, according to data compiled by Princeton, New Jersey-based InsiderScore, which tracks stocks. Companies with net sellers outnumbered those with buyers by almost 9-to-1 last week, versus a ratio of about 1-to-1 in the first week of the rally.
Bear Stearns
“They’re looking to take some money off the table because they think the rally will come to an end,” said Ben Silverman, the Seattle-based research director at InsiderScore. “It’s the most bearish we’ve seen insiders, on a whole, in two years.”
The last time there were more U.S. corporations with executives reducing their holdings than adding to them was during the week ended June 19, 2007, the data show. The next month, two Bear Stearns Cos. hedge funds filed for bankruptcy protection as securities linked to subprime mortgages fell apart, helping trigger almost $1.5 trillion in losses and writedowns at the world’s biggest financial companies and the 57 percent drop in the S&P 500 from Oct. 9, 2007, to March 9, 2009.
Insider selling during the height of the dotcom bubble in the first quarter of 2000 climbed to a record $41.7 billion on a net basis, according to data compiled by Bethesda, Maryland- based Washington Service. The sales coincided with the end of the S&P 500’s bull market and preceded a 2 1/2 year slump that erased half the value of U.S. equities.
Read Entire Article
Back in the U.S.S.A.
By Peter Schiff
Harry Browne, the former Libertarian Party candidate for president, used to say: “the government is great at breaking your leg, handing you a crutch, and saying ‘You see, without me you couldn’t walk.’” That maxim is clearly illustrated by the financial industry regulatory reforms proposed this week by the Obama Administration.
In seeking to undo the damage inflicted over the past decade by misguided government policies, the new regulatory regime would ensure that the problems underlying our financial system will only get worse. As was the case with the deeply flawed Sarbanes-Oxley legislation of 2002, or the misguided provisions of the Patriot Act of 2001, such as the torturous anti-money laundering requirements, the move will further burden the financial services industry with unnecessary regulation that will drive up costs, lower quality, and shelter the biggest and least innovative companies. Ultimately, the structure will put the entire U.S. financial industry at a global competitive disadvantage.
The underlying problem is that the excessive risk taking which brought about the crisis was not market-driven, but a direct consequence of government interference with risk-inhibiting market forces. Rather than learning from its mistakes and allowing market forces to once again control risks and efficiently allocate resources, the government is merely repeating its mistakes on a grander scale – thereby sowing the seeds for an even greater crisis in the future.
As is typical of government attempts to control economic outcomes, Obama’s plans focuses on the symptoms of the disease and not the cause. The American financial system imploded for two reasons: cheap money and moral hazard – both of which were supplied by the government. Under the proposed new regulatory structures, these toxic ingredients will be combined in ever-increasing quantities.
The proposals most notably involve extra regulatory oversight of financial entities that the government deems “too big to fail.” This implies that it is desirable to have such entities in the first place, and that the government will continue to back those large organizations that fall under its protection. These “too big to fail” firms will enjoy a competitive advantage over smaller firms in attracting capital, as lenders will perceive zero risk in extending them credit. This will cause these firms to grow even larger, producing even greater systemic risks and larger losses when the next round of bailouts arrives. Meanwhile, smaller firms which seek to expand, and which propose no systemic risks, will face greater challenges as higher capital costs render them less competitive.
If the government did not provide these bailouts or guarantees, then the market itself would ensure organizations did not grow beyond their ability to attract capital. It is only when market discipline is overcome by government guarantees that systemic risks arise.
Obama proposes to entrust the critical job of “systemic risk regulator” to the Federal Reserve, the very organization that has proven most adept at creating systemic risk. This is like making Keith Richards the head of the DEA.
Given the Federal Reserve’s disastrous monetary policy over the past decade, any attempt to expand the Fed’s role should be vigorously opposed. Through decades of short-sighted interest rate decisions, the Fed has proven time and again that it is only able to close the barn door after the entire herd has escaped. If setting interest rates had been left to the free market, none of the excesses we have seen in the credit market would have been remotely possible.
The perverse result will be that our government and the Fed gain more power as a direct result of their own incompetence. Such was also the case with Freddie and Fannie, which should have been allowed to fail, but were nationalized instead, leaving them in a position to do even more damage. The new round of regulations ignores them completely. Along those lines, ratings agencies such as Standard and Poor’s and Moody’s that completely missed the mark were also spared. Perhaps this special treatment is a way of ensuring that Treasury debt maintains its bogus AAA rating.
Unfortunately, despite their intent, my guess is that the new regulations will most severely impact smaller firms, like my own, that never engaged in reckless behavior. This will further reward those “too big to fail” firms, whose economies of scale and cozy relationships with regulators leave them better positioned than their smaller rivals to absorb the costs of the added red tape.
With the transition now fully under way, I propose we end the pretense and rename our country: “The United Socialist States of America.” In fact, given all the czars already in Washington, we might as well go with the Russian theme completely: appoint a Politburo, move into dilapidated housing blocks, and parade our missiles in the streets. On the bright side, there’s always the borscht.
June 20, 2009
Peter Schiff is president of Euro Pacific Capital and author of The Little Book of Bull Moves in Bear Markets and Crash Proof: How to Profit from the Coming Economic Collapse.
Read Entire Article
Harry Browne, the former Libertarian Party candidate for president, used to say: “the government is great at breaking your leg, handing you a crutch, and saying ‘You see, without me you couldn’t walk.’” That maxim is clearly illustrated by the financial industry regulatory reforms proposed this week by the Obama Administration.
In seeking to undo the damage inflicted over the past decade by misguided government policies, the new regulatory regime would ensure that the problems underlying our financial system will only get worse. As was the case with the deeply flawed Sarbanes-Oxley legislation of 2002, or the misguided provisions of the Patriot Act of 2001, such as the torturous anti-money laundering requirements, the move will further burden the financial services industry with unnecessary regulation that will drive up costs, lower quality, and shelter the biggest and least innovative companies. Ultimately, the structure will put the entire U.S. financial industry at a global competitive disadvantage.
The underlying problem is that the excessive risk taking which brought about the crisis was not market-driven, but a direct consequence of government interference with risk-inhibiting market forces. Rather than learning from its mistakes and allowing market forces to once again control risks and efficiently allocate resources, the government is merely repeating its mistakes on a grander scale – thereby sowing the seeds for an even greater crisis in the future.
As is typical of government attempts to control economic outcomes, Obama’s plans focuses on the symptoms of the disease and not the cause. The American financial system imploded for two reasons: cheap money and moral hazard – both of which were supplied by the government. Under the proposed new regulatory structures, these toxic ingredients will be combined in ever-increasing quantities.
The proposals most notably involve extra regulatory oversight of financial entities that the government deems “too big to fail.” This implies that it is desirable to have such entities in the first place, and that the government will continue to back those large organizations that fall under its protection. These “too big to fail” firms will enjoy a competitive advantage over smaller firms in attracting capital, as lenders will perceive zero risk in extending them credit. This will cause these firms to grow even larger, producing even greater systemic risks and larger losses when the next round of bailouts arrives. Meanwhile, smaller firms which seek to expand, and which propose no systemic risks, will face greater challenges as higher capital costs render them less competitive.
If the government did not provide these bailouts or guarantees, then the market itself would ensure organizations did not grow beyond their ability to attract capital. It is only when market discipline is overcome by government guarantees that systemic risks arise.
Obama proposes to entrust the critical job of “systemic risk regulator” to the Federal Reserve, the very organization that has proven most adept at creating systemic risk. This is like making Keith Richards the head of the DEA.
Given the Federal Reserve’s disastrous monetary policy over the past decade, any attempt to expand the Fed’s role should be vigorously opposed. Through decades of short-sighted interest rate decisions, the Fed has proven time and again that it is only able to close the barn door after the entire herd has escaped. If setting interest rates had been left to the free market, none of the excesses we have seen in the credit market would have been remotely possible.
The perverse result will be that our government and the Fed gain more power as a direct result of their own incompetence. Such was also the case with Freddie and Fannie, which should have been allowed to fail, but were nationalized instead, leaving them in a position to do even more damage. The new round of regulations ignores them completely. Along those lines, ratings agencies such as Standard and Poor’s and Moody’s that completely missed the mark were also spared. Perhaps this special treatment is a way of ensuring that Treasury debt maintains its bogus AAA rating.
Unfortunately, despite their intent, my guess is that the new regulations will most severely impact smaller firms, like my own, that never engaged in reckless behavior. This will further reward those “too big to fail” firms, whose economies of scale and cozy relationships with regulators leave them better positioned than their smaller rivals to absorb the costs of the added red tape.
With the transition now fully under way, I propose we end the pretense and rename our country: “The United Socialist States of America.” In fact, given all the czars already in Washington, we might as well go with the Russian theme completely: appoint a Politburo, move into dilapidated housing blocks, and parade our missiles in the streets. On the bright side, there’s always the borscht.
June 20, 2009
Peter Schiff is president of Euro Pacific Capital and author of The Little Book of Bull Moves in Bear Markets and Crash Proof: How to Profit from the Coming Economic Collapse.
Read Entire Article
IMF Says Dollar Adjustment Might Be Needed
PARIS, June 22 (Reuters) - An increase in exports is needed for a sustained recovery in the United States and this may require an adjustment in the value of the U.S. dollar, IMF chief economist Olivier Blanchard said on Monday.
'For the US, it is absolutely no question that a sustained recovery has to come from a large increase in exports, that may not be very easy to do. This may require fairly substantial adjustments in the dollar,' he told a conference.
Enter Remainder of Article Here
Read Entire Article
'For the US, it is absolutely no question that a sustained recovery has to come from a large increase in exports, that may not be very easy to do. This may require fairly substantial adjustments in the dollar,' he told a conference.
Enter Remainder of Article Here
Read Entire Article
Friday, June 19, 2009
Dollar Vulnerable as Countries Diversify
NEW YORK (Reuters) - The U.S. dollar, whose leading role in world currency markets has faced increasing questions, will remain under pressure for years as more countries diversify their reserve holdings, top analysts and strategists said this week.
Still, no other currency appears ready to take over the dollar's dominant role in foreign exchange markets in the foreseeable future, which will likely prevent any precipitous fall in the greenback, the analysts and strategists said at the Reuters Investment Outlook Summit in New York
Comments by Russian President Dmitry Medvedev on Tuesday suggesting a need for a global reserve currency other than the greenback highlighted the challenges facing the dollar -- and sent it sliding across the board. Just a few months ago, China had suggested how the dollar could be replaced as the world's main reserve currency.
The United States' expansionist fiscal and monetary policies, which are raising fears of inflation down the road that could erode the value of the dollar, is surely driving diversification out of dollar-denominated assets, analysts said.
"What you are seeing is dissatisfaction with the dollar as the world's reserve currency," said Steven Englander, chief foreign exchange strategist for the Americas at Barclays Capital.
Nouriel Roubini, the economist known for predicting the current financial crisis, said the main fear haunting investors is that the United States could allow inflation to return or the dollar to devalue as a way out of its debt problems.
"Over time, the willingness of the U.S. creditors to finance (U.S. spending) and buy dollar reserves is going to be reduced," said Roubini, chairman of New York-based economics research firm RGE Monitor.
The dollar has weakened whenever talk about an alternative reserve currency makes the headlines. Calls for currency diversification have come mainly from emerging economies such as Brazil, Russia, India and China, or the BRIC nations.
In their first summit held on Tuesday in Russia, leaders of the BRIC countries called for "a stable, predictable and more diversified international monetary system."
They did not make any direct reference to the dollar in their final statement.
Although the dollar had strengthened considerably against the euro from March through the beginning of June, it has weakened in the last two weeks since talk of diversification away from the greenback reemerged.
CANDIDATES WANTED
Despite its growing weaknesses, the dollar will retain its reserve currency status for a considerable period of time for lack of better candidates.
"That diversification is happening very slowly, but it is important to recognize that the dollar has that position as a reserve currency because so much trade in the world takes place in the form of dollars," Abby Joseph Cohen, senior investment strategist at Goldman Sachs, told the Reuters summit.
She expects most global trade will likely remain denominated in dollars for a long time, despite diversification efforts by some countries.
By Walter Brandimarte
Read Entire Article
Still, no other currency appears ready to take over the dollar's dominant role in foreign exchange markets in the foreseeable future, which will likely prevent any precipitous fall in the greenback, the analysts and strategists said at the Reuters Investment Outlook Summit in New York
Comments by Russian President Dmitry Medvedev on Tuesday suggesting a need for a global reserve currency other than the greenback highlighted the challenges facing the dollar -- and sent it sliding across the board. Just a few months ago, China had suggested how the dollar could be replaced as the world's main reserve currency.
The United States' expansionist fiscal and monetary policies, which are raising fears of inflation down the road that could erode the value of the dollar, is surely driving diversification out of dollar-denominated assets, analysts said.
"What you are seeing is dissatisfaction with the dollar as the world's reserve currency," said Steven Englander, chief foreign exchange strategist for the Americas at Barclays Capital.
Nouriel Roubini, the economist known for predicting the current financial crisis, said the main fear haunting investors is that the United States could allow inflation to return or the dollar to devalue as a way out of its debt problems.
"Over time, the willingness of the U.S. creditors to finance (U.S. spending) and buy dollar reserves is going to be reduced," said Roubini, chairman of New York-based economics research firm RGE Monitor.
The dollar has weakened whenever talk about an alternative reserve currency makes the headlines. Calls for currency diversification have come mainly from emerging economies such as Brazil, Russia, India and China, or the BRIC nations.
In their first summit held on Tuesday in Russia, leaders of the BRIC countries called for "a stable, predictable and more diversified international monetary system."
They did not make any direct reference to the dollar in their final statement.
Although the dollar had strengthened considerably against the euro from March through the beginning of June, it has weakened in the last two weeks since talk of diversification away from the greenback reemerged.
CANDIDATES WANTED
Despite its growing weaknesses, the dollar will retain its reserve currency status for a considerable period of time for lack of better candidates.
"That diversification is happening very slowly, but it is important to recognize that the dollar has that position as a reserve currency because so much trade in the world takes place in the form of dollars," Abby Joseph Cohen, senior investment strategist at Goldman Sachs, told the Reuters summit.
She expects most global trade will likely remain denominated in dollars for a long time, despite diversification efforts by some countries.
By Walter Brandimarte
Read Entire Article
Thursday, June 18, 2009
Broader Fed Role Provokes Wide Dissent
Patrice Hill
The Washington Times
President Obama’s plan to revamp financial regulations triggered immediate criticism Wednesday from both the political left and right over the expanded policing authorities given to the Federal Reserve while business groups grumbled about a powerful new agency charged with protecting consumers against abusive lending.
The broad plan would step up regulation of nearly every financial institution while extending government control to markets and players such as hedge funds that escaped supervision in the past. But it keeps much of the patchwork quilt of regulatory agencies created in the last century as the government responded to financial crises like the one that precipitated the current overhaul last fall.
Read Entire Article
The Washington Times
President Obama’s plan to revamp financial regulations triggered immediate criticism Wednesday from both the political left and right over the expanded policing authorities given to the Federal Reserve while business groups grumbled about a powerful new agency charged with protecting consumers against abusive lending.
The broad plan would step up regulation of nearly every financial institution while extending government control to markets and players such as hedge funds that escaped supervision in the past. But it keeps much of the patchwork quilt of regulatory agencies created in the last century as the government responded to financial crises like the one that precipitated the current overhaul last fall.
Read Entire Article
Wednesday, June 17, 2009
Supply and Demand
Commentary: The supply of stock is mushrooming -- a bearish sign
What bear market?
Notwithstanding the carnage the stock market suffered between October 2007 and March of this year -- the worst since the Great Depression -- corporations' share issuance departments are partying like it's 1999.
In fact, firms have recently issued far more shares of their stock (either through initial public offerings or secondary offerings) than they did even in the go-go years of the late 1990s and at the top of the Internet bubble in early 2000.
That's not good news, from a contrarian point of view: The stock market historically has tended to perform poorly following periods in which firms have flooded the market with more shares.
Prior to May, according to TrimTabs Investment Research, the highest level of share issuance in a given month was $38 billion. May blew that record out of the water, with a monthly total of $64 billion.
Furthermore, that blistering pace has continued during the first two weeks of June, according to TrimTabs.
How bad an omen is this corporate eagerness to offer its shares to the investing public? Looking back through recent history, TrimTabs found that there have been just 12 months since 1998 in which total new corporate offerings totaled at least $30 billion. The average return for the S&P 500 index (SPX) over the 90 days following those months was a loss of 4%.
Dissecting the data further, TrimTabs next focused on those months in which not only did total corporate issuance exceed $30 billion, but also those in which total corporate share purchases were less. The S&P 500's average 90-day return following those months was a loss of 7%.
This more-narrowly-defined subset applies to today, unfortunately. According to TrimTabs, corporate new offerings since the beginning of May have been nearly five times greater than corporate purchases.
The recent surge in the supply of shares has also caught the attention of Ned Davis, the eponymous head of Ned Davis Research. He has found through his research that it is optimal not to focus on monthly totals but instead on a rolling 13-week window. On this basis, according to Davis, recent corporate issuance has been exceeded historically only by two other occasions -- early 2000 and early 2008.
Those were "not great times to buy stocks," Davis notes dryly.
Davis also draws an even more ominous parallel to the recent corporate rush to sell stock: "This high level of [recent] supply is one of the key characteristics of the monster rally in November 1929 - April 1930."
From April 1930 through the low in July 1932, of course, the Dow Jones Industrial Average (INDU) fell by 86%.
For the record, I should point out that Davis, despite these ominous portents, remains cautiously bullish for the short-term, since many of his other indicators suggest that this rally has further to run.
But TrimTabs is quite bearish, recommending that clients be 50% short U.S. equities. "Stock prices are going to fall hard," they predict.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Copyrighted, MarketWatch. All rights reserved. Republication or redistribution of MarketWatch content is expressly prohibited without the prior written consent of MarketWatch. MarketWatch shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon
By Mike Gallagher
Read Entire Article
What bear market?
Notwithstanding the carnage the stock market suffered between October 2007 and March of this year -- the worst since the Great Depression -- corporations' share issuance departments are partying like it's 1999.
In fact, firms have recently issued far more shares of their stock (either through initial public offerings or secondary offerings) than they did even in the go-go years of the late 1990s and at the top of the Internet bubble in early 2000.
That's not good news, from a contrarian point of view: The stock market historically has tended to perform poorly following periods in which firms have flooded the market with more shares.
Prior to May, according to TrimTabs Investment Research, the highest level of share issuance in a given month was $38 billion. May blew that record out of the water, with a monthly total of $64 billion.
Furthermore, that blistering pace has continued during the first two weeks of June, according to TrimTabs.
How bad an omen is this corporate eagerness to offer its shares to the investing public? Looking back through recent history, TrimTabs found that there have been just 12 months since 1998 in which total new corporate offerings totaled at least $30 billion. The average return for the S&P 500 index (SPX) over the 90 days following those months was a loss of 4%.
Dissecting the data further, TrimTabs next focused on those months in which not only did total corporate issuance exceed $30 billion, but also those in which total corporate share purchases were less. The S&P 500's average 90-day return following those months was a loss of 7%.
This more-narrowly-defined subset applies to today, unfortunately. According to TrimTabs, corporate new offerings since the beginning of May have been nearly five times greater than corporate purchases.
The recent surge in the supply of shares has also caught the attention of Ned Davis, the eponymous head of Ned Davis Research. He has found through his research that it is optimal not to focus on monthly totals but instead on a rolling 13-week window. On this basis, according to Davis, recent corporate issuance has been exceeded historically only by two other occasions -- early 2000 and early 2008.
Those were "not great times to buy stocks," Davis notes dryly.
Davis also draws an even more ominous parallel to the recent corporate rush to sell stock: "This high level of [recent] supply is one of the key characteristics of the monster rally in November 1929 - April 1930."
From April 1930 through the low in July 1932, of course, the Dow Jones Industrial Average (INDU) fell by 86%.
For the record, I should point out that Davis, despite these ominous portents, remains cautiously bullish for the short-term, since many of his other indicators suggest that this rally has further to run.
But TrimTabs is quite bearish, recommending that clients be 50% short U.S. equities. "Stock prices are going to fall hard," they predict.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Copyrighted, MarketWatch. All rights reserved. Republication or redistribution of MarketWatch content is expressly prohibited without the prior written consent of MarketWatch. MarketWatch shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon
By Mike Gallagher
Read Entire Article
Fox Guarding the Henhouse:
Obama Plans to Cut Bank Regulators, Allow Fed to Supervise Financial Holding Companies
(Reuters) - Obama administration plans to call for the U.S. Office of Thrift Supervision to close as part of its overhaul of financial regulation, which would also include the elimination of the federal thrift charter for banks.
The plan would require large, interconnected firms to draft a “credible plan” for how they would be unwound if they ran into severe trouble, a senior administration official told reporters on a conference call on Tuesday.
The official said the proposal would also call for the creation of a financial oversight council that would be led by the Treasury Department, and would make the Federal Reserve the consolidated supervisor of large financial holding companies.
The administration has been discussing how best to tighten bank and market regulation in response to the worst global financial crisis in generations. President Barack Obama will formally unveil the proposals on Wednesday.
Read Entire Article
(Reuters) - Obama administration plans to call for the U.S. Office of Thrift Supervision to close as part of its overhaul of financial regulation, which would also include the elimination of the federal thrift charter for banks.
The plan would require large, interconnected firms to draft a “credible plan” for how they would be unwound if they ran into severe trouble, a senior administration official told reporters on a conference call on Tuesday.
The official said the proposal would also call for the creation of a financial oversight council that would be led by the Treasury Department, and would make the Federal Reserve the consolidated supervisor of large financial holding companies.
The administration has been discussing how best to tighten bank and market regulation in response to the worst global financial crisis in generations. President Barack Obama will formally unveil the proposals on Wednesday.
Read Entire Article
China Sells US Bonds to ’Show Concern’
A decision by China to reduce its US Treasury holdings suggests concern about the US attitude towards its economic woes, Chinese economists were quoted as saying in state media Wednesday.
The remarks, coming after US data showed a modest decline in Chinese investments in US government bonds, were in contrast to an earlier statement in Beijing which had said the recent sell-off was a routine transaction.
“China is implying to the US, more or less, that it should adopt a more pragmatic and responsible attitude to maintain the stability of the dollar,” He Maochun, a political scientist at Tsinghua University, told the Global Times.
According to US Treasury data issued Monday, Beijing owned 763.5 billion dollars in US securities in April, down from 767.9 billion dollars in March.
It was the first month since June 2008 that Beijing failed to purchase more US T-bills.
Zhang Bin, a researcher at the Chinese Academy of Social Sciences, said China’s move showed a more cautious attitude.
Read Entire Article
The remarks, coming after US data showed a modest decline in Chinese investments in US government bonds, were in contrast to an earlier statement in Beijing which had said the recent sell-off was a routine transaction.
“China is implying to the US, more or less, that it should adopt a more pragmatic and responsible attitude to maintain the stability of the dollar,” He Maochun, a political scientist at Tsinghua University, told the Global Times.
According to US Treasury data issued Monday, Beijing owned 763.5 billion dollars in US securities in April, down from 767.9 billion dollars in March.
It was the first month since June 2008 that Beijing failed to purchase more US T-bills.
Zhang Bin, a researcher at the Chinese Academy of Social Sciences, said China’s move showed a more cautious attitude.
Read Entire Article
Gold and Silver Eagle Bullion Allocation Programs End
Yesterday, the US Mint announced the end of the long standing allocation programs for Gold and Silver American Eagle bullion coins. This should have implications for coin collectors who have been eagerly awaiting the collectible proof and uncirculated versions of the coins.
The news comes via a brief memorandum sent to authorized purchasers of US Mint bullion coins, which stated, "Effective immediately, the United States is lifting the allocation process. You may place your orders under the standard ordering procedures."
Gold and Silver Eagle Bullion Coin Shortage and Rationing
The US Mint sells gold and silver bullion coins through a network of authorized purchasers. Last year, heavy demand and a tight supply of precious metals blanks had forced the US Mint to temporarily suspend sales of bullion coins and eventually instate allocation programs. These programs limited the number of gold and silver bullion coins that authorized purchasers could order.
The US Mint would divide weekly bullion coin production into two pools. The first pool would be divided equally amongst authorized purchasers, and the second would be divided based on past sales performance. The silver allocation program had been in place since April 2008, and the gold allocation program had been in place since August 2008.
In recent months there had been signs that the heavy demand and tight supply, which necessitated the allocation programs, were easing. After reaching extreme levels during the shortage, premiums for bullion coins charged by precious metals dealers were finally dropping. At the height of the Silver Eagle shortage, bullion coins carried premiums as high as $4.50 per coin. Since last month, these premiums have declined back to their historical norms around $2.00 per coin.
Another sign had been a recent decline in monthly sales levels for the US Mint's gold and silver bullion coins. For 2009, sales had recorded month to month increases before peaking and finally declining. Sales of Silver Eagle bullion coins had risen to a peak of 3,132,000 ounces in March, before receding in April, and falling further in May to 1,904,500 ounces. Sales of Gold Eagle bullion coins had reached a peak of 147,500 ounces in April, before dropping to 65,000 in May. Notably, even the reduced sales figures from last month remain far above year over year and historical sales comparisons.
Gold and Silver Eagle Collector Coins on the Horizon?
The end of the allocation program should be welcome news for coin collectors. Because of the high demand for gold and silver bullion coins, the US Mint had suspended production of the collector versions of the coins. By law, the US Mint is required to provide bullion coins "in quantities sufficient to meet public demand." Because they were unable to meet full demand, they had been diverting their entire supply of blanks to the production of bullion coins in lieu of producing any collector coins.
Read Entire Article
The news comes via a brief memorandum sent to authorized purchasers of US Mint bullion coins, which stated, "Effective immediately, the United States is lifting the allocation process. You may place your orders under the standard ordering procedures."
Gold and Silver Eagle Bullion Coin Shortage and Rationing
The US Mint sells gold and silver bullion coins through a network of authorized purchasers. Last year, heavy demand and a tight supply of precious metals blanks had forced the US Mint to temporarily suspend sales of bullion coins and eventually instate allocation programs. These programs limited the number of gold and silver bullion coins that authorized purchasers could order.
The US Mint would divide weekly bullion coin production into two pools. The first pool would be divided equally amongst authorized purchasers, and the second would be divided based on past sales performance. The silver allocation program had been in place since April 2008, and the gold allocation program had been in place since August 2008.
In recent months there had been signs that the heavy demand and tight supply, which necessitated the allocation programs, were easing. After reaching extreme levels during the shortage, premiums for bullion coins charged by precious metals dealers were finally dropping. At the height of the Silver Eagle shortage, bullion coins carried premiums as high as $4.50 per coin. Since last month, these premiums have declined back to their historical norms around $2.00 per coin.
Another sign had been a recent decline in monthly sales levels for the US Mint's gold and silver bullion coins. For 2009, sales had recorded month to month increases before peaking and finally declining. Sales of Silver Eagle bullion coins had risen to a peak of 3,132,000 ounces in March, before receding in April, and falling further in May to 1,904,500 ounces. Sales of Gold Eagle bullion coins had reached a peak of 147,500 ounces in April, before dropping to 65,000 in May. Notably, even the reduced sales figures from last month remain far above year over year and historical sales comparisons.
Gold and Silver Eagle Collector Coins on the Horizon?
The end of the allocation program should be welcome news for coin collectors. Because of the high demand for gold and silver bullion coins, the US Mint had suspended production of the collector versions of the coins. By law, the US Mint is required to provide bullion coins "in quantities sufficient to meet public demand." Because they were unable to meet full demand, they had been diverting their entire supply of blanks to the production of bullion coins in lieu of producing any collector coins.
Read Entire Article
Tuesday, June 16, 2009
Eveillard: Buying Gold
Legendary mutual fund manager Jean-Marie Eveillard, now senior advisor to First Eagle Global Fund, sees a fragile economic recovery coming soon.
A rebound is in sight, “because there’s enough stimulus that has been put in place both from a monetary and a fiscal standpoint,” he tells Bloomberg TV.
“So at some point within the next six to 12 months there will be some kind of recovery.”
The bad news: “I’m not sure growth will come in time” to help earnings, Eveillard says.
“The key question within a few months will be will the recovery be a typical post-World War II recovery? In other words will it go on for three to five years or will it peter out or run into obstacles fairly quickly.”
Eveillard thinks the latter is highly possible.
First Eagle has 10 percent to 12 percent of its assets in gold and gold mining securities to “protect against the fact that current policy by the American government and the Fed are potentially wildly inflationary,” he says.
Eveillard also recommends investing in Asia. “If you look out five to 10 years, there will continue to be investment opportunities in the U.S., Europe and Japan,” he says.
“But the future is in Asia outside of Japan.”
By: Dan Weil
Read Entire Article
A rebound is in sight, “because there’s enough stimulus that has been put in place both from a monetary and a fiscal standpoint,” he tells Bloomberg TV.
“So at some point within the next six to 12 months there will be some kind of recovery.”
The bad news: “I’m not sure growth will come in time” to help earnings, Eveillard says.
“The key question within a few months will be will the recovery be a typical post-World War II recovery? In other words will it go on for three to five years or will it peter out or run into obstacles fairly quickly.”
Eveillard thinks the latter is highly possible.
First Eagle has 10 percent to 12 percent of its assets in gold and gold mining securities to “protect against the fact that current policy by the American government and the Fed are potentially wildly inflationary,” he says.
Eveillard also recommends investing in Asia. “If you look out five to 10 years, there will continue to be investment opportunities in the U.S., Europe and Japan,” he says.
“But the future is in Asia outside of Japan.”
By: Dan Weil
Read Entire Article
U.S. likely to lose AAA rating: Prechter
NEW YORK (Reuters) - Technical analyst Robert Prechter on Monday said he sees the United States losing its top AAA credit rating by the end of 2010, as he stuck by a deeply bearish outlook on the U.S. economy and stock market.
Prechter, known for predicting the 1987 stock market crash, joins a growing coterie of market heavyweights in forecasting the United States will lose its top credit rating as the government issues trillions of dollars in debt to fund efforts to bail out the economy.
Fears about the long-term vulnerability of the prized U.S. credit rating came to the fore after Standard & Poor's in May lowered its outlook on Britain, threatening the UK's top AAA rating. That move raised fears that the United States could face a similar risk, with the hefty amounts of government debt issued in both countries to pay for financial rescues causing budget deficits to swell.
Prechter, speaking at the Reuters Investment Outlook Summit in New York, said he sees investors' confidence in an economic rebound fading, a trend that will drag the S&P 500 stock index .SPX well below the March 6 intraday low of 666.79 by the end of this year or early next.
"There will be a leg down in stock prices, and it will affect all other areas," including corporate bonds and commodities, said Prechter, who is executive officer at research company Elliott Wave International, based in Gainesville, Georgia.
Prechter, who is known for his bearish views, has repeatedly forecast a steep decline in stocks this year, even as the stock market has rebounded from 12-year lows set in March as optimism about an economic recovery has risen.
Despite the government and Federal Reserve's massive rescues for financial companies and securities markets, Prechter expects credit markets to clam up again as they did in the first phase of the global financial crisis and for the U.S. economy to sink into a depression.
Although U.S. banks' recently passed government "stress tests" that assessed the adequacy of their capital levels to absorb losses and have been able to raise some capital in debt and equity markets, "the banking sector is in severe trouble," as more loans turn bad, he said.
The economy "is obviously heading toward a depression," despite the government's efforts to dodge one, said Prechter.
By John Parry
Read Entire Article
Prechter, known for predicting the 1987 stock market crash, joins a growing coterie of market heavyweights in forecasting the United States will lose its top credit rating as the government issues trillions of dollars in debt to fund efforts to bail out the economy.
Fears about the long-term vulnerability of the prized U.S. credit rating came to the fore after Standard & Poor's in May lowered its outlook on Britain, threatening the UK's top AAA rating. That move raised fears that the United States could face a similar risk, with the hefty amounts of government debt issued in both countries to pay for financial rescues causing budget deficits to swell.
Prechter, speaking at the Reuters Investment Outlook Summit in New York, said he sees investors' confidence in an economic rebound fading, a trend that will drag the S&P 500 stock index .SPX well below the March 6 intraday low of 666.79 by the end of this year or early next.
"There will be a leg down in stock prices, and it will affect all other areas," including corporate bonds and commodities, said Prechter, who is executive officer at research company Elliott Wave International, based in Gainesville, Georgia.
Prechter, who is known for his bearish views, has repeatedly forecast a steep decline in stocks this year, even as the stock market has rebounded from 12-year lows set in March as optimism about an economic recovery has risen.
Despite the government and Federal Reserve's massive rescues for financial companies and securities markets, Prechter expects credit markets to clam up again as they did in the first phase of the global financial crisis and for the U.S. economy to sink into a depression.
Although U.S. banks' recently passed government "stress tests" that assessed the adequacy of their capital levels to absorb losses and have been able to raise some capital in debt and equity markets, "the banking sector is in severe trouble," as more loans turn bad, he said.
The economy "is obviously heading toward a depression," despite the government's efforts to dodge one, said Prechter.
By John Parry
Read Entire Article
Monday, June 15, 2009
US Cities May Have to be Bulldozed in Order to Survive
Dozens of US cities may have entire neighbourhoods bulldozed as part of drastic "shrink to survive" proposals being considered by the Obama administration to tackle economic decline.
The government looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature.
Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area
The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint.
Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country.
Mr Kildee said he will concentrate on 50 cities, identified in a recent study by the Brookings Institution, an influential Washington think-tank, as potentially needing to shrink substantially to cope with their declining fortunes.
Most are former industrial cities in the "rust belt" of America's Mid-West and North East. They include Detroit, Philadelphia, Pittsburgh, Baltimore and Memphis.
In Detroit, shattered by the woes of the US car industry, there are already plans to split it into a collection of small urban centres separated from each other by countryside.
"The real question is not whether these cities shrink – we're all shrinking – but whether we let it happen in a destructive or sustainable way," said Mr Kildee. "Decline is a fact of life in Flint. Resisting it is like resisting gravity."
Karina Pallagst, director of the Shrinking Cities in a Global Perspective programme at the University of California, Berkeley, said there was "both a cultural and political taboo" about admitting decline in America.
"Places like Flint have hit rock bottom. They're at the point where it's better to start knocking a lot of buildings down," she said.
Flint, sixty miles north of Detroit, was the original home of General Motors. The car giant once employed 79,000 local people but that figure has shrunk to around 8,000.
Unemployment is now approaching 20 per cent and the total population has almost halved to 110,000.
Read Entire Article
The government looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature.
Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area
The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint.
Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country.
Mr Kildee said he will concentrate on 50 cities, identified in a recent study by the Brookings Institution, an influential Washington think-tank, as potentially needing to shrink substantially to cope with their declining fortunes.
Most are former industrial cities in the "rust belt" of America's Mid-West and North East. They include Detroit, Philadelphia, Pittsburgh, Baltimore and Memphis.
In Detroit, shattered by the woes of the US car industry, there are already plans to split it into a collection of small urban centres separated from each other by countryside.
"The real question is not whether these cities shrink – we're all shrinking – but whether we let it happen in a destructive or sustainable way," said Mr Kildee. "Decline is a fact of life in Flint. Resisting it is like resisting gravity."
Karina Pallagst, director of the Shrinking Cities in a Global Perspective programme at the University of California, Berkeley, said there was "both a cultural and political taboo" about admitting decline in America.
"Places like Flint have hit rock bottom. They're at the point where it's better to start knocking a lot of buildings down," she said.
Flint, sixty miles north of Detroit, was the original home of General Motors. The car giant once employed 79,000 local people but that figure has shrunk to around 8,000.
Unemployment is now approaching 20 per cent and the total population has almost halved to 110,000.
Read Entire Article
Property Rights Take a Hit
By Peter Schiff - europac.net
“Crony capitalism” is a term often applied to foreign nations where government interference circumvents market forces. The practice is widely associated with tin-pot dictators and second-rate economies. In such a system, support for the ruling regime is the best and only path to economic success. Who you know supersedes what you know, and favoritism trumps the rule of law. Unfortunately, this week’s events demonstrate that the phrase now more aptly describes our own country.
On Monday, the Supreme Court refused to hear an appeal from Chrysler’s secured creditors based on the government’s argument that the needs of other stakeholders outweighed those of a few creditors. In this case, the Administration concluded the interests of the United Auto Workers outweighed the interests of the Indiana teachers and firemen whose pension fund sued to block the restructuring. Given the enormous financial support that the UAW poured into the Obama campaign, such partiality is hardly surprising.
When making their investment in Chrysler just a few months ago, the Indiana pension fund agreed to commit capital because of the specific assurances received from the company. In allowing this sham bankruptcy to be crammed through the courts, we have shredded the vital principal of the rule of law, and have become a nation of men, rather than one of laws.
The risk that legal contracts can now be arbitrarily set aside will make investors think twice before committing capital to distressed corporations. Oftentimes enforcing contracts imposes hardships. That’s precisely why we have contracts.
Without absolute faith that deals will be honored, it will be extremely difficult for U.S. companies to borrow money. This will be particularly true for those companies already struggling with too much debt. Without the ability to issue secured debt, how will such companies access the necessary capital to turn around? If secured creditors cannot count on the courts to enforce their claims, they will not put their capital at risk. What good is being a secured creditor if courts can allow the assets securing your claim to be sold for the benefit of others?
Another problem with the government imposing losses on secured Chrysler creditors is that in its bailouts of financial companies (like Citigroup and AIG), the government took steps to specifically pay back creditors, even when those creditors should have been wiped out. This inconsistency and lack of equal protection further undermines faith in our economy.
The message here is clear: loan money to financial entities with friends in Washington and no matter how risky the loan, taxpayers will bail you out if it goes bad. However, loan money to a unionized manufacturer, even if prudently secured by real assets, and you have as much chance of getting your money back as finding Jimmy Hoffa’s body.
As if this wasn’t bad enough, testimony on Thursday from former Bank of America CEO Ken Lewis revealed a concerted effort on the part of Fed Chairman Ben Bernanke and former Treasury Secretary Henry Paulson to pressure Lewis into hiding relevant financial information regarding Merrill Lynch losses from B of A shareholders. Recently released e-mails make it clear that the government threatened to remove corporate leaders if they failed to go through with the merger and keep quiet about the losses.
Again, the justification for the interference seemed to be the “greater economic good” the merger would serve. The right of B of A shareholders to be informed that their company was about to buy a financial black hole was clearly considered to be an acceptable sacrifice.
More importantly, the fact that two of the highest-ranking government officials can conspire to violate both securities laws and private property rights is abhorrent to everything America supposedly stands for. If they get away with it, which I believe they will, the precedent and the message will be chilling.
As a broker who specializes in foreign investments, I am always wary of political risk. I must consider how the threat of arbitrary government action could undermine the value of my investments. However, recent events show that political risk is now greater here than abroad, and U.S. assets, which have historically traded at premium valuations based on faith in our legal system, will soon trade at discounts to reflect this new threat. The fear of having contracts abrogated or property rights violated when doing so serves some contrived greater good will substantially raise our cost of capital and further reduce our competitiveness.
For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read Peter Schiff’s book "Crash Proof: How to Profit from the Coming Economic Collapse".
Read Entire Article
“Crony capitalism” is a term often applied to foreign nations where government interference circumvents market forces. The practice is widely associated with tin-pot dictators and second-rate economies. In such a system, support for the ruling regime is the best and only path to economic success. Who you know supersedes what you know, and favoritism trumps the rule of law. Unfortunately, this week’s events demonstrate that the phrase now more aptly describes our own country.
On Monday, the Supreme Court refused to hear an appeal from Chrysler’s secured creditors based on the government’s argument that the needs of other stakeholders outweighed those of a few creditors. In this case, the Administration concluded the interests of the United Auto Workers outweighed the interests of the Indiana teachers and firemen whose pension fund sued to block the restructuring. Given the enormous financial support that the UAW poured into the Obama campaign, such partiality is hardly surprising.
When making their investment in Chrysler just a few months ago, the Indiana pension fund agreed to commit capital because of the specific assurances received from the company. In allowing this sham bankruptcy to be crammed through the courts, we have shredded the vital principal of the rule of law, and have become a nation of men, rather than one of laws.
The risk that legal contracts can now be arbitrarily set aside will make investors think twice before committing capital to distressed corporations. Oftentimes enforcing contracts imposes hardships. That’s precisely why we have contracts.
Without absolute faith that deals will be honored, it will be extremely difficult for U.S. companies to borrow money. This will be particularly true for those companies already struggling with too much debt. Without the ability to issue secured debt, how will such companies access the necessary capital to turn around? If secured creditors cannot count on the courts to enforce their claims, they will not put their capital at risk. What good is being a secured creditor if courts can allow the assets securing your claim to be sold for the benefit of others?
Another problem with the government imposing losses on secured Chrysler creditors is that in its bailouts of financial companies (like Citigroup and AIG), the government took steps to specifically pay back creditors, even when those creditors should have been wiped out. This inconsistency and lack of equal protection further undermines faith in our economy.
The message here is clear: loan money to financial entities with friends in Washington and no matter how risky the loan, taxpayers will bail you out if it goes bad. However, loan money to a unionized manufacturer, even if prudently secured by real assets, and you have as much chance of getting your money back as finding Jimmy Hoffa’s body.
As if this wasn’t bad enough, testimony on Thursday from former Bank of America CEO Ken Lewis revealed a concerted effort on the part of Fed Chairman Ben Bernanke and former Treasury Secretary Henry Paulson to pressure Lewis into hiding relevant financial information regarding Merrill Lynch losses from B of A shareholders. Recently released e-mails make it clear that the government threatened to remove corporate leaders if they failed to go through with the merger and keep quiet about the losses.
Again, the justification for the interference seemed to be the “greater economic good” the merger would serve. The right of B of A shareholders to be informed that their company was about to buy a financial black hole was clearly considered to be an acceptable sacrifice.
More importantly, the fact that two of the highest-ranking government officials can conspire to violate both securities laws and private property rights is abhorrent to everything America supposedly stands for. If they get away with it, which I believe they will, the precedent and the message will be chilling.
As a broker who specializes in foreign investments, I am always wary of political risk. I must consider how the threat of arbitrary government action could undermine the value of my investments. However, recent events show that political risk is now greater here than abroad, and U.S. assets, which have historically traded at premium valuations based on faith in our legal system, will soon trade at discounts to reflect this new threat. The fear of having contracts abrogated or property rights violated when doing so serves some contrived greater good will substantially raise our cost of capital and further reduce our competitiveness.
For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read Peter Schiff’s book "Crash Proof: How to Profit from the Coming Economic Collapse".
Read Entire Article
Foreign demand for US financial assets falls
Foreign demand for long-term US financial assets falls in April; China, Japan cut holdings
WASHINGTON (AP) -- Foreign demand for long-term U.S. financial assets fell in April as both China and Japan trimmed their holdings of Treasury securities.
The Treasury Department said Monday that net purchases of stocks, notes and bonds obtained by foreigners fell to $11.2 billion in April, from $55.4 billion in March.
Treasury Secretary Timothy Geithner traveled to Beijing earlier this month to assure the Chinese government that the Obama administration is determined to get control of an exploding U.S. budget deficit, which is projected to hit a record $1.84 trillion this year.
China's holdings of Treasury securities represent about 10 percent of America's publicly held debt.
Martin Crutsinger, AP Economics Writer
Read Entire Article
WASHINGTON (AP) -- Foreign demand for long-term U.S. financial assets fell in April as both China and Japan trimmed their holdings of Treasury securities.
The Treasury Department said Monday that net purchases of stocks, notes and bonds obtained by foreigners fell to $11.2 billion in April, from $55.4 billion in March.
Treasury Secretary Timothy Geithner traveled to Beijing earlier this month to assure the Chinese government that the Obama administration is determined to get control of an exploding U.S. budget deficit, which is projected to hit a record $1.84 trillion this year.
China's holdings of Treasury securities represent about 10 percent of America's publicly held debt.
Martin Crutsinger, AP Economics Writer
Read Entire Article
Friday, June 12, 2009
Central Banks to Add More Gold?
LONDON, June 11 (Reuters) - Central banks may be justified in increasing their gold holdings to 40-50 percent of their reserves, a senior executive of the industry-funded World Gold Council said on Thursday.
'Central banks are justified in having high gold weightings. They are justified in having a 40-50 percent weighting in gold,' Marcus Grubb, WGC's managing director of investment, research and marketing told delegates at a conference organised by ETF Securities.
He said the current macroeconomic environment supported gold buying: 'It is not only about the dollar, not only about diversification, but also about future inflation,' he said.
There were signs that a number of Asian central banks were adding to their gold reserves, he added.
Reporting by Jan Harvey; Editing by Peter Blackburn
Read Entire Article
'Central banks are justified in having high gold weightings. They are justified in having a 40-50 percent weighting in gold,' Marcus Grubb, WGC's managing director of investment, research and marketing told delegates at a conference organised by ETF Securities.
He said the current macroeconomic environment supported gold buying: 'It is not only about the dollar, not only about diversification, but also about future inflation,' he said.
There were signs that a number of Asian central banks were adding to their gold reserves, he added.
Reporting by Jan Harvey; Editing by Peter Blackburn
Read Entire Article
Thursday, June 11, 2009
We Wish it Were Satire - Schiff on the Daily Show
Wednesday, June 10, 2009
Idiocracy Reigns Supreme
Peter Schiff exchanges blows with Michael Mussa from The Peter G. Peterson Institute for International Economics.
Inflation and Higher Interest Rates
The unprecedented expansion of the money supply could make the '70s look benign..
Rahm Emanuel was only giving voice to widespread political wisdom when he said that a crisis should never be "wasted." Crises enable vastly accelerated political agendas and initiatives scarcely conceivable under calmer circumstances. So it goes now.
Here we stand more than a year into a grave economic crisis with a projected budget deficit of 13% of GDP. That's more than twice the size of the next largest deficit since World War II. And this projected deficit is the culmination of a year when the federal government, at taxpayers' expense, acquired enormous stakes in the banking, auto, mortgage, health-care and insurance industries.
With the crisis, the ill-conceived government reactions, and the ensuing economic downturn, the unfunded liabilities of federal programs -- such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid -- are over the $100 trillion mark. With U.S. GDP and federal tax receipts at about $14 trillion and $2.4 trillion respectively, such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.
But as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s.
About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base -- which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash -- by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position.
By ARTHUR B. LAFFER
Read Entire Article
Rahm Emanuel was only giving voice to widespread political wisdom when he said that a crisis should never be "wasted." Crises enable vastly accelerated political agendas and initiatives scarcely conceivable under calmer circumstances. So it goes now.
Here we stand more than a year into a grave economic crisis with a projected budget deficit of 13% of GDP. That's more than twice the size of the next largest deficit since World War II. And this projected deficit is the culmination of a year when the federal government, at taxpayers' expense, acquired enormous stakes in the banking, auto, mortgage, health-care and insurance industries.
With the crisis, the ill-conceived government reactions, and the ensuing economic downturn, the unfunded liabilities of federal programs -- such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid -- are over the $100 trillion mark. With U.S. GDP and federal tax receipts at about $14 trillion and $2.4 trillion respectively, such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.
But as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s.
About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base -- which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash -- by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position.
By ARTHUR B. LAFFER
Read Entire Article
Tuesday, June 9, 2009
IMF Says New Reserve Currency to Replace Dollar Is Possible
June 6 (Bloomberg) -- The International Monetary Fund said it’s possible to take the “revolutionary” step of creating a new global reserve currency to replace the dollar over time.
The IMF’s so-called special drawing rights could be used as the basis for a new currency, First Deputy Managing Director John Lipsky told a panel discussing reserve currencies at the St. Petersburg International Economic Forum today.
“There are many, many attractions in the long run to such an outcome,” Lipsky told a panel discussing reserve currencies at the St. Petersburg International Economic Forum today. “But this is not a quick, short or easy decision,” he said, adding that it would be “quite revolutionary.”
The SDRs would have to be delinked from other currencies and issued by an international organization with equivalent authority to a central bank in order to become liquid enough to be used as a reserve, he said.
As much as 70 percent of the world’s currency reserves are held in dollars, according to the IMF, leading to calls for nations to diversify their cashpiles to avoid excessive exposure to the U.S. economy as it quadruples its budget deficit in a bid to counter the worst recession since the Great Depression.
The dollar fell on June 3 to its lowest level in 2009 against the euro on concern that the ballooning deficit would sap demand for Treasuries among foreign investors and central banks.
“The largest debtor is very unlikely to dominate any currency arrangement today,” said Ousmene Mandeng, head of Ashmore Investment Management Ltd.’s public sector investment advisory.
By Alexander Nicholson
Read Entire Article
The IMF’s so-called special drawing rights could be used as the basis for a new currency, First Deputy Managing Director John Lipsky told a panel discussing reserve currencies at the St. Petersburg International Economic Forum today.
“There are many, many attractions in the long run to such an outcome,” Lipsky told a panel discussing reserve currencies at the St. Petersburg International Economic Forum today. “But this is not a quick, short or easy decision,” he said, adding that it would be “quite revolutionary.”
The SDRs would have to be delinked from other currencies and issued by an international organization with equivalent authority to a central bank in order to become liquid enough to be used as a reserve, he said.
As much as 70 percent of the world’s currency reserves are held in dollars, according to the IMF, leading to calls for nations to diversify their cashpiles to avoid excessive exposure to the U.S. economy as it quadruples its budget deficit in a bid to counter the worst recession since the Great Depression.
The dollar fell on June 3 to its lowest level in 2009 against the euro on concern that the ballooning deficit would sap demand for Treasuries among foreign investors and central banks.
“The largest debtor is very unlikely to dominate any currency arrangement today,” said Ousmene Mandeng, head of Ashmore Investment Management Ltd.’s public sector investment advisory.
By Alexander Nicholson
Read Entire Article
“87 Percent of [Chinese] Respondents Believe China’s Dollar-Assets are Unsafe”
Washington’s Blog
Tuesday, June 9, 2009
Remember how the Chinese laughed at Geithner when he said their American investments were safe?
The laughter was not just the opinion of those sitting in the audience listening to Geithner’s speech.
The laughter was not just the opinion of those sitting in the audience listening to Geithner’s speech.
One of China’s official newspapers, The Global Times, reports that an online poll of Chinese citizens found that 87 percent of respondents believe China’s dollar-assets are unsafe.
The paper concluded, “Ordinary Chinese people are discontent with the declining value of China’s huge foreign exchange reserves denominated in U.S. dollars.”
Read Entire Article
Tuesday, June 9, 2009
Remember how the Chinese laughed at Geithner when he said their American investments were safe?
The laughter was not just the opinion of those sitting in the audience listening to Geithner’s speech.
The laughter was not just the opinion of those sitting in the audience listening to Geithner’s speech.
One of China’s official newspapers, The Global Times, reports that an online poll of Chinese citizens found that 87 percent of respondents believe China’s dollar-assets are unsafe.
The paper concluded, “Ordinary Chinese people are discontent with the declining value of China’s huge foreign exchange reserves denominated in U.S. dollars.”
Read Entire Article
The Coming Economic Collapse
Yesterday I outlined how the mainstream financial media is completely overlooking the similarities between this latest rally and the one leading into the summer of 2008.
Today, I am beginning a three part series explaining why I expect this fall (3Q09) to be as bad, if not worse, than last year’s in real terms, why Obama’s stimulus plan is too small to accomplish anything, why the US is entering a Depression, possibly a Great Depression, and what is the most likely outcome for the US in financial terms going forward.
Today, I’ll be focusing on the issues that brought us to this current mess.
The seeds of today’s crisis were first sown in 1971 when the US formally opened trade with China. In an effort to boost profits, large scale US manufacturers and other multinational firms began outsourcing their manufacturing jobs to the People’s Republic soon after.
When other industries realized the kind of money that can be saved by sending work overseas, they soon followed suit. Outsourcing moved up the corporate food chain until even R&D jobs and other high-level, high-skill set jobs were shifted to Asia. This, of course, diminished the number of these positions in the US. Thus began three major trends:
1) The US’s economic shift from manufacturing to services (mainly financial)
2) The massive drop in US incomes
3) The beginning of the debt bubble
Nothing illustrates the first point like the rise of the financials sector. From 1970 until 2003, financials’ market capitalizations as a percentage of the S&P 500 rose from less than 5% to 22%. Over the same period, financials’ earnings as a percentage of the S&P 500’s total earnings rose from less than 10% to 31%.
Put another way, by 2007 one in every three dollars of corporate profits came from the financial sector. Meanwhile, China was experiencing an unprecedented level of growth thanks to our renewed trade: Chinese per-capita income doubled from 1978 to 1987 and again from 1987 to 1996.
Now, fewer jobs in the US means lower US incomes. Going by the Federal government’s official (inaccurate) data, weekly US incomes peaked in October 1972 and have since fallen 15%. Of course, these numbers are based on official inflation data which is horribly under-stated. According to John Williams of www.shadowstats.com, if you were to go by actual inflationary data, US incomes have fallen more like 40% since 1972.
This fact stares us in the face everyday, though no one really notices it. In the early ‘70s, typically one parent worked and the other stayed home. Today, BOTH parents work and most Americans are barely getting by.
The reason why we didn’t notice the drop in quality of life before was because of one thing:
Credit.
Credit cards had been in use since the ‘50s, but they had yet to catch on, largely because banks couldn’t make obscene profits from them (the interest rates they could charge were limited on a state-by-state basis).
Then, in 1978, the Supreme Court passed a law stating that banks could charge their cardholders any rate allowed in the bank's home state. With this ruling, credit cards suddenly had the potential to become a major profit center for banks. Large banks immediately shifted their credit card operations to states where there were no limits on interest rates (Delaware and South Dakota).
Credit creates the illusion of wealth (or in the US’s case for the last 30 years, the illusion of maintaining the same standard of living) because you’re able to spend more than you make or spend money without paying upfront. Americans, earning less and facing rising costs of living, gradually began their descent into indebtedness: between 1980 and 1990, credit card spending average household credit card balances quadrupled.
In this manner, the average American didn’t notice that his or her quality of life was deteriorating at a rate of about 2-3% a year. Similarly, he or she didn’t notice that more and more jobs (of greater and greater technical expertise) were shifting overseas.
And thus began the epic shift in American wealth to Wall Street (the rise in the financial industry) and China (the producer of cheap goods we had to buy due to the drop in incomes).
On Monday I’ll detail how the debt bubble encapsulated the US government and why Obama’s Stimulus won’t accomplish anything in terms of fixing the economy. Until then…
Read Entire Article
Today, I am beginning a three part series explaining why I expect this fall (3Q09) to be as bad, if not worse, than last year’s in real terms, why Obama’s stimulus plan is too small to accomplish anything, why the US is entering a Depression, possibly a Great Depression, and what is the most likely outcome for the US in financial terms going forward.
Today, I’ll be focusing on the issues that brought us to this current mess.
The seeds of today’s crisis were first sown in 1971 when the US formally opened trade with China. In an effort to boost profits, large scale US manufacturers and other multinational firms began outsourcing their manufacturing jobs to the People’s Republic soon after.
When other industries realized the kind of money that can be saved by sending work overseas, they soon followed suit. Outsourcing moved up the corporate food chain until even R&D jobs and other high-level, high-skill set jobs were shifted to Asia. This, of course, diminished the number of these positions in the US. Thus began three major trends:
1) The US’s economic shift from manufacturing to services (mainly financial)
2) The massive drop in US incomes
3) The beginning of the debt bubble
Nothing illustrates the first point like the rise of the financials sector. From 1970 until 2003, financials’ market capitalizations as a percentage of the S&P 500 rose from less than 5% to 22%. Over the same period, financials’ earnings as a percentage of the S&P 500’s total earnings rose from less than 10% to 31%.
Put another way, by 2007 one in every three dollars of corporate profits came from the financial sector. Meanwhile, China was experiencing an unprecedented level of growth thanks to our renewed trade: Chinese per-capita income doubled from 1978 to 1987 and again from 1987 to 1996.
Now, fewer jobs in the US means lower US incomes. Going by the Federal government’s official (inaccurate) data, weekly US incomes peaked in October 1972 and have since fallen 15%. Of course, these numbers are based on official inflation data which is horribly under-stated. According to John Williams of www.shadowstats.com, if you were to go by actual inflationary data, US incomes have fallen more like 40% since 1972.
This fact stares us in the face everyday, though no one really notices it. In the early ‘70s, typically one parent worked and the other stayed home. Today, BOTH parents work and most Americans are barely getting by.
The reason why we didn’t notice the drop in quality of life before was because of one thing:
Credit.
Credit cards had been in use since the ‘50s, but they had yet to catch on, largely because banks couldn’t make obscene profits from them (the interest rates they could charge were limited on a state-by-state basis).
Then, in 1978, the Supreme Court passed a law stating that banks could charge their cardholders any rate allowed in the bank's home state. With this ruling, credit cards suddenly had the potential to become a major profit center for banks. Large banks immediately shifted their credit card operations to states where there were no limits on interest rates (Delaware and South Dakota).
Credit creates the illusion of wealth (or in the US’s case for the last 30 years, the illusion of maintaining the same standard of living) because you’re able to spend more than you make or spend money without paying upfront. Americans, earning less and facing rising costs of living, gradually began their descent into indebtedness: between 1980 and 1990, credit card spending average household credit card balances quadrupled.
In this manner, the average American didn’t notice that his or her quality of life was deteriorating at a rate of about 2-3% a year. Similarly, he or she didn’t notice that more and more jobs (of greater and greater technical expertise) were shifting overseas.
And thus began the epic shift in American wealth to Wall Street (the rise in the financial industry) and China (the producer of cheap goods we had to buy due to the drop in incomes).
On Monday I’ll detail how the debt bubble encapsulated the US government and why Obama’s Stimulus won’t accomplish anything in terms of fixing the economy. Until then…
Read Entire Article
Monday, June 8, 2009
The Geography of Jobs
This animated map provides a striking visual of employment trends over the last business cycle using net change in jobs from the U.S. Bureau of Labor Statistics on a rolling 12-month basis. We used this approach to provide the smoothest possible visual depiction of ongoing employment dynamics at the MSA level. By animating the data, the map highlights a number of concurrent trends leading up to the nation’s present economic crisis. The graphic highlights the 100 largest metropolitan areas so that regional trends can be more easily identified.
Click Here:
The Geography of Jobs - TIP Strategies
Click Here:
The Geography of Jobs - TIP Strategies
Fed Intends to Hire Lobbyist in Campaign to Buttress Its Image
(Bloomberg) -- The Federal Reserve intends to hire a veteran lobbyist as it seeks to counter skepticism in Congress about the central bank’s growing power over the U.S. financial system, people familiar with the matter said.
Linda Robertson currently handles government, community and public affairs at Johns Hopkins University in Baltimore, and headed the Washington lobbying office of Enron Corp., the energy trading company that collapsed in 2002 after an accounting scandal. She was also an adviser to all three of the Clinton administration’s Treasury secretaries.
Robertson would help the Fed manage relations with lawmakers seeking greater oversight of a central bank that has used emergency powers to prevent Wall Street’s demise. While she wasn’t tied to Enron’s fraud, her association with the firm may raise questions, analysts said.
“Some members of Congress think there are votes in attacking the Fed” after it “unnecessarily and unwisely entangled monetary policy with fiscal policy,” said former St. Louis Fed President William Poole. “The Fed is going to have a tricky time of unwinding what has been done” and will need to “keep in touch with members of Congress more thoroughly,” said Poole, now senior fellow with the Cato Institute in Washington.
Robertson served under Treasury Secretaries Lawrence Summers, Robert Rubin and Lloyd Bentsen. She didn’t return calls seeking comment.
Summers Tie
Summers now heads the White House National Economic Council. Along with Treasury Secretary Timothy Geithner, he is leading Obama administration efforts to broaden the economic rescue and overhaul financial regulation. He has been mentioned as a possible successor to Fed Chairman Ben S. Bernanke should Bernanke not be renominated when his term ends in January.
Robertson is likely to start at the Fed in July and have the title of senior adviser to the Board of Governors, the people familiar with the situation said.
She was considered for a senior post under Geithner at the Treasury but ran up against the Obama administration’s restrictions on hiring lobbyists, the people said.
“People have been asking whether the Fed is capable of getting its job done right,” said Lynn Turner, a former chief accountant at the Securities and Exchange Commission. “Hiring a former lobbyist from Enron will surely make one wonder.”
Lawmaker Pressure
Robertson would confront a range of issues in the newly created position. Congress is looking to subject the Fed to more scrutiny, and some lawmakers have suggested that district bank presidents should be confirmed by the Senate.
Some legislators have also expressed opposition to the Obama administration’s attempt to make the Fed the regulator in charge of financial companies deemed too-big-to-fail.
In addition, the central bank has been become a target to some members of Congress who’ve posted online videos of their interrogations of Fed officials during public hearings.
One YouTube clip, of Florida Democratic Representative Alan Grayson’s grilling of Inspector General Elizabeth Coleman, has garnered almost 500,000 views in about a month.
By Robert Schmidt
Read Entire Article
Linda Robertson currently handles government, community and public affairs at Johns Hopkins University in Baltimore, and headed the Washington lobbying office of Enron Corp., the energy trading company that collapsed in 2002 after an accounting scandal. She was also an adviser to all three of the Clinton administration’s Treasury secretaries.
Robertson would help the Fed manage relations with lawmakers seeking greater oversight of a central bank that has used emergency powers to prevent Wall Street’s demise. While she wasn’t tied to Enron’s fraud, her association with the firm may raise questions, analysts said.
“Some members of Congress think there are votes in attacking the Fed” after it “unnecessarily and unwisely entangled monetary policy with fiscal policy,” said former St. Louis Fed President William Poole. “The Fed is going to have a tricky time of unwinding what has been done” and will need to “keep in touch with members of Congress more thoroughly,” said Poole, now senior fellow with the Cato Institute in Washington.
Robertson served under Treasury Secretaries Lawrence Summers, Robert Rubin and Lloyd Bentsen. She didn’t return calls seeking comment.
Summers Tie
Summers now heads the White House National Economic Council. Along with Treasury Secretary Timothy Geithner, he is leading Obama administration efforts to broaden the economic rescue and overhaul financial regulation. He has been mentioned as a possible successor to Fed Chairman Ben S. Bernanke should Bernanke not be renominated when his term ends in January.
Robertson is likely to start at the Fed in July and have the title of senior adviser to the Board of Governors, the people familiar with the situation said.
She was considered for a senior post under Geithner at the Treasury but ran up against the Obama administration’s restrictions on hiring lobbyists, the people said.
“People have been asking whether the Fed is capable of getting its job done right,” said Lynn Turner, a former chief accountant at the Securities and Exchange Commission. “Hiring a former lobbyist from Enron will surely make one wonder.”
Lawmaker Pressure
Robertson would confront a range of issues in the newly created position. Congress is looking to subject the Fed to more scrutiny, and some lawmakers have suggested that district bank presidents should be confirmed by the Senate.
Some legislators have also expressed opposition to the Obama administration’s attempt to make the Fed the regulator in charge of financial companies deemed too-big-to-fail.
In addition, the central bank has been become a target to some members of Congress who’ve posted online videos of their interrogations of Fed officials during public hearings.
One YouTube clip, of Florida Democratic Representative Alan Grayson’s grilling of Inspector General Elizabeth Coleman, has garnered almost 500,000 views in about a month.
By Robert Schmidt
Read Entire Article
The Charm Offensive
(europac.net) - This week, Team Obama took their dog and pony show on the road. Treasury Secretary Geithner went to China, Fed Chairman Bernanke to Capitol Hill, and the President himself began a Mideast tour in Saudi Arabia.
Given the renewed weakness in the dollar and the recent expressions of concern from China, our largest creditor, about the safety of its current holdings, this is no easy sell. Not only must our leaders convince holders of our debt not to sell what they already own, but to back up the truck and buy a whole lot more. The hope is that a dream team consisting of a charismatic politician, a skilled Wall Street banker with longstanding ties to China, and a respected Fed Chairman, can close the deal. However, no matter how slick the sales pitch, no amount of lipstick can dress up this pig.
The most obvious fear the trio must address is that oversized deficits will persist indefinitely. Reading from a carefully scripted rebuttal book, all three proclaim that as soon as the stimulus revives our economy, the government will take all necessary steps to reign in the deficits that result. Bernanke’s testimony showcases this rhetorical shift. The Fed Chairman claimed that catastrophe has been averted and that the recession is nearly over. As a result, he advised Congress to now focus on debt management. How he expects them to do that was left unexamined.
Setting aside the fact that the recession is far from over and that the stimulus will actually weaken the economy in the long run, Bernanke’s words were less a practical guide to Congress than a bromide for our foreign creditors. Meanwhile, Obama carefully peppers his speeches with calls for Americans to live within their means, to save more and spend less, to produce more and consume less. But nothing in the government’s current fiscal or monetary policy will encourage such behavior. In fact, the objective of economic stimulus is to prevent such changes from taking place!
The laughter of Chinese students that greeted Secretary Geithner at Peking University shows how ridiculous this spiel sounds overseas. Actions speak louder than words, and the actions of the current Administration are deafening. Multi-trillion dollar deficits, bailouts, nationalizations, quantitative easing, and grandiose plans for government-provided healthcare, education, and alternative energy, render all their claims of future prudence meaningless. If our leaders will not make tough choices now, why should anyone believe they will do so later when those choices will be even harder to make?
Of course, it’s not just major holders, like China and Saudi Arabia, that need to be convinced. Since the largest holders are already in so deep, they have the greatest short-term incentive to play ball. While throwing good money after bad is certainly a lousy investment strategy, it is politically expedient as it delays the need to officially acknowledge losses. The spin is designed to keep all the smaller, more nimble holders from dumping their Treasuries. The major holders can publicly pledge their commitment to Treasuries, while they privately planning their exit strategies, as long as they feel that the smaller holders won’t spook the market by front-running their trades.
However, once the psychology turns, there is no way to stop the rush for the exits. Remember how quickly the secondary market for subprime mortgages collapsed? One day, investors were lining up to buy; the next day, the stuff couldn’t be given away. Make no mistake about it, we are issuing subprime paper and no amount of political spin can alter that reality. Bogus credit ratings aside, I think the world already knows this and it’s just a matter of time before someone admits it.
In the meantime, by continuing to lend, our creditors merely supply us the shovels to dig ourselves into an even deeper economic hole. Their credit enables our government to grow when it needs to shrink, finances bailouts of companies that should be allowed to fail, and enables a nation that should be saving and producing to continue borrowing and spending. As a result, the more money the world loans us, the less capable we are of paying it back. I really wish the world would stop doing us favors, as neither party can afford the consequences.
For an timely example, just look at California. With an unmanageable $20 billion deficit, California recently asked Washington for a bailout. With none immediately forthcoming, California was forced to make real and needed budget cuts. The hard choices, which will benefit California in the long run, would not have been made if federal funds had been committed. We all should be so lucky.
For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read Peter Schiff’s book "Crash Proof: How to Profit from the Coming Economic Collapse".
Read Entire Article
Given the renewed weakness in the dollar and the recent expressions of concern from China, our largest creditor, about the safety of its current holdings, this is no easy sell. Not only must our leaders convince holders of our debt not to sell what they already own, but to back up the truck and buy a whole lot more. The hope is that a dream team consisting of a charismatic politician, a skilled Wall Street banker with longstanding ties to China, and a respected Fed Chairman, can close the deal. However, no matter how slick the sales pitch, no amount of lipstick can dress up this pig.
The most obvious fear the trio must address is that oversized deficits will persist indefinitely. Reading from a carefully scripted rebuttal book, all three proclaim that as soon as the stimulus revives our economy, the government will take all necessary steps to reign in the deficits that result. Bernanke’s testimony showcases this rhetorical shift. The Fed Chairman claimed that catastrophe has been averted and that the recession is nearly over. As a result, he advised Congress to now focus on debt management. How he expects them to do that was left unexamined.
Setting aside the fact that the recession is far from over and that the stimulus will actually weaken the economy in the long run, Bernanke’s words were less a practical guide to Congress than a bromide for our foreign creditors. Meanwhile, Obama carefully peppers his speeches with calls for Americans to live within their means, to save more and spend less, to produce more and consume less. But nothing in the government’s current fiscal or monetary policy will encourage such behavior. In fact, the objective of economic stimulus is to prevent such changes from taking place!
The laughter of Chinese students that greeted Secretary Geithner at Peking University shows how ridiculous this spiel sounds overseas. Actions speak louder than words, and the actions of the current Administration are deafening. Multi-trillion dollar deficits, bailouts, nationalizations, quantitative easing, and grandiose plans for government-provided healthcare, education, and alternative energy, render all their claims of future prudence meaningless. If our leaders will not make tough choices now, why should anyone believe they will do so later when those choices will be even harder to make?
Of course, it’s not just major holders, like China and Saudi Arabia, that need to be convinced. Since the largest holders are already in so deep, they have the greatest short-term incentive to play ball. While throwing good money after bad is certainly a lousy investment strategy, it is politically expedient as it delays the need to officially acknowledge losses. The spin is designed to keep all the smaller, more nimble holders from dumping their Treasuries. The major holders can publicly pledge their commitment to Treasuries, while they privately planning their exit strategies, as long as they feel that the smaller holders won’t spook the market by front-running their trades.
However, once the psychology turns, there is no way to stop the rush for the exits. Remember how quickly the secondary market for subprime mortgages collapsed? One day, investors were lining up to buy; the next day, the stuff couldn’t be given away. Make no mistake about it, we are issuing subprime paper and no amount of political spin can alter that reality. Bogus credit ratings aside, I think the world already knows this and it’s just a matter of time before someone admits it.
In the meantime, by continuing to lend, our creditors merely supply us the shovels to dig ourselves into an even deeper economic hole. Their credit enables our government to grow when it needs to shrink, finances bailouts of companies that should be allowed to fail, and enables a nation that should be saving and producing to continue borrowing and spending. As a result, the more money the world loans us, the less capable we are of paying it back. I really wish the world would stop doing us favors, as neither party can afford the consequences.
For an timely example, just look at California. With an unmanageable $20 billion deficit, California recently asked Washington for a bailout. With none immediately forthcoming, California was forced to make real and needed budget cuts. The hard choices, which will benefit California in the long run, would not have been made if federal funds had been committed. We all should be so lucky.
For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read Peter Schiff’s book "Crash Proof: How to Profit from the Coming Economic Collapse".
Read Entire Article