The metal gains ground as the dollar slumps and investors bet inflation will rebound. Analysts see $1,000 an ounce on the horizon.
NEW YORK (CNNMoney.com) -- Gold prices charged higher Thursday, with another run at $1,000 an ounce looking increasingly likely, as the dollar remains weak and concerns about inflation boost demand for the metal.
Gold for August delivery rose $16.70 to settle at $982.30 an ounce after hitting an intra day high of $992.10 an ounce earlier this week.
The metal is up 11% from its mid April low of $869.50 an ounce as the U.S. dollar has tumbled against rival currencies. Gold and other commodities that are priced in dollars often gain ground when the greenback weakens.
The recent run up has raised bets that gold could top $1,000 an ounce for the third time ever. Gold rose to an all-time settlement high of $1,003.20 an ounce last year. It made another big push early this year, closing at $1001.80 an ounce Feb. 20.
In both cases, jittery investors flocked to the metal to preserve capital as the financial markets erupted in volatility.
This time around, however, gold is benefiting from concerns that the U.S. government's efforts to rescue the economy will result in higher rates of inflation. In addition to being a safe-haven, tangible assets such as gold are considered a hedge against rising prices.
Tom Pawlicki, a precious metals analyst at MF Global, thinks gold could top $1,000 as investors fret over the "funding demands of the U.S. government."
"Budget deficits create worries in the market that more money will have to be printed," he said. "The dollar will suffer in this environment."
The government has pumped billions of dollars into the economy to stabilize the financial system and revive the flow of credit, which has helped expand the nation's budget gap to unprecedented levels.
While inflation remains relatively tame, many analysts worry that it will become a problem as the economy recovers and the massive amount of liquidity in the market will have to be absorbed.
Looking ahead, Pawlicki said the rally could have some staying power, since large investment funds have shown renewed interest in the gold market following a mass exodus last year.
By Ben Rooney
Read Entire Article
Thursday, June 4, 2009
Hi-ho Silver!
White metal looks to outpace gold again, thanks to its industrial uses
NEW YORK (MarketWatch) -- Silver, which has topped gold and platinum to become the fastest rising precious metal this year, has a chance to keep outperforming thanks to its double use as both an inflation hedge and industrial material, analysts are forecasting.
But with higher returns come greater risks. Silver has proved much more volatile than gold, partly because fewer people trade the white metal than gold.
If "prices of precious metals turn higher across the board, silver will tend to move up faster," said Neil Meader, research director at London-based precious metals consultancy GFMS.
"If all the prices come off, you will see silver prices collapse much faster," he said.
The London fixing, a global benchmark for silver's spot trading, has rallied nearly 50% this year to near $16 an ounce, the highest level in 10 months, as investors piled into coins, bars, and silver exchange-traded funds such as iShare Silver Trust. Holdings in iShare Silver /quotes/comstock/13*!slv/quotes/nls/slv (SLV 15.65, +0.51, +3.37%) hit a record high this week.
The year-to-date gain in silver easily outpaced gold's 12% advance and has also outrun platinum's 30% increase
Read Entire Article
NEW YORK (MarketWatch) -- Silver, which has topped gold and platinum to become the fastest rising precious metal this year, has a chance to keep outperforming thanks to its double use as both an inflation hedge and industrial material, analysts are forecasting.
But with higher returns come greater risks. Silver has proved much more volatile than gold, partly because fewer people trade the white metal than gold.
If "prices of precious metals turn higher across the board, silver will tend to move up faster," said Neil Meader, research director at London-based precious metals consultancy GFMS.
"If all the prices come off, you will see silver prices collapse much faster," he said.
The London fixing, a global benchmark for silver's spot trading, has rallied nearly 50% this year to near $16 an ounce, the highest level in 10 months, as investors piled into coins, bars, and silver exchange-traded funds such as iShare Silver Trust. Holdings in iShare Silver /quotes/comstock/13*!slv/quotes/nls/slv (SLV 15.65, +0.51, +3.37%) hit a record high this week.
The year-to-date gain in silver easily outpaced gold's 12% advance and has also outrun platinum's 30% increase
Read Entire Article
Wednesday, June 3, 2009
Gross Says Diversify From Dollar as Deficits Surge
June 3 (Bloomberg) -- Bill Gross, founder of Pacific Investment Management Co., advised holders of U.S. dollars to diversify before central banks and sovereign wealth funds ultimately do the same amid concern about surging deficits.
Treasury Secretary Timothy Geithner’s plan to bring the budget back into balance won’t be successful as consumers shrink spending and the U.S. growth rate slows, Gross said in a Bloomberg Radio interview today. The budget deficit will be narrowed to “roughly” 3 percent of GDP from a projected 12.9 percent this year, Geithner said June 1.
“I think he’ll fail at pulling a balanced rabbit out of a hat,” Gross said from Pimco’s headquarters in Newport Beach, California. “They are talking about -- once the economy in the U.S. renormalizes -- the move back toward balance or much less of a deficit. I suspect that will be hard to do.”
Higher savings rates and an increase in the cost to service the national debt will drag on the U.S. economy, likely meaning “trillion-dollar deficits are here to stay,” Gross wrote in his June investment outlook posted today on the firm’s Web site.
Gross, manager of the world’s biggest bond fund, said on May 21 the U.S. will “eventually” lose its AAA credit rating after Standard & Poor’s lowered its outlook on the U.K.’s AAA to “negative” from “stable” amid an escalating ratio of debt- to-gross domestic product. While U.S. marketable debt is at about 45 percent of GDP, annual deficits of 10 percent will push the amount to 100 percent within five years, a level that rating companies and markets view as a “point of no return,” he wrote.
‘Years to Come’
Government spending will push the budget deficit to $1.845 trillion in the year ending Sept. 30, according to the Congressional Budget Office.
Federal Reserve Chairman Ben S. Bernanke said today that large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall.
The U.S. growth rate “requires a government checkbook for years to come,” Gross wrote. Coupled with Medicare and Social Security entitlements, government borrowing could reach 300 percent of GDP, meaning “the Chinese and other surplus nations cannot fund the deficit even if they were fully on board,” he wrote.
China, the largest U.S. creditor, with $767.9 billion of debt, has shifted purchases of Treasuries into shorter-maturity securities amid concern about unprecedented debt sales.
Yield Curve
Geithner, speaking yesterday in an interview in Beijing with Chinese state media outlets, said he has “found a lot of confidence” in the U.S. economy during his trip to China.
Investors should position themselves in the front end of the yield curve as long-term Treasury yields likely move higher, steepening the so-called yield curve, Gross wrote.
Gross reduced his holdings of government-related bonds in the $150 billion Total Return Fund in April for the first time since January, according to company data. In addition to Treasuries, the government debt category can include inflation- linked Treasuries, so-called agency debt, interest-rate derivatives and bank debt backed by the FDIC.
Yields on benchmark 10-year notes climbed as high as 3.75 percent on May 28, the most since November, rising from a record low of 2.04 percent on Dec. 18. the 10-year yield dropped three basis points today to 3.59 percent today.
Read Entire Article
Treasury Secretary Timothy Geithner’s plan to bring the budget back into balance won’t be successful as consumers shrink spending and the U.S. growth rate slows, Gross said in a Bloomberg Radio interview today. The budget deficit will be narrowed to “roughly” 3 percent of GDP from a projected 12.9 percent this year, Geithner said June 1.
“I think he’ll fail at pulling a balanced rabbit out of a hat,” Gross said from Pimco’s headquarters in Newport Beach, California. “They are talking about -- once the economy in the U.S. renormalizes -- the move back toward balance or much less of a deficit. I suspect that will be hard to do.”
Higher savings rates and an increase in the cost to service the national debt will drag on the U.S. economy, likely meaning “trillion-dollar deficits are here to stay,” Gross wrote in his June investment outlook posted today on the firm’s Web site.
Gross, manager of the world’s biggest bond fund, said on May 21 the U.S. will “eventually” lose its AAA credit rating after Standard & Poor’s lowered its outlook on the U.K.’s AAA to “negative” from “stable” amid an escalating ratio of debt- to-gross domestic product. While U.S. marketable debt is at about 45 percent of GDP, annual deficits of 10 percent will push the amount to 100 percent within five years, a level that rating companies and markets view as a “point of no return,” he wrote.
‘Years to Come’
Government spending will push the budget deficit to $1.845 trillion in the year ending Sept. 30, according to the Congressional Budget Office.
Federal Reserve Chairman Ben S. Bernanke said today that large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall.
The U.S. growth rate “requires a government checkbook for years to come,” Gross wrote. Coupled with Medicare and Social Security entitlements, government borrowing could reach 300 percent of GDP, meaning “the Chinese and other surplus nations cannot fund the deficit even if they were fully on board,” he wrote.
China, the largest U.S. creditor, with $767.9 billion of debt, has shifted purchases of Treasuries into shorter-maturity securities amid concern about unprecedented debt sales.
Yield Curve
Geithner, speaking yesterday in an interview in Beijing with Chinese state media outlets, said he has “found a lot of confidence” in the U.S. economy during his trip to China.
Investors should position themselves in the front end of the yield curve as long-term Treasury yields likely move higher, steepening the so-called yield curve, Gross wrote.
Gross reduced his holdings of government-related bonds in the $150 billion Total Return Fund in April for the first time since January, according to company data. In addition to Treasuries, the government debt category can include inflation- linked Treasuries, so-called agency debt, interest-rate derivatives and bank debt backed by the FDIC.
Yields on benchmark 10-year notes climbed as high as 3.75 percent on May 28, the most since November, rising from a record low of 2.04 percent on Dec. 18. the 10-year yield dropped three basis points today to 3.59 percent today.
Read Entire Article
Dollar's Fate Written in History
Debt-based monetary systems are inherently unstable. Money is created out of thin air by the banks and lent to government, consumers and businesses. In order to service and repay those debts, the borrowers take on more debts. Asset prices are inflated, and the vicious cycle continues until the debtors are unable to borrow or the banks are unwilling to lend.
At that point the system snaps, everything is sold off, and we have a financial crisis at hand. Here, we examine what happens to
equity and currency markets in the aftermath of financial crisis and deduce what will be the likely outcome for the United States as it emerges from the present crisis.
1998: Russia
Declining productivity, an artificially high fixed exchange rate between the rouble and foreign currencies to avoid public turmoil, and a chronic fiscal deficit were the background to Russia's financial meltdown in 1998. The estimated US$5.5 billion economic cost of the first war in Chechnya was also a cause.
Prior to the culmination of the economic crisis, the government-issued GKO bonds in a policy that has been described as similar to a Ponzi scheme, with the interest on matured obligations being paid off using the proceeds of newly issued obligations.
Two external shocks, the Asian financial crisis that had begun in 1997 and the following declines in demand for (and thus price of) crude oil and nonferrous metals, had a negative impact on Russian foreign exchange reserves. A political crisis came to a head in March when Russian president Boris Yeltsin dismissed prime minister Viktor Chernomyrdin and his entire cabinet in March.
The Asian crisis and related political events rattled investor confidence, caused foreign investors to sell off Russian stocks, bonds, and get out of roubles.
The amount of money involved in GKO bonds, at some $150 billion, was not a cause of concern for a $1 trillion economy. But with more than 30% of GKO bonds owned by foreigners, the foreign selloff caused havoc in equities, bonds and the rouble. The Russian broad equity index crashed by more than 90% from late 1997 to October 1998, and the rouble went from five roubles per US dollar to 30 per dollar in June 1999.
After the equity panic bottom was pressed in October 1998, the Russian equity index, measured in roubles, rebounded strongly in part thanks to the depreciating national currency. However, measured in US dollars, Russian stocks didn't make a full recovery until some five years later.
2001: Argentina
In 1998, Argentina officially entered a recession that lasted for three years and ended in a collapse as fears of the devaluation of the peso led to bank runs. This led to heightened protests and violence affecting many people and companies, causing several deaths.
In 2001, Argentina had $100 billion of national debt, which was about 40% of its gross domestic product. While the amount was containable relative to its GDP, the Argentineans made a mistake of denominating its debt in US dollars. With a shrinking current account surplus, the country wasn't able to raise dollars to pay debt principal and interest in 2001 and eventually repudiated on the foreign debts. The fixed exchange rate was removed and the peso was quickly devalued. The exchange rate was then left to float, causing further devaluation. The peso went from parity with the US dollar to four per dollar in early 2002.
The Argentine equity index plummeted 60% in 2001, and although it recovered fully in 2002 in nominal terms, it wasn't until 2004 that stocks come back to their pre-crisis level in US dollar terms.
Today: USA
The US has just experienced the biggest debt blowup known to man. Mortgages debts worth more than $1 trillion had to be bailed out. Lehman Brothers, Merrill Lynch, Bear Stearns, Countrywide, Fannie Mae and Freddie Mac have all become history. Even the iconic Citibank was brought to its knees and a stock price of $1 before the government bailout. The S&P 500 index halved in 12 months.
The US is privileged to have its dollars serving as the world's reserve currency. America's debt is denominated in dollars, which can be printed at will by the Federal Reserve - and print is what the Fed did, and continues to do, creating more than $1.5 trillion to bail out various groups.
The S&P 500 responded positively to monetary easing, rising 40% since March in nominal terms. It shouldn't be surprising to see the index recover to its pre-crisis level. Equities have to rise as in the cases of Russia and Argentina, when currencies had been massively devalued.
In real terms, however, when S&P 500 is measured in gold terms, it will likely take many years before the index recovers.
Where does the dollar go from here? When foreign investors took flight from Russian rubles and Argentine pesos, the dollar was the beneficiary. When global investors take flight from the dollar, which currency benefits?
Gold is the ultimate antithesis to the dollar. Gold is liquid, universally recognized and limited in quantity. Just like Russians and Argentines trying to anchor their currencies to the dollar, the US government devised various ways to slow down the rise of gold prices to maintain the dollar's soundness. However the massive money printing by the Fed and fast-eroding confidence in the dollar by international investors might just be the key to drive gold past the ellusive $1,000 per ounce level and not look back.
By John Lee
Read Entire Article
At that point the system snaps, everything is sold off, and we have a financial crisis at hand. Here, we examine what happens to
equity and currency markets in the aftermath of financial crisis and deduce what will be the likely outcome for the United States as it emerges from the present crisis.
1998: Russia
Declining productivity, an artificially high fixed exchange rate between the rouble and foreign currencies to avoid public turmoil, and a chronic fiscal deficit were the background to Russia's financial meltdown in 1998. The estimated US$5.5 billion economic cost of the first war in Chechnya was also a cause.
Prior to the culmination of the economic crisis, the government-issued GKO bonds in a policy that has been described as similar to a Ponzi scheme, with the interest on matured obligations being paid off using the proceeds of newly issued obligations.
Two external shocks, the Asian financial crisis that had begun in 1997 and the following declines in demand for (and thus price of) crude oil and nonferrous metals, had a negative impact on Russian foreign exchange reserves. A political crisis came to a head in March when Russian president Boris Yeltsin dismissed prime minister Viktor Chernomyrdin and his entire cabinet in March.
The Asian crisis and related political events rattled investor confidence, caused foreign investors to sell off Russian stocks, bonds, and get out of roubles.
The amount of money involved in GKO bonds, at some $150 billion, was not a cause of concern for a $1 trillion economy. But with more than 30% of GKO bonds owned by foreigners, the foreign selloff caused havoc in equities, bonds and the rouble. The Russian broad equity index crashed by more than 90% from late 1997 to October 1998, and the rouble went from five roubles per US dollar to 30 per dollar in June 1999.
After the equity panic bottom was pressed in October 1998, the Russian equity index, measured in roubles, rebounded strongly in part thanks to the depreciating national currency. However, measured in US dollars, Russian stocks didn't make a full recovery until some five years later.
2001: Argentina
In 1998, Argentina officially entered a recession that lasted for three years and ended in a collapse as fears of the devaluation of the peso led to bank runs. This led to heightened protests and violence affecting many people and companies, causing several deaths.
In 2001, Argentina had $100 billion of national debt, which was about 40% of its gross domestic product. While the amount was containable relative to its GDP, the Argentineans made a mistake of denominating its debt in US dollars. With a shrinking current account surplus, the country wasn't able to raise dollars to pay debt principal and interest in 2001 and eventually repudiated on the foreign debts. The fixed exchange rate was removed and the peso was quickly devalued. The exchange rate was then left to float, causing further devaluation. The peso went from parity with the US dollar to four per dollar in early 2002.
The Argentine equity index plummeted 60% in 2001, and although it recovered fully in 2002 in nominal terms, it wasn't until 2004 that stocks come back to their pre-crisis level in US dollar terms.
Today: USA
The US has just experienced the biggest debt blowup known to man. Mortgages debts worth more than $1 trillion had to be bailed out. Lehman Brothers, Merrill Lynch, Bear Stearns, Countrywide, Fannie Mae and Freddie Mac have all become history. Even the iconic Citibank was brought to its knees and a stock price of $1 before the government bailout. The S&P 500 index halved in 12 months.
The US is privileged to have its dollars serving as the world's reserve currency. America's debt is denominated in dollars, which can be printed at will by the Federal Reserve - and print is what the Fed did, and continues to do, creating more than $1.5 trillion to bail out various groups.
The S&P 500 responded positively to monetary easing, rising 40% since March in nominal terms. It shouldn't be surprising to see the index recover to its pre-crisis level. Equities have to rise as in the cases of Russia and Argentina, when currencies had been massively devalued.
In real terms, however, when S&P 500 is measured in gold terms, it will likely take many years before the index recovers.
Where does the dollar go from here? When foreign investors took flight from Russian rubles and Argentine pesos, the dollar was the beneficiary. When global investors take flight from the dollar, which currency benefits?
Gold is the ultimate antithesis to the dollar. Gold is liquid, universally recognized and limited in quantity. Just like Russians and Argentines trying to anchor their currencies to the dollar, the US government devised various ways to slow down the rise of gold prices to maintain the dollar's soundness. However the massive money printing by the Fed and fast-eroding confidence in the dollar by international investors might just be the key to drive gold past the ellusive $1,000 per ounce level and not look back.
By John Lee
Read Entire Article
Tuesday, June 2, 2009
Northwestern Mutual Makes First Gold Buy in 152 Years
By Andrew Frye
June 1 (Bloomberg) -- Northwestern Mutual Life Insurance Co., the third-largest U.S. life insurer by 2008 sales, has bought gold for the first time the company’s 152-year history to hedge against further asset declines.
“Gold just seems to make sense; it’s a store of value,” Chief Executive Officer Edward Zore said in an interview following his comments at a conference hosted by Standard & Poor’s in Brooklyn. “In the Depression, gold did very, very well.”
Northwestern Mutual has accumulated about $400 million in gold, and Zore said the price could double or even rise fivefold if the economy continues to weaken. Gold gained 10 percent last month, the most since November. The commodity has more than tripled since 2000, rising for eight straight years. Gold futures for August delivery slipped $4.80 to $975.50 at 4:03 p.m. in New York.
“The downside risk is limited, but the upside is large,” Zore said. “We have stocks in our portfolio that lost 95 percent.” Gold “is not going down to $90.”
Policyholder-owned Northwestern Mutual, based in Milwaukee, ranks third by 2008 life insurance premiums according to data from the National Association of Insurance Commissioners. The data excludes annuities.
Read Entire Article
June 1 (Bloomberg) -- Northwestern Mutual Life Insurance Co., the third-largest U.S. life insurer by 2008 sales, has bought gold for the first time the company’s 152-year history to hedge against further asset declines.
“Gold just seems to make sense; it’s a store of value,” Chief Executive Officer Edward Zore said in an interview following his comments at a conference hosted by Standard & Poor’s in Brooklyn. “In the Depression, gold did very, very well.”
Northwestern Mutual has accumulated about $400 million in gold, and Zore said the price could double or even rise fivefold if the economy continues to weaken. Gold gained 10 percent last month, the most since November. The commodity has more than tripled since 2000, rising for eight straight years. Gold futures for August delivery slipped $4.80 to $975.50 at 4:03 p.m. in New York.
“The downside risk is limited, but the upside is large,” Zore said. “We have stocks in our portfolio that lost 95 percent.” Gold “is not going down to $90.”
Policyholder-owned Northwestern Mutual, based in Milwaukee, ranks third by 2008 life insurance premiums according to data from the National Association of Insurance Commissioners. The data excludes annuities.
Read Entire Article
Economists and Other "Experts" Are Ignorant About Timing of Economic Recovery
George Washington Blog
Most economists believe the recession will end in 2009. Specifically, a survey by the National Association for Business Economics found that 90 percent of economists believe that the recession will end this year.
As the Washington Post writes:
Mainstream economists generally believe the recession will end -- meaning the economy will stop contracting -- sometime in the second half of the year.
Among the arguments in favor of that view: The recession is already the longest since World War II, the financial system is stabilizing, the Federal Reserve has cut a key interest rate to near zero, and a program of federal spending and tax cuts is beginning to have an effect.
Are they right?
Well, as most of you know, even after the 1929 crash, there were a couple of bear market rallies on the way down to the bottom:
And as you may have heard, here are some prominent quotes which occurred during those bear market rallies:
“The Government’s business is in sound condition.”
Andrew W. Mellon, Secretary of the Treasury
-December 5, 1929
RESERVE BANK AREAS FORECAST NEW YEAR
Despite the obvious slackening of the pace of business at the close of the year, leaders in banking and industry throughout the country maintain an optimistic attitude toward the prospects for 1930.
-January 1, 1930
“The worst is over without a doubt.”
James J. Davis, Secretary of Labor.
- June 1930
‘BUSINESS CYCLE’ SEEN AT NEW PHASE; Bankers Hold Downward Trend in Markets Indicates Recovery Is Near. DENY ANALOGY TO 1920-21 Economists Point to Superior Credit Conditions Now, Holding Easy Money Points to Revival.
-July 6, 1930
BIG BANKERS PUT UP $100,000 SAFEGUARD; House of Morgan Among Those Required to Provide Protection for Investors. -August 3, 1930
“We have hit bottom and are on the upswing.”
James J. Davis, Secretary of Labor.
-September 12, 1930
“30% OF STOCKS SELL UNDER BOOK VALUES; Capital Is Above Market Price.”
-December 14, 1930
“The depression has ended.”
Dr. Julius Klein, Assistant Secretary of Commerce.
- June 9, 1931 (Stock market did bottom one year and 50% later)
But its not just the Great Depression.
As economist historian Bob Hoye points out, economists and the other "experts" say the same thing during every depression throughout history (the article is worth reading in full):
For most participants, post-bubble bear markets have been sudden and severe. The 1929 example ran for three years and the post 1873 example lasted for five years...
Although crashes are grisly events, they share a common response from the establishment. No matter how shocking, bloody, expensive, ruinous or just plain shattering a crash is – within a week, there is no one in the street who didn't see it coming. As ironical as this is, there is a critical link from the stock market to the economy...
This melancholy event is being confirmed by the behaviour of politicians and policymakers. After swanning around claiming credit for the boom politicians panic and then find scapegoats. Remember the "Goldilocks" celebration of perfect management of interest rates, money supply and the economy. Well, all five great bubbles from the first in 1720 to the infamous 1929 have been accompanied by such boasting, followed by what can best be described as frenzies of recriminatory regulation. If the political path continues – protectionism – will follow.
One of the worst such examples was called, in real time, the Tariff of Abominations. But, this is enough of dismal events and it is time to turn to irony for amusement and enlightenment. The clash between the establishment and financial history is rich with irony. Beyond that, financial history, itself, should be considered as an impartial "due diligence" on every grand scheme promoted during a financial mania by the private sector as well as by policymakers. Let's use a good old fashioned term – policymakers have been financial adventurers.
One of the richest ironies occurred with the 1873 mania and its collapse. With typical strains developing in the credit markets during a speculative summer, the leading New York newspaper editorialized:
“but while the Secretary of the Treasury plays the role of banker for the entire United States it is difficult to conceive of any condition of circumstances which he cannot control. Power has been centralized in him to an extent not enjoyed by the Governor of the Bank of England. He can issue the paper representatives of gold, and count it as much as the yellow metal itself. [He has] a greater influence than is possessed by all the banking institutions of New York.”
In so many words, because the treasury secretary was outstanding and had the benefit of unlimited issue of a fiat currency – nothing could go wrong. But it did; the initial bear market lasted for five years and the initial recession ran a year longer. The pattern of severe recessions and poor recoveries continued such that in 1884 leading economists began to call it "The Great Depression", that endured from the 1873 bubble until 1895.
An index of farm land value in England fell almost every year from 1873 to 1895. Of course, academic economists were fascinated and for a couple of decades wondered how such a dislocation could have happened, or even worse, discussed how it could have been prevented. Ironically, this debate continued until as late as 1939 when another Great Depression was belatedly discovered.
Naturally the long depression was blamed upon the old and unstable Treasury System, and at the height of the "Roaring Twenties" John Moody summed it up with:
"The Federal Reserve Law has demonstrated its thorough practicality, and thus secured the general confidence of the business interests. The breeder of financial panics, the National Banking Law, which had been a menace to American progress for two decades, has now been replaced by a modern scientific system which embodies an elastic currency and an orderly control of money markets."...
In late 2007, Gregory Mankiw, boasted that the US had a "dream team" of economists as advisors, and as with all claims at the top of six previous bubbles "Nothing could go wrong". And even if things went only a little wrong there were the "safety nets" that Krugman claimed would prevent serious deterioration. Our view on Keynesian safety nets has always been that in a bust they would be about as useless as a hardhat in a crowbar storm.
In the post-1929 bust policymakers were realistic enough to know that the boom caused the bust. The SEC was established to prevent another hazardous 1929 mania. Also, one of the promoters of the SEC boasted that the SEC would put a "Cop at the corner of Wall and Broad Streets". Without much doubt the SEC has failed to live up to its billing. The discovery of malfeasance always accompanies the discovery of malinvestment.
Of course, the other act passed to prevent another 1929 mania was Glass-Steagal, which separated commercial banking from the evils of Wall Street. This was taken off the books in 1999 as too many banks were participating in the high-tech frenzy.
Has this happened before? I'm glad I asked the question. With the financial violence of the South Sea Company in 1720, the House of Commons passed the "Anti-Bubble" Act, which was taken off the books in 1771 – just in time for the full expression of the 1772 bubble. As with the climax of the 1720 bubble the Great Depression ran for some twenty years. This was also the case for the bubbles that blew out in 1825, 1873, and 1929...
The real audacity is in the claims of charismatic economists that their personal revelations can provide one continuous throb of happy motoring. As Hayek said – Keynes, as a young scholar, was absolutely ignorant of financial or economic history. Only someone who was ineffably ignorant of financial history would claim that it can arbitrarily be altered...
On May 5, Bernanke observed that the "broad rally in equity prices" is indicating that "economic activity will pick up later in the year."
At the height of a similar rebound to April-May of 1930, Barron's wrote:
“It is thus apparent that the public preference for stock is not only as marked as ever, but also the will to speculate is still a speculative factor not to be overlooked. The prompt return of huge speculation and the liberal manner in which current earnings are again being discounted indicate that it will be difficult to quench the fires of stock-market enthusiasm for long.”
Prompted by an animated stock rally, the Harvard Economic Society, but with more gravitas, concluded that it "augured" a recovery by late in the year. As we all know this did not last and what we should understand is that it is the dynamics of a crash that sets up the exciting rebound. Not policymakers.
Let's look at a classic fall crash, which we expected. The pattern is interesting. The 1929 crash amounted to 48%. The decline to the low in November 2008 was 47%, and within this the hit to October 27 amounted to 42%. In 1929 the initial plunge amounted to 40% to October 29.
The rebound was to November 4, in both examples, with 2008 gaining 17% and 1929 gaining 12%. The final slump into each November was 22% and 23%. Is it important to identify it as 1929 or 2008?
Our "historical" model expected the crash and the rebound, as well as the nature of the establishment's utterances...
Ironically, today's excitement in the markets and convictions in policymaking circles are important steps on the path to a great depression. As disconcerting as this may be, it is worth reviewing another cliché of policymaking, which is the notion that lowering administered rates will restore the momentum of a boom. Massive declines in short rates, such as Treasury Bills have only occurred in a post-bubble crash. In 1873 the senior bank rate plunged from 9% to 2.5%, as the stock market crashed. In the 1929 example the fed discount rate plunged from 6% to 1.5%, as the stock market crashed...
There are some early terms to describe the sudden loss of liquidity that marks the end of a bubble. In the 1561 crash Gresham wrote the “Credit cannot be obtained – even on double collateral.”.
Another term goes back to the 1600s when Amsterdam was the commercial and financial center of the world. The Dutch described the good times as associated with "easy" credit and the consequence as "diseased" credit...
Misselden in the 1618 to 1622 crash earnestly believed that throwing credit at a credit contraction would make it go away. [He was wrong].
Read Entire Article
Most economists believe the recession will end in 2009. Specifically, a survey by the National Association for Business Economics found that 90 percent of economists believe that the recession will end this year.
As the Washington Post writes:
Mainstream economists generally believe the recession will end -- meaning the economy will stop contracting -- sometime in the second half of the year.
Among the arguments in favor of that view: The recession is already the longest since World War II, the financial system is stabilizing, the Federal Reserve has cut a key interest rate to near zero, and a program of federal spending and tax cuts is beginning to have an effect.
Are they right?
Well, as most of you know, even after the 1929 crash, there were a couple of bear market rallies on the way down to the bottom:
And as you may have heard, here are some prominent quotes which occurred during those bear market rallies:
“The Government’s business is in sound condition.”
Andrew W. Mellon, Secretary of the Treasury
-December 5, 1929
RESERVE BANK AREAS FORECAST NEW YEAR
Despite the obvious slackening of the pace of business at the close of the year, leaders in banking and industry throughout the country maintain an optimistic attitude toward the prospects for 1930.
-January 1, 1930
“The worst is over without a doubt.”
James J. Davis, Secretary of Labor.
- June 1930
‘BUSINESS CYCLE’ SEEN AT NEW PHASE; Bankers Hold Downward Trend in Markets Indicates Recovery Is Near. DENY ANALOGY TO 1920-21 Economists Point to Superior Credit Conditions Now, Holding Easy Money Points to Revival.
-July 6, 1930
BIG BANKERS PUT UP $100,000 SAFEGUARD; House of Morgan Among Those Required to Provide Protection for Investors. -August 3, 1930
“We have hit bottom and are on the upswing.”
James J. Davis, Secretary of Labor.
-September 12, 1930
“30% OF STOCKS SELL UNDER BOOK VALUES; Capital Is Above Market Price.”
-December 14, 1930
“The depression has ended.”
Dr. Julius Klein, Assistant Secretary of Commerce.
- June 9, 1931 (Stock market did bottom one year and 50% later)
But its not just the Great Depression.
As economist historian Bob Hoye points out, economists and the other "experts" say the same thing during every depression throughout history (the article is worth reading in full):
For most participants, post-bubble bear markets have been sudden and severe. The 1929 example ran for three years and the post 1873 example lasted for five years...
Although crashes are grisly events, they share a common response from the establishment. No matter how shocking, bloody, expensive, ruinous or just plain shattering a crash is – within a week, there is no one in the street who didn't see it coming. As ironical as this is, there is a critical link from the stock market to the economy...
This melancholy event is being confirmed by the behaviour of politicians and policymakers. After swanning around claiming credit for the boom politicians panic and then find scapegoats. Remember the "Goldilocks" celebration of perfect management of interest rates, money supply and the economy. Well, all five great bubbles from the first in 1720 to the infamous 1929 have been accompanied by such boasting, followed by what can best be described as frenzies of recriminatory regulation. If the political path continues – protectionism – will follow.
One of the worst such examples was called, in real time, the Tariff of Abominations. But, this is enough of dismal events and it is time to turn to irony for amusement and enlightenment. The clash between the establishment and financial history is rich with irony. Beyond that, financial history, itself, should be considered as an impartial "due diligence" on every grand scheme promoted during a financial mania by the private sector as well as by policymakers. Let's use a good old fashioned term – policymakers have been financial adventurers.
One of the richest ironies occurred with the 1873 mania and its collapse. With typical strains developing in the credit markets during a speculative summer, the leading New York newspaper editorialized:
“but while the Secretary of the Treasury plays the role of banker for the entire United States it is difficult to conceive of any condition of circumstances which he cannot control. Power has been centralized in him to an extent not enjoyed by the Governor of the Bank of England. He can issue the paper representatives of gold, and count it as much as the yellow metal itself. [He has] a greater influence than is possessed by all the banking institutions of New York.”
In so many words, because the treasury secretary was outstanding and had the benefit of unlimited issue of a fiat currency – nothing could go wrong. But it did; the initial bear market lasted for five years and the initial recession ran a year longer. The pattern of severe recessions and poor recoveries continued such that in 1884 leading economists began to call it "The Great Depression", that endured from the 1873 bubble until 1895.
An index of farm land value in England fell almost every year from 1873 to 1895. Of course, academic economists were fascinated and for a couple of decades wondered how such a dislocation could have happened, or even worse, discussed how it could have been prevented. Ironically, this debate continued until as late as 1939 when another Great Depression was belatedly discovered.
Naturally the long depression was blamed upon the old and unstable Treasury System, and at the height of the "Roaring Twenties" John Moody summed it up with:
"The Federal Reserve Law has demonstrated its thorough practicality, and thus secured the general confidence of the business interests. The breeder of financial panics, the National Banking Law, which had been a menace to American progress for two decades, has now been replaced by a modern scientific system which embodies an elastic currency and an orderly control of money markets."...
In late 2007, Gregory Mankiw, boasted that the US had a "dream team" of economists as advisors, and as with all claims at the top of six previous bubbles "Nothing could go wrong". And even if things went only a little wrong there were the "safety nets" that Krugman claimed would prevent serious deterioration. Our view on Keynesian safety nets has always been that in a bust they would be about as useless as a hardhat in a crowbar storm.
In the post-1929 bust policymakers were realistic enough to know that the boom caused the bust. The SEC was established to prevent another hazardous 1929 mania. Also, one of the promoters of the SEC boasted that the SEC would put a "Cop at the corner of Wall and Broad Streets". Without much doubt the SEC has failed to live up to its billing. The discovery of malfeasance always accompanies the discovery of malinvestment.
Of course, the other act passed to prevent another 1929 mania was Glass-Steagal, which separated commercial banking from the evils of Wall Street. This was taken off the books in 1999 as too many banks were participating in the high-tech frenzy.
Has this happened before? I'm glad I asked the question. With the financial violence of the South Sea Company in 1720, the House of Commons passed the "Anti-Bubble" Act, which was taken off the books in 1771 – just in time for the full expression of the 1772 bubble. As with the climax of the 1720 bubble the Great Depression ran for some twenty years. This was also the case for the bubbles that blew out in 1825, 1873, and 1929...
The real audacity is in the claims of charismatic economists that their personal revelations can provide one continuous throb of happy motoring. As Hayek said – Keynes, as a young scholar, was absolutely ignorant of financial or economic history. Only someone who was ineffably ignorant of financial history would claim that it can arbitrarily be altered...
On May 5, Bernanke observed that the "broad rally in equity prices" is indicating that "economic activity will pick up later in the year."
At the height of a similar rebound to April-May of 1930, Barron's wrote:
“It is thus apparent that the public preference for stock is not only as marked as ever, but also the will to speculate is still a speculative factor not to be overlooked. The prompt return of huge speculation and the liberal manner in which current earnings are again being discounted indicate that it will be difficult to quench the fires of stock-market enthusiasm for long.”
Prompted by an animated stock rally, the Harvard Economic Society, but with more gravitas, concluded that it "augured" a recovery by late in the year. As we all know this did not last and what we should understand is that it is the dynamics of a crash that sets up the exciting rebound. Not policymakers.
Let's look at a classic fall crash, which we expected. The pattern is interesting. The 1929 crash amounted to 48%. The decline to the low in November 2008 was 47%, and within this the hit to October 27 amounted to 42%. In 1929 the initial plunge amounted to 40% to October 29.
The rebound was to November 4, in both examples, with 2008 gaining 17% and 1929 gaining 12%. The final slump into each November was 22% and 23%. Is it important to identify it as 1929 or 2008?
Our "historical" model expected the crash and the rebound, as well as the nature of the establishment's utterances...
Ironically, today's excitement in the markets and convictions in policymaking circles are important steps on the path to a great depression. As disconcerting as this may be, it is worth reviewing another cliché of policymaking, which is the notion that lowering administered rates will restore the momentum of a boom. Massive declines in short rates, such as Treasury Bills have only occurred in a post-bubble crash. In 1873 the senior bank rate plunged from 9% to 2.5%, as the stock market crashed. In the 1929 example the fed discount rate plunged from 6% to 1.5%, as the stock market crashed...
There are some early terms to describe the sudden loss of liquidity that marks the end of a bubble. In the 1561 crash Gresham wrote the “Credit cannot be obtained – even on double collateral.”.
Another term goes back to the 1600s when Amsterdam was the commercial and financial center of the world. The Dutch described the good times as associated with "easy" credit and the consequence as "diseased" credit...
Misselden in the 1618 to 1622 crash earnestly believed that throwing credit at a credit contraction would make it go away. [He was wrong].
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Geithner Laughed Out of the Room
US Treasury Secretary Tim Geithner was laughed at by an audience of Chinese students after insisting that China's US assets are safe.
In his first official visit to China since becoming Treasury Secretary, Mr Geithner told politicians and academics in Beijing that he still supports a strong US dollar, and insisted that the trillions of dollars of Chinese investments would not be unduly damaged by the economic crisis. Speaking at Peking University, Mr Geithner said: "Chinese assets are very safe."
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In his first official visit to China since becoming Treasury Secretary, Mr Geithner told politicians and academics in Beijing that he still supports a strong US dollar, and insisted that the trillions of dollars of Chinese investments would not be unduly damaged by the economic crisis. Speaking at Peking University, Mr Geithner said: "Chinese assets are very safe."
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