Wednesday, September 29, 2010

It Is A Race To The Bottom For Global Currencies And The Winner Will Be Gold

"...It seems like everyone wants gold right now.

Not that gold is any more valuable than it ever has been.

It is just that it is not going down in value like all of the fiat paper currencies around the world are.

This is not a good time to have faith in paper currencies - particularly the U.S. dollar.

Already the dollar has been slipping substantially and the Federal Reserve has not really even cranked up the next round of quantitative easing yet..."

Is The Federal Reserve Out Of Control? Markets Across The Globe Brace For Impact As The Federal Reserve Powers Up The Printing Presses

"What in the world is going on over at the Federal Reserve?    Has it gotten to the point where the Federal Reserve is completely and totally out of control?.."

Whitney: States Are Next Credit Crisis for US

"The financial challenges states face could be the next systemic risk within the financial markets, according to Meredith Whitney, CEO of the Meredith Whitney Advisory Group..."

Marc Faber Says Accumulate Gold and Keep it as Cash

"Faber thinks the Chinese yuan, along with other Asian currencies, will continue to appreciate against the weakening US dollar. “We are in an Olympic game in the world to depreciate currencies,” he says..."

Forget a Recession, The American Empire is Crumbling

"I look around me and I see an Empire in Decline.

The US economy is clearly in a depression… not a recession, not a recovery, but a DEPRESSION. More than 40 million Americans (12%) are on Food stamps. Nearly one in five of us are unemployed of underemployed. Folks go to Wal-Mart at 11PM waiting for their government checks to clear at midnight so they can buy baby formula, milk and other necessities..."

If the Recession Has Ended, Why Is the Fed So Worried?

"...After all before QE1 the Fed didn’t consider Japan’s intervention experience with stock market and real estate bubbles. Instead, they insisted there was no bubble in the U.S.

Then when the bubble did burst, they used the exact policy as the Japanese did to fight the aftermath. And just like Japan, the Fed’s efforts failed.

Now by continuing to ignore Japan’s “lost decade” it looks like the Fed is about to do the same thing once again. And if they follow through on their promise, the weak U.S. economy could easily be headed for a further slowdown that amplifies the problems that already exist..."

U.S. Debt Options of Default or Hyperinflation

"..In plain terms, the entire US system is one giant debt bubble. And there are only three ways to deal with a debt problem:

1.Pay it back
2.Default/ restructure
3.Hyper-inflate it away
The US has no chance of #1, which leaves either #2 or #3. Both involve the Dollar taking a sizable hit, which might explain why Gold has begun breaking out while Treasuries are dipping..."

Deep Economic and Debt Frictions Triggering Competing Currency Wars

"Some prefatory stories are highly revealing. Bank of America is badly on the ropes. On the same weekend at the end of July, when the Bank For Intl Settlements executed a 340 ton gold swap contract, two other events happened. The London metals exchange apparently suffered coordinated delivery raids, all legal, but painful nonetheless, stripping the embattled exchange of much gold bullion. My source from the German banking fortress shared that the BIS might have rescued the London Bullion Market Assn, and thereby prevented a near default at the exchange. Spurious stories about aiding commercial banks, even the Portuguese central bank, were floated to distract the masses.

The second event was that on the same weekend, Bank of America suffered a failure. But the USFed pulled it out of the fire by Monday morning with fresh huge infusions of funny money. This week, another $13 billion infusion came to BOA by way of much darker corners of USGovt agencies, from nether recesses. It is getting that bad! So BOA had been propped by the USFed and the USCongress in the past, but by the syndicate now. In time, they will remove the valued assets and exit the burning building. Unexpected consequences are sure to come, a fact of nature. The BOA story came after a prompted inquiry as to which banks might next succumb to the rising gold & silver prices. BOA was at the top of the list of banks mentioned, but others were mentioned too. They appear in the September Hat Trick Letter, the usual suspects..."

Saturday, September 18, 2010

Shadow Bank Liabilities Plunge By $700 Billion In Q2, $2.1 Trillion Year To Date

"...In fact, from the peak of the credit bubble in Q2 2008, through Q2, total bank liabilities (shadow and traditional) have plunged by $2.6 trillion, from $32.1 trillion to $29.5 trillion. Yet it is the collapse in shadow banking that was responsible, with shadow liabilities falling by a stunning 20% from $21 trillion to $17 trillion in just over two years even as banks have benefitted from the transfer of cheap government cheap on their traditional lending books (think Fed intervention and QE, leading to record low interest rates).

What this means is very clear: the shadow banking system is collapsing, period. Yes, the rate of collapse is slower than in Q1, but the total plunge was still a whopping $4.2 trillion annualized for 2010. And the delta between Shadow Banking and Traditional liabilities has collapsed from $10.7 trillion at the peak in March 2008, down to under $4 trillion. This is a record amount of "money" being removed from the system, and explains why, for now at least, the velocity of money is nothing faster than a crawl..."

Currency War

"...Are we willing to start a trade war?

Considering the fact that China holds nearly a trillion dollars worth of U.S. Treasuries, that probably would not go so well for us.

Even though China's currency manipulation is absolutely raping the U.S. economy, China has so much leverage over us at this point that it isn't even funny.

For example, China has almost a complete and total monopoly on rare earth elements. If China totally cut off the supply of rare earth elements, we would have no hybrid car batteries, flat screen televisions, cell phones or iPods. Not only that, but rare earth elements are used by the U.S. military in radar systems, missile-guidance systems, satellites and aircraft electronics..."

Recessions Will Be Far More Frequent Now That The Debt Super Cycle Is Over

"...This seems to be down to credit availability; in the absence of a gold standard, the authorities could ease policy and stave off recessions.

But if we have reached the end-game of the debt super-cycle, then recessions will be more frequent. The last recession started in December 2007; if the cycle is 56 months, the next one is thus due in August 2012, less than two years away. Such short, sharp shocks make high-yield bonds look a very bad investment. The asset category changed in character during the great moderation; junk bonds used to be investment grade bonds gone bad, but after the mid-1980s, companies issued primary debt at junk yields. An economic cycle that lasts almost nine years gives investors a chance to earn their yield and get out before the bust; a cycle that lasts less than five years makes that much more difficult. The same principle applies to private equity..."

Can the U.S. Afford to Call China a Currency Manipulator?

"...Labeling China a currency manipulator or engaging the Red Dragon in an all out trade war will have consequences, but analysts are divided over what those consequences would be.

When pressed on the currency issue, Beijing traditionally has threatened to stop financing U.S. debt. China is the world's largest holder of U.S. Treasuries, with holdings of $846.7 billion in July.

Lou Jiwei, chairman of China's $300 billion sovereign wealth fund earlier this month said China should diversify its assets away from the dollar if the United States maintains loose monetary policy that weakens the currency.

"For China, the chief tools to reduce economic risks are to strengthen regulation of capital flows, control liquidity through cash management, monitor asset markets and divert foreign exchange reserves to non-dollar assets," Lou said.

Ding Yifan, a policy guru at the Development Research Centre, said China could force a rise in U.S. interest rates by unloading its holdings of U.S. debt, estimated at over $1.5 trillion. His comments at a forum in Beijing followed a string of remarks by Chinese officials questioning US credit-worthiness and the reliability of the dollar..."

The Chances of a Double Dip Economic Recession

"...We're on record for a 50% or higher probability of a second dip or another recession, whatever it would be called. The composition of the ECRI Weekly Leading Index remains proprietary, but its growth rate has fallen to the level that in the past was always associated with recessions (Chart 11). Historically, however, recessions have been propelled by shocks. The post- World War II downturns prior to 2001 were caused by Fed tightening in response to threats of economic overheating and the resulting higher inflation. Since then, other shocks have been responsible. The 2001 recession resulted from the 2000 collapse of the dot com bubble augmented by the 9/11 shock. The 2007-2009 downturn resulted from the collapse in subprime residential mortgages that commenced early in 2007..."

What's Driving the Gold Price Up?

"...There are several key factors coming together at the same time and all of them are bullish for gold. But if we had to boil it down, the bottom line is uncertainty. This makes investors nervous, which has always been good for gold. But is this response rational?

We think so. Gold is the ultimate safe haven and as the economy stumbles, demand for gold has grown. That's been the case for almost a decade. In the second quarter of 2010, for instance, the economic indicators were down and gold demand was up 36%.

Investors are concerned. Not only did the economy falter this month, but the stock market declined as well. This has fueled uncertainty about the government's policies, the potential for a "double dip" recession, and the danger of a deflationary period.

At times like this, safety becomes the paramount consideration. Risk is avoided, and that's when gold shines. Gold provides a shelter from the storm, regardless of what lies ahead. The ongoing rise in the gold price has reinforced this maxim..."

Friday, September 17, 2010

China Japan Forex Battle

"While many have assessed Japan's powerful intervention (JPY 2 trillion worth of currency selling) via the lens of the US dollar, the operation could be a loud warning shot to Beijing, given the record buying of Japanese Government Bonds by China. Cynics (possibly realists) could reason that China seeks to hamper Japan's recovery by keeping the yen excessively strong, while profiting along the way (via accumulating appreciating yen and gradually reducing exposure to depreciating US dollars). After all, the race for the 2nd biggest economy remains in close contention between China and Japan.
Japan's finance minister Noda has already stated "I don't know the true intention", referring to China's JPY 583 bln purchases of JGBs in July after JPY 457 bln of purchases in June. Why would the Japanese Finance Minister make such a suspicious remark? The post-intervention statements from Tokyo regarding its resolve to pursue further action sound like a warning shot to Beijing's yen-purchases as opposed to the average currency speculator..."

Japan’s Economic Problem Is Bigger Than Yen

Friday, September 10, 2010

GSE foreclosures and short sales rising, despite loss mit efforts

"Fannie Mae and Freddie Mac continue an aggressive push to modify mortgages and refinance loans in their respective portfolios, boosting the volume of Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP) workout plans.

But completed and initiated foreclosures and third-party sales are back on the rise in the second quarter of 2010 and short sale volume is up more than 150% from volume in 2Q09, according to the Federal Housing Finance Agency’s second quarter government-sponsored enterprise (GSE) “Foreclosure Prevention & Refinance Report.”

During 2Q10, the volume of permanent modifications under HAMP increased 65% and refinancing of existing GSE loans through HARP increased 30%."

Filtering Through the Economic Noise, America's Second Great Depression

"Early last month, the Commerce Department released the latest GDP data. For Q2 of 2010 the GDP growth came in at 2.4%, missing the consensus estimate of 2.5%.

The Commerce Department also released its latest revisions to 2007-2009 GDP data. As I had predicted, the economy shrank more than the previous estimate of 2.6% versus the 2.4% data recorded last year. That made it the largest drop in GDP since 1946..."

Thursday, September 9, 2010


"JP Morgan is joining me in acknowldging that policymakers appear to be out of ammo:

“Have policymakers run out of ammunition? Unless they become a lot more adventurous, the answer is probably yes, or at least almost, as monetary policy is already max stimulative and public finances are in a precarious condition. Mr. Bernanke tried to allay market fear by assuring us the FOMC will do “all that it can” to assure recovery, but what is that exactly? He listed three potential added measures: more QE buying of USTs; assuring markets it will keep rates on hold for longer; and paying less interest on excess reserves. The first two ought to work through lowering bond yields. We see indeed a decent probability that the Fed will announce another $500 billion-$1 trillion of QE UST buying during the second half of September. With bond yields already at historic lows and credit demand weak, these measures are unlikely to have much impact on the economy.”

Yes, QE is in fact a non-event. The Fed is out of bullets and Congress is gridlocked in a battle for their jobs. The risk in such an environment is continued disinflation with a dollop of Japanese economic syndrome (higher risk of full blown deflation than high inflation):

“The risk is thus rising that the mature economies of Europe and North America are joining Japan into a decade of low growth and deflation. Bernanke said today that he did not consider this risk significant, but we suspect he was trying to allay fears, rather than trying to gauge probabilities. Deflation is not our base case, either, but we still consider it a serious risk that is worth hedging.”


"Finally, you know it’s a depression when, 33 months after the onset of recession…

• Wages & Salaries are still down 3.7% from the prior peak
• Corporate profits are still down 20% from the peak
• Real GDP is still down 1.3% from the peak
• Industrial production is still down 7.2% from the peak
• Employment is still down 5.5% from the peak
• Retail sales are still down 4.5% from the peak
• Manufacturing orders are still down 22.1% from the peak
• Manufacturing shipments are still down 12.5% from the peak
• Exports are still down 9.2% from the peak
• Housing starts are still down 63.5% from the peak
• New home sales are still down 68.9% from the peak
• Existing home sales are still down 41.2% from the peak
• Non-residential construction is still down 35.7% from the peak
Folks, in a normal recession-recovery cycle, practically all these indicators are making new highs at this juncture of the business cycle."

The True Cost of the Bank Bailout

"Interview with Bob Ivry of Bloomberg News, who led a reporting team on an award-winning series of articles showing the true cost to the taxpayer of the Federal bailout of Wall Street – $12.8 trillion lent, spent or guaranteed to banks at its peak..."

International Banking System Linkages

"Fascinating chart in the BIS Quarterly Review that helps to explain how any banking crisis can go viral, infecting the entire globe:

Wednesday, September 8, 2010


"If you missed this segment on CNBC today it’s worth taking a look. Michael Pento, the very vocal gold bug, is debating whether or not the USA is essentially insolvent (we all know my positions here – deflation remains the greater risk and the USA is certainly not bankrupt). He makes all the classic inflationista arguments while always making sure to point out that gold has been rising. What he fails to actually do is exactly what he accuses Erin Burnett of not being able to do – justify his argument. Pento claims that the onus is on Erin Burnett to explain to the guest why she doesn’t believe a particular position. Erin rightly corrects Pento and reminds him that he is the guest and she is merely the moderator. So, of course, the onus is on Pento to prove why the USA is insolvent...."


"JP Morgan says investors should buy Chinese equities on any dips. They believe the economy has bottomed and that the environment will remain conducive to economic growth:

(1) China’s real GDP growth, on a sequential basis, may have bottomed out at 7.2% QoQ in 2Q10. Yet we believe China’s final demand growth will not bottom out until late FY10, because the modest sequential rebound in GDP in 3Q should be driven by a slowdown in de-stocking and the widening of the trade surplus on sharply falling imports, rather than by a decent recovery in final demand;

(2) improving liquidity conditions – (a) China’s M2 growth (which tends to lead H-shares performance), on sequential terms, is expected to bottom out, with trend growth reaching a trough of 11.8% 3m/3m, saar in September before rising to 16.8% in December; (b) we estimate new loans made by Chinese banks in 2H10 will reach around Rmb3 trillion, up 37% YoY;

(3) we believe the worst of the policy tightening environment may be behind us.”

European Credit Stress Returns With Vengeance - Irish, Portuguese Bond Spread at All Time High - Yen Soars - Gold Hits All Time High

"The risk aversion trade was back in play today with treasuries, the dollar, the Yen, and gold all rallying while the Euro and European government bonds (except German Bunds) were under significant pressure.

Please consider Stocks, Irish Bonds Drop, Gold, Yen Rally on Europe Concern..."

The Second Wave of Europe's Banking Crisis Is Crystallizing

"As the crisis in the European financial sector deepens, trading patterns are indicating a major sell-off within the next month, if the market breaks out of the consolidation pattern forming in the MSCI European Financials Index. After all, the ECB’s extension of its liquidity safety net for vulnerable euro zone banks – and the guarantees for troubled banks in Ireland – can only fuel suspicion about skeletons in the closet.

It's the growing realization that the weakest banks may only have been saved temporarily, by taking on even more risk, that’s leading investors to conclude that the European financial system may be even more unstable than it was at the start of the credit crunch. And now the news flow - and rumors of a bank in trouble - are coinciding with the formation of a big technical 'flag' pattern for the sector that points to a sharp sell-off. As can be seen in the chart ishares' Spanish ETF is tracking the financials sector - given that 45% of it is invested in banks..."

Saturday, September 4, 2010

Not Buying 'the Light at the End of the Tunnel' Scenario

"I've highlighted news and other reports indicating that conditions on Main Street are far worse than your average Wall Streeter believes they are. Interestingly enough, even those who are ostensibly benefiting from the bullish-Kool-Aid-induced euphoria that's keeping share prices afloat are pessimistic about the outlook..."

Double-Dip Recession Deepens as U.S. Housing Market Collapses

"The Double-Dip recession I’ve been predicting for some time is deepening. And nowhere is the emergence of this powerful economic force more clear than in the housing market.

All the fresh economic data confirms that home sales are weakening … home inventories are rising … and home price pressure is building.

Meanwhile, we’re seeing a fresh rise in early-stage mortgage delinquencies after a multi-quarter respite. Credit demand is contracting for real estate and other loans. And bank failures are rising fast.

This can’t be prevented. Neither the Obama administration nor Congress nor the Federal Reserve can fire some magic bullet at the problem to kill it. So as an investor, you can only do one thing: Prepare!..."

Wednesday, September 1, 2010

Sovereign debt worries will last 10 years: strategist

"Short-term fiscal pressures are more manageable than most investors realize, but problems will be far more difficult to deal with over the next 10 years, according to Andrew Milligan, the head of global strategy at Standard Life Investments in London.

“There are significant long-term risks from high levels of public debt sector debt," Milligan told CNBC Wednesday. "In Particular, there are potential funding problems, crowding out effects and sovereign debt rating concerns for a decade to come."

“We argue that the impact of tax increases and spending cuts will be more moderate than bearish commentators are arguing," he said. "However, we do warn about the longer-term risks facing governments: unfunded liabilities mean difficult tax and spending decisions.”

Why the Bank of Japan's Economic Stimulus is Good For the Gold Price

"...How can this be good for gold? Put yourself into the shoes of the Japanese investor. He has suffered deflation for so long he regularly invests in other currencies to gain the interest rate differential as well as the gain in foreign currencies over the Yen when it falls. With the B of J telling these investors they want to lower the Yen, these investors, when convinced this is about to happen, will follow this route more enthusiastically.

If he believes inflation is about to take off, he knows that in the present global environment the B of J cannot afford to let interest rates rise [and take the Yen with them]. He then realizes that the buying power of the Yen is being reduced by such stimuli. Inevitably, once the Yen has been undermined by QE, interest rates will eventually have to rise, to counter excessive inflation. With this in mind both cash and fixed income securities lose their attraction. A hard asset that cannot be debauched is preferable. Locally this can be anything from property to gold. The advantage of gold is that it is well known to the Japanese and it travels all over the world. History also shows that gold has proved itself the certain retainer of value in all extreme times including both deflation and inflation.

In view of this we believe that the Japanese will turn to gold, once they see the policies intended to lower the Yen, working."

Warning Global Fiat Currency Financial System Collapse By Early 2011

"Readers of my articles will recall that I have warned as far back as December 2006, that the global banks will collapse when the Financial Tsunami hits the global economy in 2007. And as they say, the rest is history.

Quantitative Easing (QE I) spearheaded by the Chairman of Federal Reserve, Ben Bernanke delayed the inevitable demise of the fiat shadow money banking system slightly over 18 months.

That is why in November of 2009, I was so confident to warn my readers that by the end of the first quarter of 2010 at the earliest or by the second quarter of 2010 at the latest, the global economy will go into a tailspin. The recent alarm that the US economy has slowed down and in the words of Bernanke “the recent pace of growth is less vigorous than we expected” has all but vindicated my analysis. He warned that the outlook is uncertain and the economy “remains vulnerable to unexpected developments”.