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Monday
Mar222010

Bank of America/Merrill Lynch Medium Term Target of $1500 for Gold Prices

Bank of America Logo 23 March 2010.JPG

Support for gold prices will come from China according to the Bank of America/Merrill Lynch who expect Chinese buying from both the government and the regulatory changes that now allow the Chinese public to own gold.


Gold prices, which have taken a breather in the last two days, could get help in coming months from Chinese demand for bullion, says one analyst. Bank of America/Merrill Lynch expects China “to provide continued support to gold prices going forward,” and maintained a medium-term gold price target of $1,500 an ounce for gold. China’s demand for gold has flourished thanks to a slew of regulatory changes, analyst Michael Widmer wrote in a recent report.

China liberalized jewelry market and also lifted restrictions on “gold hoarding,” unleashing “significant pent-up investment demand,” he added. China is now the biggest gold producer in the world as authorities have tackled supply issues and gold production has expanded fast. Government itself has also been a steady gold buyer, raising its gold holdings to 1,054 tons in recent years.

Gold for April delivery ended down $8.10, or 0.7%, at $1,009.50, closing below the $1,100-an-ounce mark for the first time since Feb. 24. It was the second consecutive day of losses as the dollar rose for much of the session.


— Claudia Assis

Looks like we have a way to go then!


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Sunday
Mar212010

Gold: A quick Look at the Chart

Gold Chart 22 March 2010.JPG


Taking a quick look at the above chart we can see that gold prices appear to be stuck in a trading range for now and may continue to trade sideways until we get some sort of resolution to the European Fiasco. The long term trend is still up so we must learn to expect these knocks along the way. Shortly after gold had risen above the $600/oz level (many moons ago) we wrote that you would never see $600/oz gold again and the detractors fired in the brick bats accordingly, well it wont be too long before $1100/oz is history too.

Here we are at much higher levels and the doubters still abound in abundance. None us know for sure where gold will take us in the short term but we are however confident that gold prices are headed higher and will finish the year at higher levels than they are today.

The question of which vehicle will give us the biggest bang for our investment dollar will remain with us and we will continue to wrestle with it and try alternatives, but there is no substitute for having the real deal in your own hands. We see it as not just an insurance but also as an investment that is as good as, if not better, than any other investment available today.

Back to the chart, please note that the 200dma is still rising and closing the gap between with gold prices which will support gold prices and we see it as being very positive for gold.

The USD has bounced and we note the inverse reaction by both silver and the HUI which have turned down sharply. Various programmed 'stops' have been triggered by the fall in gold prices which added to the selling pressure on Friday, however, by the end of the trading session gold prices were stabilizing.

Well fast forwarding to today all eyes will be focused on President Obama's health care reform bill and how the market reacts to it. We understand that there are last minute changes being undertaken such as abortions will not be allowed on the state, but we will need to see the final draft, if and when it is passed.

Also look out for Thursday, when the European Union meet as we may get some indication as to just what they propose to do about the Greek problem.

Have a good one.

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Saturday
Mar202010

The Tail Wags the Dog

USD Chart 21 March 2010.JPG

The US Dollar has bounced over the last two days to close at 80.75 on the US Dollar Index as shown on the above chart. India raising its interest rates played a bit part in this resurgence, however, the prime mover would appear to be the Euro which is clouded in uncertainty regarding an amicable solution to the financial problems in Greece.

The European Union will not want to lose a member as they believe that big is beautiful,so a solution must be found. However a bail out is unpalatable and who amongst us would expect the Greeks to adopt an austerity package, they have no history of doing so and as they say a leopard does not change its spots. So the drag on the Euro continues and the flight to a safe haven pushes dollar higher. So here we have it, a European state which only accounts for around 2% of the European GDP has got the Euro at its mercy and is bolstering the dollar at the same time. We cant ignore it but to us it is a ridiculous state of affairs. As we are on the subject of ridiculous you might want to take some light relief from this short video clip of German and Greek philosophy, just click this link.

Now if you think that things are not too bad for the dollar then please take a peak at the US Debt Clock, not a pretty sight and for those interested in gold prices you can also checkout the league table of just who owns gold.

Going forward the only certainty that we have is change and in our tiny arena that change is going to become more dramatic as the oscillations in gold prices become more violent as prices swing in both directions. So its time to find your sea legs and hold on tight.



Have a good one.

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Friday
Mar192010

The Reserve Bank of India raises Rates

The Hindu Logo 20 March 2010.JPG


In a surprise move The Reserve Bank of India raised their rates in an unscheduled move. With inflation heading towards the 10% level they have decided to apply the brakes a tad as explained in this snippet from The Hindu Online:


MUMBAI: The Reserve Bank of India on Friday raised its key short-term lending and borrowing rates by 25 basis points each as part of its tight money policy to combat inflation, which the government feels is a cause of concern.

The repo and reverse rates (short-term rates at which the RBI lends and borrows from banks) were hiked to 5 per cent and 3.5 per cent, respectively, and could make banks commercial lending dearer.

“These measures should anchor inflationary expectations and contain inflation going forward,” the RBI said a month ahead of the announcement of its annual monetary policy on April 20 for 2010-11.

Finance Minister Pranab Mukherjee had expressed concern saying inflation was heading to double digits from 9.89 per cent at present while at the same time not giving up on growth.

“As liquidity in the banking system will remain adequate, credit expansion for sustaining the recovery will not be affected,'' the RBI said.

The decision to tighten monetary policy follows inflation surpassing the RBI's March-end projection of 8.5 per cent and the government's recent decision to hike prices of petrol and diesel.

WPI inflation

“Headline Wholesale Price Index (WPI) inflation on year-on-year basis at 9.9 per cent in February has exceeded our baseline projection of 8.5 per cent for end March 2010,'' the RBI said, justifying its decision to hike key rates ahead of its monetary policy.

Rising commodity and energy prices are exerting pressure on overall inflation, it said, adding that “the acceleration in the process of non-food manufactured goods and fuel items in recent months has been of particular concern.''

We now need to keep an eye on the actions of other nations who may well follow India's example and also raise rates, which in turn tends to render gold less appealing.

To read the article in full please click this link.


Have a good one.

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Friday
Mar192010

The Taylor Rule: A Tool for Predicting Fed Policy

Taylor Rule 20 March 2010.JPG


By Bud Conrad, Editor, The Casey Report

On March 3, I heard John Taylor over lunch at the San Francisco Federal Reserve. In his talk he reviewed the government’s bailouts and their effects on our economy. If you aren’t familiar with Taylor, he co-authored, along with Bob Hall, the macroeconomics textbook most widely used these days. In addition, he served as undersecretary of the Treasury in the early Bush years where, among other responsibilities, he was tasked with bringing a new currency to Iraq.

But for us economics nerds, he is most famous for formulating the Taylor Rule, a guideline for where the fed funds rate should be set. While there is more to it, the general idea is to use the inflation rate and the gap in GDP growth from its potential growth rate.

To make sure that inflation doesn’t get out of control, the fed funds rate should be higher with higher inflation. When the economy is doing poorly, a lower fed funds rate can help the economy.

The Taylor Rule incorporates these two items into the calculation to suggest an appropriate level for the Fed to use in setting its overnight rate. The basic rule is that the appropriate rate for the Fed can be calculated as follows:

Rate = 1.5 X inflation % + 0.5 X (real GDP gap %) + 1%

In the chart just below, I calculated what the Taylor Rule indicated would be a reasonable level for the fed funds rate (in orange), overlaid with the actual fed funds rate (in red). It shows how the Fed kept rates too low in 2004, fueling the housing bubble. That was Taylor’s major point and is documented in his latest book.

A similar comment could be made about 1975-1977. The wild swing down at the end of 2008, with negative inflation and GDP growth, indicated that the economy was so bad that the rate should go below zero, an impossibility. Even so, that provides some justification for the extreme actions of the Fed in undertaking its quantitative easing.

Looking to the future, the more important concern for me is that the end of the chart seems to indicate that the appropriate rate has already moved up to 4%. That’s because the measure of inflation used here for personal consumption expenditures has turned from negative to positive.
If you think inflation will be rising and the economy will not be as bad going forward, you might expect rates to head higher soon. Of course, the Taylor Rule for rates and the actual rates don’t follow an exact track, but using data from the last quarter of 2009, we see a dramatic turnaround in the pressures on rates, based on the Taylor Rule.

Taylor was surprisingly critical of the long lists of bailout programs, citing data that they had very little positive effect on other measures of the economy. He implied we would have done better with less of these measures, including the granddaddy of the Fed’s actions, to buy $1.25 trillion mortgage-backed securities (MBS), as mortgage rates dropped only slightly. He said we shouldn’t worry about deflation, as he considers it unlikely but felt that in the future we will be worrying about inflation.

In combination, the conclusions I came away with were supportive of our position that the country’s economic problems are not over, and that inflation will be added to the list of those problems in the future.

As you can see, Bud, along with Doug Casey and the other editors of The Casey Report, don’t have a rosy outlook on the economy. They believe that it is imperative for any serious investor to foresee and protect themselves from the perfect economic storm that’s in store for us. Read more here…


Have a good one.

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Thursday
Mar182010

An update from Jim Rogers

Jim Rogers 19 March 2010.JPG

He's considered to be one of the world's savviest investors. Jim Rogers, chairman, Rogers Holdings, talks to BNN and gives his opinions on the investment world.

The discussion kicks off with the topic of trade wars which Jim says is no good for anyone and that some time in the future the Chinese currency could become the world reserve currency, sorry Canada, the Loonie is thought to be too small.

On the subject of bubbles Jim sees both the Chinese coastal property and US Bonds as being in a bubble. As for gold prices his prediction is for gold prices to hit $2000/oz by the end of the decade but that is easily achievable by only a 6-7% rise per year.

On the matter of the Euro - Jim was in favour of letting Greece go broke then confidence would return to the Euro, however, the European Union will not let that happen. As we see it Greece is only one the PIIGS (Portugal, Ireland, Italy, Greece and Spain) with the UK rapidly coming into the frame. So if there is a bail out or financial support for Greece then the other troubled nations are sure to come banging on the door, time will tell.

For anyone with a $100k to invest Jim favours the agriculture sector as it is so depressed at the moment. He also comments on coal, natural gas and uranium.

Well worth watching, please click here to view the interview.



Now for a mouth watering upcoming event, April 30 - May 2, 2010 being held at the Four Seasons Hotel - Las Vegas, Nevada, entitled:

'The Casey Research Crisis & Opportunity Summit'

The line up has to be one of the most impressive ever just take a look at this list of speakers:

Simon Black, Editor, The Sovereign Man

Bill Bonner, Chairman, Agora Financial

David Brin, scientist, technical consultant and world-known author

Dr. Marc Bustin, Senior Analyst, Casey Research Energy Division

Chuck Butler, President, EverBank World Markets

Doug Casey, Chairman, Casey Research

Bud Conrad, Chief Economist, Casey Research

Terry Coxon, Senior Researcher, Casey Research

Alex Daley, Chief Investment Strategist, Casey Research Technology Division

John Embry, Chief Investment Strategist, Sprott Gold & Precious Minerals Fund

Dr. Robert Falls, CEO, ERA Ecosystem Restoration Associates Inc.

Steve Henningsen, Senior Investment Strategist, The Wealth Conservancy

Louis James, Chief Investment Strategist, Casey Research Metals Division

Marin Katusa, Chief Investment Strategist, Casey Research Energy Division

Axel Merk, Manager, Merk Hard, Asian and Absolute Return Currency Funds

Andy Miller, real estate pro, Partner, Miller-Frishman

Jim O’Rourke, serially successful mine builder

Rick Rule, Chairman, Global Resource Investments




Explorer League Honorees:


Arnold Armstrong, President & CEO, International Enexco

Ron Netolitzky, Chairman, Brett Resources

Jim O’Rourke, President & CEO, Copper Mountain

Ron Parratt, President & CEO, AuEx Ventures

Duane Poliquin, CEO, Almaden Minerals

Simon Ridgway, President, Radius Gold

Roman Shklanka, Chairman, Kobex Resources

If you fancy the trip please click here.



Have a good one.

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Tuesday
Mar162010

The Federal Reserve: No Change to Rates for an Extended Period

USD Chart 17 March 2010.JPG


The balancing act continues as the Federal Reserve holds interest rates and hints at an "extended period" of the no change policy. As we write the US Dollar has moved lower to trade at 79.64 on the US Dollar Index with gold moving higher to trade at $1128.00/oz at the close on the NYSE.

No joy or encouragement here for savers as the dollar returns next to nothing at the moment. If you look hard enough at the alternatives you can get close to 5% on the Australian or New Zealand dollar, which have been strengthening against the US Dollar over the last year or so.

The dilemma for the Fed is one of balancing a gentle withdrawal of excess cash out the system without taking the patient off life support too early and is summed up very well by this snippet from MarketWatch

WASHINGTON (MarketWatch) -- The Federal Reserve kept its benchmark interest rate at a record low level Tuesday and made no changes to the key "extended period" policy pledge, a signal that it believes the economy still needs support to get to a sustainable path.

Altering the wording would be a clear signal that the Fed is more sanguine about the economic outlook and believes ultra-low rates are no longer necessary -- and financial markets would react accordingly.

The Fed's policy statement, released after a closed-door meeting, said the economic situation is "likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Brian Bethune, economist at HIS Global Insight said the statement was designed to calm markets that any change in interest rate policy was imminent. At the moment, the Fed is walking bit of a tightrope, Bethune said.

One the one hand, the Fed has been winding down its emergency funding programs as the economy has recovered and Fed officials have been talking in great detail about how the central bank will be able to exit from its zero-interest rate policy before inflation pressures emerge.

On the other hand, the central bank doesn't want to tighten prematurely, which could kill the housing market and lead to more woes at the nation's crippled banking sector.

"The Fed...has to avoid being stampeded into a short-term tightening which would be a disaster," Bethune said.

It will be interesting to see just how gold performs as it reaches the $1140/oz level which we see as the next resistance point, gold may back off and try again later, however, if it goes through this level then we would expect a decent rally to ensue, just our humble opinion.



Have a good one.

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Sunday
Mar142010

The Federal Reserve: The Greatest Scam in History (revision C) the Yellen Effect

Janet Yellen.JPG



Janet L. Yellen appears to be the favourite to replace Don Kohn, the outgoing vice-chairman at The Federal Reserve Board, an appointment that does not surprise us, however, her resume is a smorgasboard of academia without even a hint of a proper job.

This resume belongs to a person who went to school, then to university as a student and then back to university. This is the resume of an overgrown school kid who has spent a lifetime acquiring many academic certificates from educational institutions along the way and stayed in the academic world pontificating on whatever took her interest.

Now, unless you consider working for the Federal Reserve as a stint in the private sector, this lady has no experience whatsoever in working or running a real business. A mirror image of Ben Bernanke she has never mustered the courage to venture into the private sector and implement her theories for the benefit of an organization battling to survive and grow in the private sector.

Her theories remain unproven outside of the classroom and as they have remained theoretical only, there isn't the hard won experience in the real world to support and give credit to her words. Every corporation and indeed every person in the United States of America will be and are being affected everyday by the actions of The Federal Reserve Board, the governance of which is entrusted to people who have never fixed so much as a wing nut to a Ford motor car.

Helicopter Ben has said that he will run the money printing presses for as long as it takes and now he has the assistance of Janet L. Yellen to shovel the money out of the doors in the belief that more money is the solution to a debt laden nation. The political courage to suck money out of the economy just does not exist as unemployment is high and the economy is fragile and will remain so for sometime to come. Should a double dip recession appear on the horizon then the drunk will be given yet another drink, well it almost worked in Zimbabwe.

Please forgive us for being old cynics as we cannot see anything in this resume to boost our confidence. This is her resume as published by The Federal Reserve Bank of San Francisco, if we have missed a proper job then please correct us.


Janet L. Yellen took office as President and Chief Executive Officer of the Federal Reserve Bank of San Francisco on June 14, 2004. As a member of the Federal Open Market Committee, Dr. Yellen fully participates in the meetings and brings her District's perspective to policy discussions in Washington.

Dr. Yellen is Professor Emeritus at the University of California at Berkeley where she was the Eugene E. and Catherine M. Trefethen Professor of Business and Professor of Economics and has been a faculty member since 1980.

Dr. Yellen earlier took leave from Berkeley for five years starting August 1994 when she served as a member of the Board of Governors of the Federal Reserve System through February 1997, and then left the Fed to become Chair of the Council of Economic Advisers through August 1999. She also chaired the Economic Policy Committee of the Organization for Economic Cooperation and Development from 1997 to 1999.

Dr. Yellen became a member of The Group of 30 in September 2009. She also serves on the executive committee of the Bay Area Council and is a member of the Council on Foreign Relations and the American Academy of Arts and Sciences. Dr. Yellen is a research associate of the National Bureau of Economic Research and has served as president of the Western Economic Association and vice president of the American Economic Association. She was also a Fellow of the Yale Corporation.

Dr. Yellen graduated summa cum laude from Brown University with a degree in economics in 1967, and received her PhD in Economics from Yale University in 1971. She received the Wilbur Cross Medal from Yale in 1997, an honorary Doctor of Laws degree from Brown in 1998, and an honorary Doctor of Humane Letters from Bard College in 2000.

An Assistant Professor at Harvard University from 1971 to 1976, Dr. Yellen served as an economist with the Federal Reserve’s Board of Governors in 1977 and 1978, and on the faculty of the London School of Economics and Political Science from 1978 to 1980.

Dr. Yellen has written on a wide variety of macroeconomic issues, while specializing in the causes, mechanisms and implications of unemployment.



The Federal Reserve: The Greatest Scam in History (revision B)
posted on the 20th March 2009.

USD Chart 18 March 2009.JPG

We first posted this article on 13th August 2007 when it appeared to us that the US Dollar along with the economy was heading into such dangerous waters that gold would be the beneficiary. At the time gold was trading at around $670/oz and it closed yesterday at $960 for a gain of $290 or 43.2%. Yesterday was the first time that we have seen the ‘C‘ word used as the Federal Reserve announced that it would be buying back $300 billion in longer-term Treasuries in order to assist the economic recovery. This move to buy these Treasuries is regarded by many as a last resort or a sign of panic as the turmoil in the financial markets reaches a crisis point.

Gold was languishing at the $890/oz level just prior to the announcement and then within the hour it rocketed to the $950/oz level as the news of the Feds action spread. Whether it be an article on Market Watch or a mention on the BBC World Service, news travels fast these days to every corner of the planet and investors react accordingly with startling results. A new government and a New Fed, not really, just more of the same but in increasingly larger doses. Todays action will turn out to be a defining moment for the US Dollar and recorded by historians as the beginning of its demise. Unfortunately the worst is yet to come so steel yourself for a force ten storm.

On 4th October 2008 we updated our original essay with the following excerpts;

If we fast forward to time now and read any newspaper the headlines are dominated with the fire fighting actions being implemented by the Federal Reserve with bankers and politicians in tow. From these bailouts we can only conclude that the dilution of paper money will continue with the pace of dilution accelerating, resulting in massive inflation and propelling the precious metals to higher ground. If you have the time, please read this article and then take a look at what’s happening around you and then find the time to question what you are doing and why you are doing it. Being too busy to organise your own affairs is a poor excuse. Just switch the television off for a couple of nights and clear your head, the way forward for you personally will become apparent.

The Federal Reserve: The Greatest Scam In History?

The Fed Res Logo 15 March 2010.JPG

This is the original essay posted on 13th August 2007

The Federal Reserve was created in 1913-1914 in order to bring stability to the economy and yet almost every major crash, including the great depression, can be attributed to the Federal Reserve.

We are going to take a look at the history of the Fed and what prominent historical figures have said about the organisation.

Firstly, from 1837-1862 there was a system of national banks in the USA but then in 1913-1914 a consortium of 12 privately held banks got together and formed the Federal Reserve Bank, an entity that is not part of the US government. These banks then purchased notes from the US Mint for printing costs and lent them out through member banks charging interest.

The Federal Reserve came into being after its supporters paid for the Presidential campaign of US President Woodrow Wilson. Wilson signed the bill that transferred the US currency to twelve regional private banks Wilson regretted his decision later saying:

“I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.”

In 1933 President Roosevelt confiscated citizens gold and handed it to the Federal Reserve. At the very moment when Americans have needed to protect their wealth the most, the best store of wealth ever created, gold, was confiscated from American citizens and given to a un-elected conglomerate of private banks.

When the bill for the Federal Reserve was being considered, some brave politicians spoke out against its creation calling it “the strangest, most dangerous advantage ever placed in the hands of a special privilege class by any Government that ever existed” and Congressman Victor Murdock said, “I do not blind myself to the fact that this measure will not be effectual as a remedy for a great national evil – the concentrated control of credit.”

It even appears that one of the most important and most respected figures in American history disagrees with the Federal Reserve saying, “If the American people ever allow private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.”

Jefferson also said, “I sincerely believe the banking institutions having the issuing power of money are more dangerous to liberty than standing armies”

“Paper is poverty… it is only the ghost of money, and not money itself.”

The Federal Reserve make no secret about the scam they are running as the Boston section of the Federal Reserve Bank said:

“When you or I write a check there must be sufficient funds in our account to cover the cheque, but when the Federal Reserve writes a check there is no bank deposit on which that cheque is drawn. When the Federal Reserve writes a cheque, it is creating money.”

Perhaps the Fed can create money, but we strongly believe that wealth cannot be created. Wealth is simply transferred, it is not created and we challenge anyone to prove otherwise. The only time wealth was created was when the world was created, with all its resources, true wealth. So why hasn’t the Federal Reserve been disbanded?

Well as the Rothschild Brothers of London said in 1863; “The few who understand the system, will either be so interested from it’s profits or so dependant on it’s favours, that there will be no opposition from that class.”

The great Henry Ford once said “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

The problem is, very few people understand the system at all. It is not taught in schools and even some of the most prominent financial analysts and fund managers really have no idea how the system works. They tend to define inflation as rising prices when in fact inflation occurs because of the expansion of the money supply. Or even link inflation with the economy doing well, saying, “we should raise interest rates as the economy did extremely well this month and we don’t want inflation getting out of hand”, or words to that effect.

What all people, not just investors, need to understand is that paper money is worthless. Gold and precious metals are the real money, the real wealth that cannot be created like its paper ghost.

Gold has been telling us for sometime that all is not well so listen up and put at least a small part of your wealth into precious metals or their associated stocks.

Discipline is about to return to a screen near you.

The Fed Building 15 March 2010.JPG

All the best.

Got a comment then please add it to this article, all opinions are welcome and appreciated.

If you would like to get a bit more bang out of your your buck, then check out our Options Trading Service please click here.


To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address.

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For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.

Saturday
Mar132010

The Big Dead-Cat Bounce

Dead Cat Bounce 13 March 2010.JPG



By Doug Hornig, Senior Editor, Casey Research

It’s now been a year since the dark days of early March 2009, when, although no one knew it at the time, the stock market hit rock bottom. From there, all of the indexes went on a tear through the rest of the year, moving almost uninterruptedly higher before easing slightly in the first two months of 2010. At this writing (March 5), the Dow is still up 60%, the S&P 500 68%, and the NASDAQ 83%.

Virtually no one was calling for this kind of rally a year ago. But it happened. So investors are either seeing the “green shoots” supposedly sprouting from the moribund economy or believe that they’re about to break ground any day now. That sentiment is continually reinforced by government officials and media talking heads who almost universally proclaim that “the worst is past,” “we’re back from the brink,” or other words to that effect.

It’s often said that stock market action is a leading indicator, reflecting what investors think the economy will be like six or nine months down the road.

Are they right? Will good times soon be here again? Or is this just a big dead-cat bounce?

Jobs: Now here, we’ve clearly turned the corner. Everyone says so. For evidence, all we need do is look at the declining rate of job loss in the country. Uh-huh.

Perhaps it’s rude of us to point this out, but a declining rate of job loss is still a job loss. It is not the same as job creation.

The hard reality behind February’s “encouraging” numbers is that 14.9 million people remained out of work. 8.4 million jobs now have been lost since the start of the recession. In addition, there is a net need for 100,000 new jobs a month, just to keep up with first-time entrants to the workforce.

Even if the economy were suddenly to start churning out new jobs at the robust rate of a half-million a month – and the chances of that range from zero to none – it would still take nearly two years to return just to pre-recession employment levels.

(Near-term employment figures may blip up, as the government hires one and a half million people – who knew we needed so many? – to help take the census. That could lead to a classic false dawn.)

Anyone looking to the housing market to lead the recovery, as it often does, had better find a magnifying glass. January marked the third consecutive monthly drop in new home sales, and it was a whopping 11.2% tumble. Mortgage applications fell to the lowest level in 13 years. There was even a decline of 6.1% from January of 2009, itself a very dark month. Congress’s extension of home buyers’ tax credits is proving to be of increasingly little consequence.

New home sales are very important, since they cause a cascade effect down through the entire supply chain, from architects to building contractors, to sawmills, to sheetrock manufacturers, to carpenters, plumbers, and electricians. But sales of existing homes are also relevant, and there, too, the figures are grim. After piggybacking on federal subsidies through the fall, sales absorbed the worst pummeling on record in December, down 16.2%. January was a little better, only off 7.2%.

One number that is unfortunately growing is this: distressed sales, such as foreclosures, accounted for 38% of sales in January, up from about 32% in December. People are losing their homes at an increasing rate, with few buyers stepping up to the plate.

But hey, maybe there is a huge pent-up housing demand out there. We doubt it, but if there is, it doesn’t matter. Because lenders are ignoring it. In 2009, U.S. banks posted their sharpest decline in lending since 1942. One reason is that many are too cash-strapped themselves to deal with borrowers. According to the FDIC, at year’s end its “problem” list of U.S. banks at risk of failing hit a 16-year high at 702 (or nearly one in eleven), rocketing up from 552 at the end of September and 416 at the end of June. And little wonder. More than 5% of all outstanding loans are now at least three months past due, the highest level recorded in the 26 years the data have been collected.

Then there’s those that can’t lend because they’re no longer with us. 140 banks went belly-up in 2009, and 2010’s total will be worse than that if January’s 15 failures prove representative. The FDIC is bankrupt after reporting a $20.9 billion loss in the fourth quarter of 2009 in its Deposit Insurance Fund.

However, never let it be said that the government won’t try to squeeze some lemonade out of its bag of lemons. To wit, the FDIC’s own financial woes haven’t prevented it from opening a huge new satellite office in the Chicago area. The facility will be dedicated to managing receiverships and liquidating assets from failed Midwest banks, and will occupy seven floors of an 11-story building. The office space being leased is well over 100,000 square feet and will employ approximately 500 temporary employees and contractors. 

Does the FDIC know something we don’t? We can’t say for sure, but the fact is that the agency has already opened similar offices in Irvine, California, and Jacksonville, Florida.  Each time, the number of bank failures in those states spiked dramatically after the FDIC set up shop.

Elsewhere, consumer confidence is flagging and, since the economy is 75% consumer-driven, that doesn’t bode well. The Conference Board’s index took a swan dive in February, to its lowest point since last April. The index plunged to 46 from January’s reading of 56.5, stifling the previous three months’ uptrend. As a measure of how bleak the public mood is, the economy is considered stable only when the consumer confidence reading exceeds 90. We’re barely halfway there.

And finally, we don’t want to lose sight of the 800-pound gorilla in the room, the federal debt. How bad is it? Well, the Bank for International Settlements recently released a very frightening figure. In order just stabilize debt at pre-crisis levels, the BIS says the U.S. government must run a budget surplus of 4.3% of GDP. Every year. For ten years.

For an in-depth look, try Harvard economist Kenneth Rogoff’s new book, This Time is Different: Eight Centuries of Financial Folly (co-authored with Carmen Reinhart of the University of Maryland), the first comprehensive survey of past financial crises around the world.

Dr. Rogoff, who may be the country’s leading expert on the historical record, concludes that a banking crisis often leads a country into default, because government’s response is usually to try to prop up the financial system with yet more debt.

If that sounds familiar and disconcerting, it should. Even more so because Rogoff has identified a clear tipping point, beyond which there is little hope of recovery. When a government’s debt grows to equal annual GDP, the game is essentially over.

Where we are now: We have $12.5 trillion in gross debt, growing at $2 trillion per year, on a GDP of $14.3 trillion. Next year, it will be $12.5T + $2T = $14.5 trillion on a projected $14.5T of GDP. Or 100%. A level we cannot survive for long.

That means it’s likely, in the not-too-distant-future, that the government will be confronted with a very stark choice between defaulting on the debt or trying to inflate its way out. The former would kill off economic growth and likely launch a worldwide depression of epic proportions.

Disastrous as that would be, if the alternative is chosen and Washington’s printing presses beget hyperinflation, that would probably be worse. In a serious deflation, those who have saved for a rainy day can make it through okay. In hyperinflation, which unconstrained further spending could easily bring on, everyone loses.

The truly prudent prepare, as best they can, for either eventuality.

How to prepare for the worsening crisis… how best to diversify your portfolio and protect your assets… which investments and specific stocks to pick… learn all that and more at the Casey Research Crisis & Opportunity Summit in Las Vegas, April 30 – May 2. Listen (and talk!) to top-notch speakers like Doug Casey, Agora Financial Chairman Bill Bonner, real estate pro Andy Miller, Sprott Chief Investment Strategist John Embry, and many more. Early-bird discounts still available for those who sign up today. Click here to find out more…


All the best.

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Friday
Mar122010

Doug Casey on Surviving Financial Apocalypse Now

White House Money 12 March 2010.JPG


(Conversations with Casey: Interviewed by Louis James, Editor, International Speculator)


L: Doug, last time we spoke, you said quite a bit about debt, in the context of your expectation that the euro is on its way out. At the end of that conversation, you mentioned, of course, that the problem is not limited to Greece, nor the eurozone. America as a country has become a world-class debtor, and many Americans seem to think a maxed-out credit card is a reason to get a higher credit limit, not to economize. It’s like a global epidemic. Let’s talk about debt.

Doug: Sure. This is a story that’s going to end very badly for a lot of people. I’ve said this before, in many different ways, but I think it’s worth saying again, because most people just don’t grok it

L: Grok. From the Martian word for “drink” and “understand.” In Heinlein’s novels, water was a critical element of Martian culture – makes sense, for a desert planet. When you grok knowledge, as when you drink water, you don’t just hold it in your mouth and spit it out. You take it into yourself, it goes into your blood, and eventually into every cell in your body; it becomes part of you. This is heavy-duty understanding… Sorry for jumping in with the spontaneous lecture. I just suspect many readers will not know the term.

Doug: Or put another way, in the negative case, most people just don’t get what money really is – and what it isn’t. They take it as a given, as part of the cosmic firmament. But it’s not. A prime example of this is the mistaking of debt for money, a phenomenon David Galland pointed out in a Casey’s Daily Dispatch a few weeks ago. This is why the entire world’s monetary system today is headed for a disastrous failure. And this is absolutely inevitable. There’s no way around it.

L: Why?

Doug: Because you can’t use debt as money. As I’ve pointed out before, Aristotle, in the fourth century BC, was the first person to define what money is. And what is it? It’s a store of value and a medium of exchange.

The paper we use today is a medium of exchange – it got that way because governments made it illegal not to accept it – but it’s not a good store of value. And it’s rapidly and radically becoming less of a store of value. What we use as money today is actually not money; it’s currency. Technically, that’s simply a word that indicates a government substitute for money.

What does make for good money? Again, Aristotle gives us the answer. It’s something that has five characteristics: it’s durable and divisible, consistent and convenient, and has value in itself.

L: Some of our readers who’ve studied Austrian economics challenged us on that last bit, last time we talked about gold, because, as the Austrians pointed out, value is subjective. But you don’t mean some sort of value that’s independent of people making value judgments. You mean that people value something that makes for good money, because of its innate qualities – not something “valued” because of government threats of force.

Doug: Right. And for these reasons, gold is almost certainly the best thing to use for money. Not because I say so, nor because Aristotle said so, but because, over time, people have found it to be the most durable, divisible, consistent, convenient, and inherently valuable thing to use. Silver is also good, but it’s less durable because it corrodes. And less convenient, in that it takes about 60 times more of it – at the moment – to offer the same value as gold. Copper is the next traditional step down the ladder.

L: That, plus one reason that’s pertinent today but was not a problem in Aristotle’s world: gold can’t just be printed up on the arbitrary whims of those in power.

Doug: That’s the big one. Using metals as money takes the whole matter out of the hands of the government and its bureaucrats.

L: But we don’t use gold today…

Doug: No, as per David’s example, it’s as though a bunch of friends without any real money started exchanging IOUs for money, and then after a while forgot that the IOUs were supposed to represent, and be redeemed in, real money.

The problem with this is that, in the case of the IOUs between friends, paper is based solely on hope and trust. One can move away, or die, or turn dishonest, or become insolvent – many other things could happen. A guy stuck with a dead man’s IOU has nothing.

With government IOUs, or currencies, it’s worse, because they can increase the number of IOUs in circulation without telling anyone – that’s what inflation is. Since the government creates the IOUs, it gets the benefit of spending them before the inflation they create raises prices, which is basically stealing from the people. And, of course, sometimes governments do “die,” leaving the holders stuck with nothing, just as with the IOUs between friends. In fact, it’s arguably far more likely that such problems will arise from trusting a government to print IOUs than from trusting a friend.

[To read the full 8-page interview with Doug Casey and what he thinks will happen to the American middle class, sign up here.]



All the best.

Got a comment then please add it to this article, all opinions are welcome and appreciated.


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