The perils of vendor financing

China is financing the US, while Germany is financing European consumption. With economies from the developed world tanking, and the consumer flat on its back, this game is unwinding.

http://dollarcollapse.com/articles/china-and-germany-the-perils-of-vendor-financing/

China lends money directly to the U.S. by using the dollars it receives from us to buy Treasury paper. This lowers U.S. interest rates and supports the dollar, which allows us to continue to buy Chinese stuff.

Germany, on the other hand, has lent its credit rating to the whole Euro Zone, allowing countries like Greece and Spain to borrow more and at lower rates than they could have otherwise. The borrowers use some of this money to buy cars, pharmaceuticals, and solar panels from Germany.

Now both China and Germany have discovered that their surpluses were based in part on bad loans to weak borrowers, and that some of the assets they thought they owned are 1) not really theirs or 2) worth way less than face value.

China has a lot of dollars, but can’t unload them without destroying the value of the dollars it retains. It’s trying to move out slowly, scaling back its purchases of U.S. debt and buying gold and oil resources, but it has to walk a fine line because spooking the markets would defeat its purpose. So it’s stuck with big dollar balances for the foreseeable future, while the U.S. is actively destroying the currency’s value.

Economics and health care

Thanks to Dick for finding this analysis on economics, capitalism, socialism, and health care.

http://www.financialsense.com/stormwatch/geo/analysis.html

Is gold a crowded trade?

According to Paul Brodsky, the answer is an emphatic "no."

http://www.ritholtz.com/blog/2010/02/is-gold-a-crowded-trade/

Did China just buy almost 200 tons of gold from the IMF?

India purchased 200 tons last year, and China was rumored to be the next big buyer of gold from the IMF. This unconfirmed article says the Chinese just stepped up to the gold window.

http://english.pravda.ru/business/finance/25-02-2010/112369-china_gold-0

If true, this is potentially bullish for gold. For 20 years, central bankers have been net sellers of gold. Last year, they flipped and became net buyers.

As of today, Reuters could not confirm the validity of the source--even as the price of gold appreciated 1%.

http://www.reuters.com/article/idUSTRE61L3UQ20100225?loomia_ow=t0:s0:a49:g43:r1:c0.179245:b31125058:z0

Disclosure: long gold mining shares

ARNA receives PDUFA date of 10/22/10 for Lorcaserin

http://invest.arenapharm.com/releasedetail.cfm?ReleaseID=447459

Arena Pharmaceuticals, Inc. (Nasdaq: ARNA) announced today that the US Food and Drug Administration (FDA) has assigned a Prescription Drug User Fee Act (PDUFA) date of October 22, 2010, for the review of the lorcaserin New Drug Application (NDA). The acceptance of the lorcaserin NDA filing confirms that the application is sufficiently complete to permit a substantive review, and the PDUFA date is the goal date for the FDA to complete its review of the NDA.

Disclosure: long ARNA shares

The 911 tax

http://cbs13.com/local/tracy.911.calls.2.1502690.html

Tracy residents will now have to pay every time they call 9-1-1 for a medical emergency.

Unbelievable.

Sovereign Alchemy Will Fail

http://matterhornassetmanagement.com/2010/02/11/sovereign-alchemy-will-fail/

When we look at the world economy today, wherever we turn we see a wall of risk. And sadly this is an insurmountable wall with risks that are totally unprecedented in history. There has never before been a potentially catastrophic combination of so many virtually bankrupt major sovereign states (US, UK, Spain, Italy Greece, Japan and many more) and a financial system which is bankrupt but is temporarily kept alive with phoney valuations and unlimited money printing. But governments will soon realise that they are not alchemists who can turn printed paper into gold. The consequences of the global financial crisis are potentially catastrophic.

As the Austrian economist von Mises said: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

In our view, governments like the US and the UK and many others will not abandon further credit expansion. They are committed to printing increasing amounts of worthless paper money in order to finance the growing deficits and the rotten financial system. Therefore there is no chance of Quantitative Easing ending but instead it will accelerate in 2010 and after. The consequence of this will be a hyperinflationary depression in many countries due to many currencies becoming worthless. No economy in the world, including China, will avoid this severe economic downturn which is likely to have a major impact on the world economy for many, many years to come.

Greece, the Euro, and supermodels

The bond vigilantes are attacking Greek bonds and the Euro, as further credit downgrades are inevitable.

Gisele Bundchen should consider getting paid in gold, instead of Euros.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aUdDmoYyZhdY

Supermodels should stick to modeling, and leave speculation to the foreign currency traders. While I agree with the USDollar continuing it's decades-long decline, the Euro will tank even further from the EU fracturing.

Greek unions protest and strike

Citizens of indebted western, developed countries had better get used to this Greek example.

http://news.yahoo.com/s/ap/20100224/ap_on_bi_ge/eu_greece_financial_crisis

Bloomberg reports the protests are becoming violent.

http://www.bloomberg.com/apps/news?pid=20601087&sid=auLLhrWZiKi8&pos=8

Currency crisis and gold

http://beforeitsnews.com/story/19836/The_Sovereign_Debt_Disaster.html

Applying the true inflation rate on the gold price shows that the gold high in 1980 of $850 in todays terms is $6,400.

It's interesting that Societe Generale, a French investment bank, came to the same number--but through an entirely different method of calculation. They used the total amount of USDollars in circulation, divided by the total amount of gold above ground, and came up with a $6,300/ounce price.

Here is a video that explains the monetary base / gold inventory ratio calculation.

http://www.foxbusiness.com/search-results/m/27466595/more-growth-ahead-for-gold.htm

Disclosure: no position in GLD ETF. long gold mining shares

The case against Keynesian Economics

Despite a raging battle among economists on the solutions to preventing and solving financial crises, it's becoming more apparent that Keynesian Economics is a total failure ultimately. Long live Austrian School of Economics!

http://www.bloomberg.com/apps/news?pid=20601039&sid=a5t.xQdllnbo

Good news for ARNA shareholders

http://finance.yahoo.com/news/Arena-Pharmaceuticals-prnews-489018725.html?x=0&.v=1

The US FDA formally accepted the New Drug Application (NDA) from Arena Pharmaceuticals (ticker symbol "ARNA") for their anti-obesity drug Lorcaserin. Although this is good news for ARNA shareholders, the shorts will take this normally bullish development as an opportunity tank the price per share down in order to profit on the decline, as well as enable long institutional investors to accumulate more shares at a lower entry point. That's the Wall Street playbook.

Disclosure: long ARNA shares.

More money printing in the UK a virtual certainty

In central banker parlance, "quantitative easing" means printing more currency in an attempt to stimulate a moribund economy. As many of us predicted, rhetoric of "exit strategies" on stimulus programs are shallow. Expect the US to continue their printing presses as well.

http://www.nytimes.com/reuters/2010/02/23/business/business-uk-britain-bank-qe.html?_r=2

SEC mulling curbing limits on short selling

http://finance.yahoo.com/news/Ahead-of-the-BellSEC-poised-apf-4172165911.html?x=0&sec=topStories&pos=3&asset=&ccode=

In addition to restricting short selling, the SEC needs to expand their enforcement of naked short selling, including elimination of the market maker exemption (so-called the "Bernie Madoff exemption" after the infamous Wall Streek crook), which enables them to create phantom shares. This method of "married puts" allows shorts to deploy illegal bear raids on stocks without actually shorting the underlying shares, and keeps their illegal price manipulation activities under the regulatory radar.

See Chapter 2 of Deep Capture on how the "married puts" strategy works. In fact, reading all 15 chapters will help investors understand better how the markets are rigged.

CFTC to holding hearing on position limits

The CFTC will be holding a hearing on March 25 to examine position limits in the gold, silver and copper futures markets. I've blogged a few entries on the need to limit and enforce concentrated positions in commodities markets in order to prevent price manipulation, including this entry yesterday: http://gregnguyen.blogspot.com/2010/02/gold-and-silver-suppression-confirmed.html (the original link was incorrect--click on it again).

http://www.gata.org/node/8364

Let's see if anything positive comes out of this meeting. I'll post the results when available.

FDIC falls further into the sink hole

http://www.zerohedge.com/article/fdic-hits-record-default-levels-deposit-insurance-fund-plunges-127-billion-negative-209-bill

The Federal Deposit Insurance Corp. said Tuesday that its deposit-insurance fund fell to $20.9 billion at the end of 2009, a $12.6 billion drop in the final three months of the year, as bank failures continued at a pace not seen since the savings and loan crisis. The fund's reserve ratio was -0.39% at the end of the quarter, the lowest on record for the combined bank and thrift fund.

Consolidated Financial Statements

Guess which entity had the following "stellar" judgment from its auditor?

Material weaknesses discussed later in our report continued to (1) hamper the federal government’s ability to reliably report a significant portion of its assets, liabilities, costs,and other related information; (2) affect the federal government’s ability to reliably measure the full cost as well as the financial and nonfinancial performance of certain programs and activities; (3) impair the federal government’s ability to adequately safeguard significant assets and properly record various transactions; and (4) hinder the federal government from having reliable financial information to operate in an efficient and effective manner. We found the following:

Certain material weaknesses in financial reporting and other limitations on the scope of our work resulted in conditions that continued to prevent us from expressing an opinion on the accompanying accrual basis consolidated financial statements for the fiscal years ended September 30, 2008 and 2007.

…The federal government did not maintain effective internal control over financial reporting (including safeguarding assets) and compliance with significant laws and regulations as of September 30, 2008.

It describes the US government's finances, and the report is given by the Government Accountability Office, who is required to audit financial statements from the US Treasury.

http://www.fms.treas.gov/fr/08frusg/08gao2.pdf

Higher inflation goal

I blogged earlier about economists actually desiring higher inflation objectives. The madness continues.

http://dollarcollapse.com/articles/mr-bernanke-has-acknowledged-the-allure-of-a-higher-inflation-goal/

Read the commentary at the end.

Worst financial crisis ever - Greenspan

It's predictable that former Fed Chairmen and government bureaucrats finally speak the truth after they leave office.

http://www.businessweek.com/news/2010-02-23/greenspan-calls-crisis-by-far-worst-ever-recovery-uneven.html

Former Federal Reserve Chairman Alan Greenspan said the financial crisis was “by far” the worst in history and called the recovery from the global recession “extremely unbalanced.”

In a speech today in Washington, Greenspan said the global economy has undergone “by far the greatest financial crisis globally ever.” He also said small businesses show few signs of improving because lenders are struggling with commercial real estate mortgages.

Gold and silver suppression confirmed

Folks, I ain't crazy. Thanks to Dick for finding this must-read commentary.

http://www.financialsense.com/Market/daily/monday.htm

Basically, It's Over

A parable about how one nation came to financial ruin - by Charles Munger, Berkshire Hathaway (partner with Warren Buffett).

http://www.slate.com/id/2245328/

The Dollar bubble and hyperinflation

Thanks to Kathleen for finding this. The National Inflation Association seeks to educate people on impending hyperinflation.

Citi can delay withdrawals 7 days

I earlier blogged about banks delaying redemptions from money market accounts, in case of a "broken buck." See this blog and this blog. Now Citi just announced to customers the bank can delay withdrawal requests up to seven days.

http://www.businessinsider.com/citigroup-warns-customers-it-may-refuse-to-allow-withdrawals-2010-2

Who didn't see the crisis coming?

Here are Dr. Alice Rivlin's credentials, which are quite impressive:

http://www.brookings.edu/experts/rivlina.aspx

Current Positions
Visiting Professor, Public Policy Institute, Georgetown University

Past Positions
Henry Cohen Professor, Milano Graduate School of Management and Urban Policy, New School University (2001-2003);Chair, District of Columbia Financial Management Assistance Authority (1998-2001);Vice Chair, Board of Governors, Federal Reserve System (1996-99);Director, White House Office of Management and Budget (1994-96);Deputy Director, White House Office of Management and Budget (1993-94);Recipient, MacArthur Foundation Prize Fellowship (1983);Hirst Professor of Public Policy, George Mason University;Director of Economic Studies, Brookings Institution;Founding Director, Congressional Budget Office (1975-83);Assistant Secretary for Planning and Evaluation, U.S. Department of Health, Education, and Welfare (1968-69);President, American Economic Association

Yet, in this Bloomberg article, the first two paragraphs read:

http://www.bloomberg.com/apps/news?pid=20601039&sid=aK0qZPTFUG.k

The big lesson of 2009 was that financial panic can be catastrophic for the economy if caused by a bursting housing bubble with an enormously overleveraged financial structure perched on top of it.

That sounds obvious, but the best minds of our economic establishment didn’t see it coming. The unforeseen losses were off the charts: millions of jobs, widespread foreclosures and business failures, plummeting wealth and confidence, and immeasurable human misery.

So are the best minds not really that bright--or were they hiding something? Because I recall reading a few articles by economic dullards who EXACTLY predicted this financial crisis, only to be marginalized and ridiculed by the mainstream financial community and press. This list includes Peter Schiff, Ron Paul, Jim Rogers, and Marc Faber.

Perhaps Dr. Rivkin should expand her circle of "best minds"--at least beyond academia and the government. She rightly blames the "clueless Titans" of banking, but she totally absolves her former colleagues in government. I guess it's not a mea culpa if one doesn't admit to mistakes.

Ted Butler on the shortage in physical silver

The physical shortage in silver will precede a run in gold. I may be a gold bug, but I'm even more bullish on silver.

http://news.silverseek.com/SilverSeek/1266344983.php

Disclosure: long gold and silver mining shares

US Treasury bond auctions--a warning

http://seekingalpha.com/article/188380-the-u-s-land-of-the-free-and-home-of-a-nearly-failed-treasury-auction-of-its-own?source=feed

To see such a MASSIVE drop off in Indirect Buyers (40% down to 28%) is a MAJOR warning sign that Foreign Governments are no longer willing to buy long-term US debt.

This auction was a very small step away from a failed auction. To see Primary Dealers buying so much (remember they HAVE to buy it) and Indirect Buyers so little, only confirms what I’ve been saying for months: that the US is entering a Debt Spiral; a situation in which it must issue more and more debt (while rolling over trillions of old debt) at the very time that fewer and fewer investors are willing to lend to the US for any lengthy period of time (more than ten years).

Folks, forget Greece, the US has its own debt problems. And they’re MAJOR. The fact that stocks RALLIED on this news tells you how disconnected stocks are from reality. The Debt Spiral has started and is now accelerating. It’s only a matter of time before it becomes a full-fledged crisis. And this one will make 2008 look like a cakewalk.

Hyperinflation? Part 1

Watch the entire 9-minute video.

The stages of a bubble

http://pragcap.com/where-are-we-in-the-bubble-process

According to this article, after the bursting of the equities and real estate bubbles, both markets will have a tough road ahead, with high volatility.

However, it seems to me that the decline of gold in late 2008 was a bear trap, and that gold is about to enter it's mania phase.

Disclosure: long biotech and gold and silver shares

Greece outlawing cash transactions

As part of their movement toward "austerity", the Greek government is outlawing cash transactions and levying higher taxes, including enacting a value-added tax (VAT), increasing the capital gains tax, and repatriated funds. They are also cutting wages of some state employees by 50%.

In essence, they are trying to eliminate the black market, while shutting down their borders from further capital flight. This is the playbook for bankrupt sovereign governments. US citizens take note--this movie will be playing in a theatre near you.

http://globaleconomicanalysis.blogspot.com/2010/02/greece-outlaws-cash-transactions-above.html

Hackers, Inc.

According to John Murrell:

According to sources who talked to the New York Times, security experts investigating the sophisticated hacking of U.S. corporations that Google exposed in January have traced the attacks past a group of servers in Taiwan back to computers at two Chinese institutions of higher learning: Lanxiang Vocational School, which has ties to China's military, and Jiaotong.

That's fine and dandy, except a team of geeks from Jiaotong University recently won a contest sponsored by IBM when they solved a set of complex computing problems.

So a US corporation is unwittingly enabling a group of geeks to hack into another US corporation's network. Sure, there's a loose connection, as the perps haven't been identified yet, but the scenario is dripping with irony.

Total debt to GDP

As long as US total debt is high relative to GDP, the Fed will have to keep priming the liquidity pump. That can only be bullish for precious metals.

https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlYg50ZYURl5uBGe1zoye_zAs3NSbhFecrTGnpwQ9eJb8vtwxd4U2grq6sTDYNKq8qVZRzLAawKjGL1OjsZG4u-6y0wCkY9xgF5CAJ8aRT5vZlESqV_klL-1D5AakBLHvZP16ZSmJSU0F_/s1600-h/TCMDGDPR.JPG

What inflation? Healthcare costs just went up 39%

A good friend told me last week her healthcare insurer informed her that her premiums will increase 39%. This article confirms it.

http://www.reuters.com/article/idUSN1820581220100218

Yet, official government statistics insist the Consumer Price Index ("CPI") is only 2.7%, excluding food and energy costs--since they are "too volatile" to track in the CPI. How convenient.

Putin: US is just as bad as Greece

The next cold war won't be one with missiles and nuclear weapons. It will be an economic war--one of attrition. And one the Russians and Chinese are more than happen to wait out, as the US economy tumbles due to gargantuan debts and deficits.

http://www.theglobeandmail.com/report-on-business/putin-calms-greece-says-us-debt-big-too/article1469868/

Russian Prime Minister Vladimir Putin played down Greece's economic woes on Tuesday, telling his visiting Greek counterpart that the United States were no better than Greece in handling its debt and fiscal deficit.

“As we all know, the global economic crisis started neither in Greece, nor in Russia, nor in Europe,” Mr. Putin told a news conference after talks with George Papandreou. “It came to us from across the ocean,” he said in a clear reference to the United States.

“There (in the U.S.) we can see similar problems - massive external debt, budget deficit,” Mr. Putin added, suggesting Russia and Greece should concentrate on the “real economy” to weather the economic crisis.

Municipal bankruptcies aboout to soar

Please don't tell me you didn't see it coming. I've been handing out these pamphlets for a couple years.

http://finance.yahoo.com/taxes/article/108866/muni-threat-cities-weigh-chapter-9?sec=topStories&pos=4&asset=&ccode=

The Euro, the British pound sterling, the USDollar will take a beating--in fact, almost every paper currency will be affected. In addition to municipalities, California, Nevada, Illinois, Michigan, New Jersey et. al, defaulting on their debt obligations cannot be good for the USDollar, much like debt problems in Greece, Spain, Italy, and Portugal have not been good for the Euro.

Paper gold alchemy

Central bankers, with the help of bullion banks, have been suppressing the prices of gold and silver for years. We independent thinkers are not paranoid lunatics.

http://www.zerohedge.com/article/imf-gold-sales-v-alchemy-gold-futures-%E2%80%93-what%E2%80%99s-impact-future-gold-prices

Behind the unemployment numbers

It's uglier than our government wants us to believe. No surprise there.

http://www.nolanchart.com/article7388.html

Economic inequality is shown by much higher unemployment rates with lower income households. The political use of a national unemployment rate is political propaganda designed to hide the real problem that is intractable.

Guild Investment market commentary

http://www.guildinvestment.com/ARThome.aspx?ModuleId=0&Itemid=374&SType=F

High inflation, jobless growth

Just as independent thinkers like my friend Dick have been predicting (thanks to him again for submitting this article), the exploding monetary base would cause producer prices to rise, and eventually hit consumers in the wallet (call this the multiplier effect due to an increasing money supply). Merge that with a jobless "recovery", and you have a lethal combination of stagnant growth and inflation, or "stagflation", a term coined during the disastrous economy in the 1970's.

http://www.cnbc.com/id/35457298

Notice the last paragraph in the CNBC article:

In the claims report, the four-week moving average of new claims, which irons out week-to-week volatility, fell 1,500 to 467,500, the Labor Department said. The number of people still receiving for benefits after an initial week of aid was unchanged at 4.56 million in the week ended Feb. 6.

This measure has held below the 5 million mark for eight straight weeks and analysts believe it is starting to reflect an improvement in the labor market rather than people merely dropping off rolls because they have exhausted their benefits.

That last bit of editorial inserted by CNBC, a financial media outlet, sure looks like political spin based on no facts. Which "analysts" have come to this inane conclusion? It's not included in any of the other news releases that I've seen. As always, the devil is in the details of a press release, or footnotes in a financial statement and SEC filing.

The George Soros head fake on gold

George Soros, perhaps the planet's most famous (or infamous) billionaire trader, recently caused a raucous among gold bugs and bears alike with this comment at the recent World Economic Forum in Davos, the so-called summit in late January 2010 of billionaire financiers, global bankers, media moguls, and government heads of state:

When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold.

Many interpreted this comment that Soros was bearish on gold, and that its decade-long bull market was finally over, after more than quadrupling since 2001.

Within that context, here's a very interesting development in what George Soros' hedge fund has done--and not what he has said.

http://www.bloomberg.com/apps/news?pid=20603037&sid=aKs0jaibTSmY

Billionaire George Soros’s Soros Fund Management LLC more than doubled its holding in the biggest gold exchange-traded fund in the fourth quarter after bullion advanced 8.9 percent to a record.

The $25 billion New York-based firm became the fourth- largest holder in the SPDR Gold Trust, adding 3.728 million shares valued at $421 million, according to a filing with the U.S. Securities and Exchange Commission yesterday. Its investment was worth about $663 million, the fund’s largest single investment, as of Dec. 31.

Which begs the question: if he expected gold to be a bubble about to tumble in price, why would he double down on gold? Sounds to me like George Soros is "talking down his book" to throw his followers off his trail. "Do as I do, not as I say" seems highly appropriate advice here.

Remember: Soros became a billionaire not by telegraphing his next move--he became wealthy by fooling others into taking the losing side of a trade. For every buyer, there is a seller, and for every seller, there is a buyer. So despite his rhetoric, Soros has been a buyer of gold, not a seller. Add to the list of big hedge funds who were net purchasers of gold last year, including John Paulson, David Einhorn, Kyle Bass, Jim Rogers, Paul Tudor Jones, and one has to wonder who has more credibility: billionaire hedge fund managers who correctly bet on a subprime mortgage crisis exploding into a global financial meltdown--or government economists and leaders who totally missed the real estate bubble and bust?

Besides, who would you rather take sides with: successful billionaires with track records--or retail sellers of grandma's jewelry for 20 cents on the dollar after watching Cash4Gold commercials?

Michael Vachon, a spokesman for Soros, declined to comment on Soros’s investments.

Ya think?

See disclaimers on the sidebar.

Disclosure: long gold and silver mining shares

If Greece is in trouble, where does that leave the US?

In many ways, the US sovereign debt problems are bigger than Greece's--much bigger. Click on chart to enlarge.

Gold reaches all-time high in euros

http://jsmineset.com/2010/02/16/gold-hits-new-all-time-high-in-euro-terms/

The Euro is cratering due to concerns about Greece's debt crisis, and looming problems on the sovereign debt of Portugal, Italy, Ireland, Greece, and Spain, part of the (mostly) Club Med countries affectionately dubbed the PIIGS nations. Hence, nervous investors are fleeing the Euro and piling into gold, driving up gold prices to all-time highs when indexed against the Euro. Gold is still below it's all-time high when priced in USDollars, due to recent dollar strength, but that will prove to be a head fake as insolvency among states like California, Illinois, et. al will become more apparent. In fact, the US federal government's fiscal problems will soon become transparent once the media provides more illumination. In other words, the recent flight to safety in the USDollar and US Treasury bonds will prove to be a wrong-way bet. The Euro may be trash, but so is the USDollar.

The bond vigilantes (multi-national hedge funds) attacked the debt and securities of companies and banks in 2008, and now they will put on bear raids against sovereign countries with solvency concerns, betting on their decline. First it was Iceland, then Dubai, now Greece, and eventually the PIIG countries.

Like a pack of predators, they target the weakest countries first, moving up the food ladder as they take out each debtor nation. In my opinion, countries in their crosshairs down the road will include Japan, the UK, and the US.

Jim Sinclair interview on markets, currencies, and gold

I suspect 1% of my blog readers will listen to this rather long, but incredibly insightful interview of Jim Sinclair, and I expect fewer people to even know who Jim Sinclair is, but I would also wager the other 99% within 5 years will regret not listening to him. The guy's track record is impressive, but his disseminated experience as a trader is invaluable. Click on the little microphone icon to hear the interview.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/2/15_Jim_Sinclair.html

The true story about him hiring an imposter to act like a big Saudi investor walking into the COMEX exchange was hilarious. "How do I turn these paper gold contracts into physical gold?" The big gold short must have crapped in his pants when he heard the question.

Sinclair's blog/website is linked in the sidebar as http://jsmineset.com/.

Fed President agrees on debt crisis

Thanks to Kathleen for finding this short article.

WASHINGTON (MarketWatch) -- U.S. fiscal policy is on an "unsustainable course" and the government must adjust its spending and tax programs or risk a crisis, Kansas City Federal Reserve Bank President Thomas Hoenig said Tuesday. In remarks prepared for delivery to a conference about the budget, Hoenig also said the current outlook for fiscal policy poses a threat to the Fed's ability to achieve price stability and long-term growth. It's therefore a threat to the Fed's independence, Hoenig said.

Dow Jones / gold ratio revisited

I earlier blogged about the Dow Jones Industrial Average-to-gold price ratio in this entry.

The graph above is basically the same graph charting the ratio, only the number of years in the dominant trends are delineated (click on chart to enlarge). The duration of an increasing ratio--indicating rising equities markets and a positive slope in the chart, is between 20 and 32 years in the last century. The periods when the ratio contracts lasts about 14 years. We are currently in the midst of a contracting DJIA/gold ratio, currently around 9.

If history is any indicator, the ratio will drop to below 2--or to unity before the downtrend reverses itself. Since the last inflection point occurred in 1999 when the ratio peaked at an all-time high of 44, we can expect the ratio to bottom out around 2013. Gold's nominal low of approximately $250/ounce occurred in 1999 and 2001, inferring this current downtrend has legs until 2013 - 2015.

So unless the DJIA plummets to 2000, expect higher gold prices over the next several years.

See sidebar for disclaimers.

Disclosure: long gold and silver mining shares.

"Greed is good."

How many moviegoers remember those emphatic words from Gordon Gekko, the fictional evil corporate raider in the 1987 classic "Wall Street"? But reading the screenplay of that scene within its full context yields some truths about corporate gluttony and complacency.

Well, ladies and gentlemen, we're not here to indulge in fantasy, but in political and economic reality. America, America has become a second-rate power. Its trade deficit and its fiscal deficit are at nightmare proportions. Now, in the days of the free market, when our country was a top industrial power, there was accountability to the stockholder. The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management has no stake in the company!

All together, these men sitting up here [Teldar management] own less than 3 percent of the company. And where does Mr. Cromwell put his million-dollar salary? Not in Teldar stock; he owns less than 1 percent.

You own the company. That's right -- you, the stockholder.

And you are all being royally screwed over by these, these bureaucrats, with their steak lunches, their hunting and fishing trips, their corporate jets and golden parachutes.



Cromwell: This is an outrage! You're out of line, Gekko!


Gekko: Teldar Paper, Mr. Cromwell, Teldar Paper has 33 different vice presidents, each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can't figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I'll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents.

The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated.

In the last seven deals that I've been involved with, there were 2.5 million stockholders who have made a pretax profit of 12 billion dollars. Thank you.

I am not a destroyer of companies. I am a liberator of them!

The point is, ladies and gentleman, that greed -- for lack of a better word -- is good.

Greed is right.

Greed works.

Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.

Greed, in all of its forms -- greed for life, for money, for love, knowledge -- has marked the upward surge of mankind.

And greed -- you mark my words -- will not only save Teldar Paper, but that other malfunctioning corporation called the USA.

Redoing the kitchen while the house burns down

http://dollarcollapse.com/articles/redoing-the-kitchen-while-the-house-burns-down/

No one really understands the U.S. balance sheet, of course, and because we own a printing press, the growing imbalances have yet to bite. Which is why the struggles of Greece are so enlightening. As part of the euro zone it doesn’t own the printing press that makes its currency. And now that it can’t borrow to fund its deficits, it has to decide — very publicly — how to live within its means.

As numerous analysts have concluded, that can only be achieved by cutting every citizen’s income by a painful amount. But the resulting drop in consumer spending will push the government budget even further into the red, requiring more cuts, which will lower spending even more, and so on. You see the problem: Without a printing press a bloated public sector can’t function.

ECB Chief Economist Stark on Greece, the Euro, and the US

http://www.spiegel.de/international/europe/0,1518,druck-677544,00.html

SPIEGEL:

Mr. Stark, Greece is threatened with a national bankruptcy, other European Union countries are heavily in debt and the common currency has come under great pressure. How safe is the euro these days?

Stark:

We have been in a global crisis for more than one-and-a-half years now. We still can't say whether it's over. But you could just as easily apply your question to other regions. No one talks about whether the United States could break apart because of California's ailing finances.

Government economists and bureaucrats seem to only become honest when throwing stones at others' glass houses.

A Tale of Two Cities (part 2)

Here's the bad news for equities. This graph (click to enlarge) charts the DJIA relative to the price of 1 ounce of gold. At the height of the internet bubble, the DJIA/gold ratio was 44--and clearly unsustainable. At the depths of previous bear markets, the ratio was unity (1:1).

Currently, the ratio is around 10:1, and trending downward in the short- and mid-term. In order for the ratio to reach unity, the Dow Jones index has to either decline by a significant amount, or the price of gold per ounce has to increase by a significant amount--or both have to occur simultaneously. Simply put, the numerator (DJIA) has to match the denominator (gold price per ounce).

The take away message from the disaggregation of both charts is that while financial asset values may increase appreciably in nominal terms, in real terms (i.e. inflation-adjusted or indexed against gold), the returns for equities do not appreciate nearly as much when measured over a long period of time. In other words, the rate of return for equities is impaired due to the devaluation of the USDollar.

No one has a crystal ball, but the short US equities / long gold trade seems like the logical play going forward. Of course, with governments and central bankers wreaking havoc by manipulating markets worldwide, logic doesn't always win out initially. Fundamentals become distorted beyond recognition as bubbles are created and burst, causing investors to lose money, despite making correct market calls. Timing becomes the enemy, not the ally. So tread carefully. Read the disclaimers in the sidebar. Perform your own due diligence.

Disclosure: long biotech and energy sector equities, long gold and silver mining shares.

A Tale of Two Cities (part 1)

First, the good news. The equities market (as measured by the Dow Jones Industrial Average, or DJIA) has done remarkably well for over a century--in nominal terms (click on the chart to enlarge). The overall trend looks positive, foreboding continued long-term appreciation--probably due to monetary growth. In between periods of consolidation are years of bullish stock markets.

Conscious manipulation

"The conscious and intelligent manipulation of the organized habits and opinions of the [public] is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country."

– Edward Bernays

Bank of England gold manipulation

An article written by University of Tennessee professor John R Garrett, "Monetary Policy and Expectations: Market-Control Techniques and the Bank of England, 1925-1931" which describes in exquisite detail the gold falsification measures undertaken by the Bank of England in the interwar period in order to impact interest rates in a favorable direction, performed with the full criminal complicity of the Federal Reserve Bank of New York, may mean paranoid "gold bugs" could soon be forever absolved of their "tin hat" wearing status as outright gold, and other data, manipulation by a major central bank is now proven beyond doubt. The implications regarding the possibility of comparable deceitful and treasonous acts by modern central bankers are staggering.

http://www.zerohedge.com/article/exclusive-bank-england-engaged-flagrant-gold-manipulation-interwar-period-new-york-fed-does-

The Counterfeiters

Speaking of good feature films about WW II and finance, rent The Counterfeiters, based on a true story of the largest counterfeiting organization in history, run by the Nazis in an attempt to destroy the British and American economies. Click on the trailer to get a taste.

I Served the King of England

The subtitled feature film is set in pre- and post-WW II Czechoslovakia, and is a light-hearted fictional narrative with real documentary passages, but has some serious, dark undertones. The movie is thematic of power and corruption, sovereignty, social disorder, and the fickle nature of paper currencies and stamps. Throw in a quirky, disturbing, but heart-warming love story, and the movie will hold your attention.

It's a bit slow at first, but gathers steam as the plot thickens and messages become more apparent. It is not surprising that it won several film festival awards. It's worth renting--here's the trailer. Enjoy.

Gensler - CFTC Chairman of the people?

I've chronicled CFTC Chairman Gary Gensler's attempts to increase transparency in futures markets, specifically in derivatives. One proposal is to transfer over-the-counter trading of derivatives into an exchange, where price discovery is more transparent. He is targeting the energy complex, particularly crude oil. We'll see if he ratchets up regulation against price manipulation in the precious metals sector.

http://www.bloomberg.com/apps/news?pid=20601109&sid=a3OkrdITAZtA&pos=10

IMF recommends raising inflation target to 4%

I wonder if the IMF's top economist is buying gold for his own personal stash. Okay, that was an irreverent dig, but Olivier Blanchard (on leave from MIT coincidentally) advises the IMF should raise their inflation target from 2% to 4%. He believes with zero interest policies already in place, central banks worldwide have no more bullets to stimulate their respective economies.

This is what they call in the feature film industry "foreshadowing."

http://online.wsj.com/article/SB20001424052748704337004575059542325748142.html

Even allies are ganging up on the US

It's understandable that China has criticized US monetary policy and erected trade barriers in the form of import tariffs. Even Japan is lashing back at Washington DC for calling out Toyota executive in the brake scandal.

And now Swiss banks are declaring US government debt at high risk of default. Perhaps this is retaliation for the US attacking Swiss private banking laws.

Here's the problem I see developing: our foreign traders have historically funded our overconsumption, buying US Treasury bonds. Without their participation in future bond auctions, there will be no buyers to replace them. Other than the Fed, which means the US Treasury just has to print more money, and down the drain the dollar goes. It's already occurring, as 30-year Treasury bond yields ticked up last week. That does not bode well for an already fragile economic recovery.

And yet folks still view the USDollar and Treasury bonds as safe havens.

Notice where US sovereign debt ranks relative to the rest of the world. It may surprise you--but then again, it may not.

http://ftalphaville.ft.com/blog/2010/02/10/146606/handy-sovereign-risk-table/

This time it's different...

http://usawatchdog.com/this-time-is-different-it%E2%80%99s-global/

Economists Kenneth Rogoff and Carmen Reinhart do a great job of researching various financial meltdowns in places like South America, Asia, Europe and the U.S. In every crisis, no matter where it took place in the last 8 centuries, people thought a big debt buildup could not end badly. The authors say “arrogance and ignorance” always pave the way to financial hell, no matter what country or what century.

The news gets worse because just about every other industrialized country in the world is facing record deficits and liabilities. Those countries will also print money to pay off debt.

Sovereign debt is being called into question with talk of national defaults on a scale unheard of before. Just this week, economist Dr. Mark Faber said, “…I am not interested in government or sovereign debt because all governments will eventually default, including the U.S.” Faber thinks governments will default, in part, by printing money to pay for their liabilities and debt. That prediction spells I-N-F-L-A-T-I-O-N on a global level. It is no surprise that Dr. Faber thinks gold will continue to outperform stocks.

So, the things that got us in this financial crisis are no different than the things that caused other financial meltdowns throughout history. I think what is different this time is the size of the debt buildup. It is on a scale never before seen in human history. Debt is overwhelming individuals, corporations and countries. This global debt will likely produce the biggest financial meltdown in history, deserving of the Volker expression “mother of all financial crises.”

All terrorists please register in South Carolina

The legislature in South Carolina is requiring all terrorists to register with the Secretary of State to declare their intentions. I am not making this up.

http://rawstory.com/2010/02/south-carolinas-subversive-activities-registration-act-force/

Gee, we need more smart politicians in office.

Sovereign debt and central banker self-delusions

http://www.zerohedge.com/article/just-how-ugly-sovereign-default-truth-how-self-delusions-prevent-recognition-reality

Behavioural psychology applies to central bankers, regulators and politicians as much as it does to investors. In promising to ‘fiscally retrench tomorrow’, finance ministers are exhibiting the behavioural phenomenon of overconfidence in their future self-control. The bitter fiscal medicine required to stabilise debt levels won’t become more palatable today relative to tomorrow until the bond market makes it so. It can only do this through higher yields. Thus, Ireland and perhaps now Greece lead the way. For the Japanese it’s too late.

As the housing bubble inflated, Bernanke in a quite staggering display of logical sloppiness, concluded that the risk of a housing collapse in the future was small because there had never been one in the past ? Weren't they then guilty of "framing" their analysis in a way guaranteed to preclude an uncomfortable conclusion? If you don't expect to see something, you're less likely to see it. Similarly cringe worthy logic was used when sub-prime rolled over, and Bernanke concluded that there was no risk of contagion to the rest of the economy because... er... there had been no contagion to the rest of the economy yet... wasn't this textbook "recency bias" whereby the importance of recent events is over-weighted?

It probably was, and it probably demonstrates that central bankers are as prone to be as systematically silly as the rest of us. Indeed, just last year a study by yet more of Bernanke's "best and brightest" concluded that “monetary policy was not a primary factor in the housing bubble”. I don?t want to pretend I?m any kind of behavioural expert, but isn't this the well documented "attribution bias" by which people attribute positive outcomes to themselves, but negative ones to others?

So here we are today, with regulators rounding on investment banks, hedge funds and tax havens, apparently in denial of the reality that the problem was not the regulations but the regulators. After all, heavily regulated institutions like Fannie Mae and Freddie Mac were at the epicentre of the crisis.

Oscar Wilde said he could resist anything but temptation. But doing something you know you shouldn't is easier if you can convince yourself that this will be the last time you indulge, that you won't do it again. So we convince ourselves that since we'll be strong in the future, we can still indulge today. Whether it?s smoking, eating too much or going to the pub instead of the gym, we delude ourselves into thinking that we will take the more difficult path next time.

Apparently heroin addicts can become so drug dependent their bodies cannot withstand the shock of withdrawal, and failure to continue taking the drug triggers multiple organ failures. I just wonder how apt that analogy is to our governments' debt dependency today. As long as governments think that taking these difficult decisions to end the addiction will be easier in the future than it is today, they will never take the decision "today." At the very least, there will have to be a sufficiently large bond market "event" to force the issue.

At some point, sovereign governments and central bankers will have to withdraw stimulus programs. Will they have the political will?

Corrections in gold and silver

This is a good primer on corrections within a bull market in gold and silver.

http://www.dailywealth.com/archive/2010/feb/2010_feb_11.asp

If the Chinese economy falters, then it is very possible that commodities will fall as well, since China has been a huge market for them.

I think gold will do better than silver under this scenario, because gold is viewed as a monetary commodity by all the major players, whereas silver is viewed as an industrial metal as well as a monetary one. In a contracting economy, silver may fall. That doesn't mean I'm going to rush to sell my silver, it means that I am prepared to see silver fall.

- Chris Weber

Brian Hunt auggests the smart money is buying the dips.

Disclosure: long gold and silver mining shares.

Crime does pay

Financial Armageddon

I think the expression "going to hell in a hand basket" is very apropos right now. There is absolutely no way out of this economic, financial and monetary Armageddon that awaits the entire planet.. and I would suspect that all governments and their respective central banks know that. The only thing that's unknown, is the timing. But, judging by the speed with which things are circling the drain, something has to give pretty soon.

As I said the other day, there are only three possible outcomes... or combinations of all three... that are staring 'the powers that be' in the face. One is an outright deflationary collapse, the second a hyperinflationary depression... and the third, a return to a gold standard of some sort. Which will it be?

- Ed Steer

Niall Ferguson on sovereign debt

I won't chastise Niall Ferguson for teaching Economics at Harvard (sarcasm intended), since he is completely dialed into the sovereign debt problem among developed, westernized countries. I saw him in a Bloomberg TV interview last week, but couldn't find the video clip. Thanks to my friend Dick, here is an article which captures his main points on the default risk of the Club Med countries--and of the US.

http://www.ft.com/cms/s/0/f90bca10-1679-11df-bf44-00144feab49a.html?nclick_check=1

It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate.

That leaves just three possibilities: one of the most excruciating fiscal squeezes in modern European history – reducing the deficit from 13 per cent to 3 per cent of gross domestic product within just three years; outright default on all or part of the Greek government’s debt; or (most likely, as signalled by German officials on Wednesday) some kind of bail-out led by Berlin. Because none of these options is very appealing, and because any decision about Greece will have implications for Portugal, Spain and possibly others, it may take much horse-trading before one can be reached.

Yet the idiosyncrasies of the eurozone should not distract us from the general nature of the fiscal crisis that is now afflicting most western economies. Call it the fractal geometry of debt: the problem is essentially the same from Iceland to Ireland to Britain to the US. It just comes in widely differing sizes.

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect

For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.

CNBC anchors in an uproar with Faber's comments

CNBC anchors raised an uproar regarding economist Marc Faber's comments on sovereign debt and impending defaults in the westernized world. Notice how they try to discredit Faber's forecasts, when they themselves missed the financial crisis. What's that expression about throwing stones in glass houses?

http://www.zerohedge.com/article/fabers-bold-prediction-both-us-and-europe-will-default-their-debt

Deficit to GDP

Risk of sovereign debt default is permeating throughout nervous bond markets for Greece, Spain, and Portugal--among other countries, as credit spreads widen.

The US fiscal picture isn't much better. Yet, investors still view the USDollar as a safe haven. Time will tell whether US Treasury bond investors will be trapped in another bubble.

Commercial real estate train wreck

Andy Miller's take on the pending implosion of commercial real estate:

http://www.caseyresearch.com/editorial/3212?ppref=CRX175ED0210C

Bankers' last gasp

The collapse of our banking system is inevitable, according to Darryl Schoon.

http://www.drschoon.com/articles/DavosTheBombShelter.pdf

The Chinese dumping US bonds

The Chinese are finally doing what they've threatened to do for a while: not only are they not buying US corporate and Treasury bonds, they are now net sellers.

http://www.zerohedge.com/article/china-dumping-begins-reserve-managers-notified-any-non-usg-guaranteed-securities-must-be-div

The China Securities Journal, a government-backed daily, accused the U.S. in a tough-worded front page editorial of playing the "exchange rate card."

It said that, just as China didn't interfere with Federal Reserve purchases of U.S. Treasuries, "the U.S. has no right to interfere in China's exchange rate policy."

"Whether or not to appreciate is our own business," the newspaper said.

"Whether it will appreciate, when and by how much is an integral part of China's monetary policy."

Stiglitz US and UK default

Nobel laureate Joseph E. Stiglitz said the prospect of a default by the U.S. or the U.K. is an “absurd” notion constructed in financial markets.

Both nations “deserve to keep the Aaa rating” and “the likelihood of a default is so small, particularly in the U.S. because all we do is print money to pay it back,” he said in response to questions after a speech in London yesterday. “The notion of a default is so absurd, it’s another reflection of the absurdities in the financial markets.”

Let's see...I don't have a Nobel Laureate, but the comment of "the likelihood of a default is so small, particularly in the US because all we do is print money to pay it back" sounds like circular logic to me.

While Moody’s Investors Service says the grade may face pressure without more action to cut the budget deficit, Stiglitz said the economy requires more stimulus right now.

Sounds predictably like quantitative easing to infinity to me.

GE and the US government are broke

General Electric and the US government are bankrupt, according to Porter Stansberry.

We've been telling our friends for months that sooner or later the U.S. Treasury secretary would come out and publicly say something ridiculous in defense of the U.S. dollar – much like a banana republic's finance minister on the eve of devaluation. Today, we got our first actual taste... On Sunday, Geithner said the U.S. "will never" lose its triple-A credit rating. Never is a very long time. And if you believe the representative of a bankrupt government, there's a bridge in Brooklyn you should look into buying...

Watching Geithner lie through his teeth reminded us of July 2008, when Fed Chairman Ben Bernanke assured us Fannie Mae and Freddie Mac were "adequately capitalized" and "in no danger of failing." One month earlier, I'd written an issue of my newsletter (Porter Stansberry's Investment Advisory) titled "Freddie Mac and Fannie Mae Are Going to Zero." I was watching Bernanke's testimony on TV in a hotel room on the 30th floor of the Four Seasons Hotel in Las Vegas. I could literally see more than $100 million worth of bankrupt real estate from my window – more than enough to bankrupt both Fannie and Freddie. As an investor, I had a simple choice to make: I could believe a government bureaucrat, who is in charge of running a paper money system backed by nothing by confidence... or I could believe audited financial statements and my own two eyes. I chose the latter.

More recently, I've been warning investors both our government and our biggest conglomerate (GE) are broke. On Friday, Moody's seemed to agree with me, warning the current deficits are unsustainable. Geithner and Bernanke will undoubtedly beg to differ. However, anyone who has ever paid interest on any debt before is welcome to simply look at the numbers and ask themselves a few basic questions... How can so few taxpayers be expected to repay more than $20 trillion worth of debt? How can a democracy where most people don't actually pay taxes ever be expected to run a balanced budget? Why would anyone expect America to repay its debts when millions of our consumers and a large number of our biggest companies are going bankrupt?

Big problems like these are easy for investors to ignore. And many investors will ignore these problems – for a long, long time. I can't tell you when, exactly, the scary numbers behind GE and our federal government will cause investors to take action. But I can tell you when that time comes you won't want to be holding dollars or GE bonds. And I can tell you with 100% certainty both GE and the federal government are going bankrupt within the next five years.

Central bankers' secret meeting

An excerpt from Ed Steer:

Central banks meeting in secret it Australia... it sounds like The Creature From Jekyll Island all over again. Greece, Portugal and Spain et al on the brink. A stock market [the Dow] that wants to die. It appears that the central banks are watching their control of world financial and monetary events slip away... and are in a full panic mode.

From what I can see at this juncture, there are only two possible ways this economic, financial, and monetary situation is going to resolve itself, and they are... a hyper-inflationary depression... or a complete deflationary collapse. Both of which will result in the destruction of most of the world's currencies. But, somewhere along either of those paths, or a combination of the two paths... individually or collectively, the central banks will be forced back into using gold as a convertible currency. When [and notice I didn't say 'if'] that happens, gold will have to be revalued to some fantastically high price. At that moment, the Golden Rule will come into play... He who has the gold, makes the rules!

Then, and only then, will we find out which countries and their respective central banks have gold reserves of any kind... and how much they really have left.

In the interim, things are going to get incredibly ugly. And, without doubt, the world's central banks will resort to anything to prevent 'all of the above' from happening.

Deficit picture

A chart is worth a thousand words, so thanks to my friend Craig Bardo for finding this article.

http://blog.heritage.org/2009/03/24/bush-deficit-vs-obama-deficit-in-pictures/

Debt panel

In the "speaking out of both sides of the mouth" category, Obama raised the national debt limit to $14.3 trillion, simultaneously proclaiming the creation of a debt panel to reduce budget deficits and debt levels.

http://www.reuters.com/article/idUSN0510452820100205

Euro in trouble

Notice how government officials always blame currency "speculators" for their country's woeful finances? How about trying to balance your budgets first before pointing your finger at others?

http://www.ft.com/cms/s/0/0330ba78-149f-11df-9ea1-00144feab49a.html

Wall Street and the White House

Thanks to Kathleen for this gem. As referenced ad nauseum, the pipeline from Wall Street to the White House is alive and well. The poker games in the back rooms must be fun. "I'll call and raise ya $1 million (or one speaking engagement, whichever is higher)."

http://trueslant.com/timzimmermann/2010/01/21/the-amount-of-wall-street-money-in-wh-pockets-is-stunning/

Meow.

The law of big numbers

As an engineering student, I understood the concepts of linear growth vs. exponential growth. But even I underestimated the practical applications of calculating exponential growth when it comes to energy consumption. Here's a primer on exponential growth and the future impact it will have in our consumption habits in a world of finite natural resources.



Lesson learned? Demand for energy, base metals, commodities, and precious metals will continue to outstrip supply, as world population and the standard of living in emerging countries grow. I'll let readers come up with their own conclusions.

Barclays says gold prices will decline

Brian Nick of Barclays Bank believes gold prices are headed lower. Question: how many short contracts does Barclays have on gold in the COMEX or LBMA? In other words, is he "talking his book"?

In any case, I just wanted to present both sides of the coin.

http://www.hardassetsinvestor.com/features-and-interviews/1/1984-brian-nick-time-to-short-gold.html

Geithner says US will never lose AAA credit rating

US Treasury Secretary Tim Geithner says the US could never lose its AAA crediting rating. Seeing how the track records for the Fed and US Treasury are spotty regarding economic forecasts, I'll beg to disagree with Geithner.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ahGwg7V3u3Gs&pos=3

The major credit ratings agencies missed the subprime and financial crises, failing to downgrade insolvent banks and toxic mortgage-backed securities, so for them to call into question the sovereign credit risks of Dubai, Greece, Spain, Portugal, Ireland, the UK, Japan, and now the US, should cause one to sit up and take notice.

Moody’s Investors Service Inc. last week said the U.S. government’s bond rating will come under pressure in the future unless additional measures are taken to reduce budget deficits projected for the next decade.

Yep, QE to infinity is coming.

Despite declarations of quantitative easing ending, and "exit strategies" for pulling back "stimulus" spending, the title of this Bloomberg article says all you need to know ("G-7 Vows to Keep Economic Stimulus Even as Budget Deficits Grow"): central banks worldwide will predictably continue to print money in an attempt to stave off The Greater Depression. Congress and the Obama administration will continue to kick the can down the road--at least until the mid-term elections are over. Meanwhile, the budget deficit and national debt will continue to grow by monstrous proportions.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aHNY95xmqjwM&pos=1

And Tim Geithner, US Treasury Secretary once again endorses a "strong dollar policy." Yeah, right...we've all heard that one before.

John Embry of Sprott Asset Management, January 2010

http://www.sprott.com/Docs/InvestorsDigest/2010/01_29_2010%20Expect%20gold%20to%20gain%20more%20than%2030%20this%20year.pdf

Taleb is shorting US Treasury bonds

Nassim Taleb, author of "The Black Swan", who predicted the credit bubble and financial crisis in 2007, says the US Treasury bond market is the next to burst. I couldn't agree more, and have been blogging about this for over a year. Who in their right mind would lend money to a broke US government, tying their money up for 30 years, while earning less than 5% interest for the privilege of taking on that risk?

http://www.bloomberg.com/apps/news?pid=20601087&sid=a3E4uC5VIFeo&pos=5

While it's not convenient or prudent for retail investors short US Treasuries in the futures market, the TBT ETF is a possible trade on rising long-dated bond yields. But TBT is not an efficient proxy for shorting Treasury bonds, and tends to underperform in the long-term.

However, home borrowers should lock in a low fixed-rate mortgage to protect themselves from rising yields in the 10-year Treasury bond.

See sidebar for disclaimers.

Disclosure: no position in TBT.

Euro vs. US

“Let me get this straight: investors are getting out of the euro zone ( 2010 deficit/GDP 6.7 per cent; debt/GDP 88 per cent, according to OECD) because of its poor fiscal situation and flocking to the U.S. (10.7 per cent and 92 per cent, respectively).”

- Erik Nilsson, an economist at Scotia Capital:

Unemployment - don't believe the hype

Despite today's official unemployment rate being reported as 9.7%--down from last month's 10%, don't fall for the inference that the jobs picture is improving. The number of those out of work for over half a year has tripled in the past year. Based on those who have given up looking for work, of those forced to take lesser jobs, the unemployment rate is over 17% or 22%--depending on your source. See shadowstats.com.

Berkshire Hathaway downgrade

In the "what in the heck is this world coming to?" category, Berkshire Hathaway's credit rating was officially downgraded from the highly coveted "AAA" to "AA+" by S & P. Warren Buffett, Chairman of Berkshire Hathaway and considered the greatest equities investor of all-time by consensus, has made huge bets on an economic recovery, recently acquiring Burlington Northern railroad for $26 billion.

The acquisition required cash, stock, and $8 billion in notes, now rated AA+. This reduced Berkshire's cash position, increased their debt levels, and introduced risk into the Berkshire holding company's business model.

http://www.usatoday.com/money/markets/2010-02-05-aaabuffett05_ST_N.htm

Cal STRS looking at commodities play

http://www.bloomberg.com/apps/news?pid=20601087&sid=adUC4S1obfh4&pos=7

The California State Teachers’ Retirement System, the second-biggest U.S. public pension, is considering investments in commodities to boost returns and provide a hedge against inflation and slumping equities.

The governing board of the fund, with $134 billion under management, is scheduled to hear today a staff report in Sacramento that recommends its first-ever commodity investment. The board will decide whether to seek additional research on strategies and portfolio weightings.

Given their poor timing and wrong-way investments, is it time to exit the commodities reflation play? They're only a year late.

COMEX and LBMA default?

Thanks to Dick for another gem.

Could a default, or "failure to deliver" in the COMEX or London Bullion Market Association be imminent? It probably has occurred already. There is a widening gap between the prices of paper gold contracts and physical gold bullion, due to price suppression schemes by the bullion banks and central bankers. Jim Willie believes the bifurcation of futures contracts and physical gold prices will occur when the physical shortage of gold is exposed.

http://www.financialsense.com/fsu/editorials/willie/2010/0203.html

The paper gold market and the physical gold bullion market have finally separated in a practical manner, meaning actual gold has almost no role anymore in London paper contract settlement. The absence of gold in London requires extraordinary tactics to settle contracts and to obtain gold bullion. Red tape procedures delay delivery for individuals, and bribes accompany gold delivery demands as standard practice. The London Bullion Market Assn has almost zero gold, its supply having been drained in high volumes since early December, a process currently in acceleration.

The public is unaware of government and central bank intervention in markets. They are also unaware of the pipeline between Wall Street and Washington, DC. The populist anger expressed by Congress and the Obama Administration is manufactured, armed with public opinion polls. You know the best way to eliminate taxpayer-funded banker bonuses? Don't bail out the banks in the first place. The media is complicit, cheerleading green shoots, while ignoring accurate data.

The financial press is critically important precisely now, for not spilling the facts on the current gold market breakdown and divergence. Much of the pressures are hidden though, since the financial press networks report only the official paper-based prices. Do not expect to read in Reuters or Bloomberg or the Associated Press or Wall Street Journal or the New York Times or Investors Business Daily or Barrons that a grotesque gold shortage exists in the London metals exchange or at the COMEX in New York and Chicago. They will not report that London is virtually drained of gold, yet still sells gold contracts. Accurate news reporting would accelerate the breakdown and remove the possibility for time extension. The press will not report that billionaires are emptying their gold bullion accounts at rapidfire pace, out of gross distrust of the bankers, since gold leasing has illegally been standard practice for many years. Imagine selling lumber contracts without wood delivered. Imagine selling mortgages without home titles delivered. Actually, Wall Street did precisely that from 2003 to 2007.

The Great Repression

Wow, I agree with a Harvard economist, as he bashes Keynesian economics.

http://www.niallferguson.com/site/FERG/Templates/ArticleItem.aspx?pageid=203

Pension funds are in trouble

http://www.bloomberg.com/apps/news?pid=20601039&sid=aKQk6SUcSr3A

This Bloomberg provides insights on the perils of investing for big pension funds. The "crowding effect" virtually guarantees underperformance, as consultants and pension managers invest to avoid fiduciary litigation, not for investment returns. This leads to unfunded pensions--and eventual promises unpaid.

Here is an article sizing up the unfunded California Teachers pension fund:

http://articles.latimes.com/2010/jan/29/business/la-fi-calstrs29-2010jan29

Safe havens

The USDollar has been a safe haven asset since the Bretton-Woods agreement in 1945. To many, it still is, when all other assets decline in value in a risk-adverse investment environment. Don't be fooled by Wall Street's head fakes. The US government's finances are stuck between a hard place and a rock. We are not out of the woods--not even close.

Consider precious metals as a haven. Gold and silver got clocked today, much like every other asset. This is a knee jerk reaction as panic selling kicks in during a liquidity crunch. Cooler heads will re-discover gold and silver are historically reliable stores of value. Precious metals were the first to recover in the 2008 liquidity crisis. They'll be the first to recover in the future. Stay the course. Accumulate on dips, if you can. Go watch a movie, and stop watching the daily fluctuations. Because one day, when the debt crisis turns into a currency crisis, your purchasing power will still be protected.

Two good articles:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ay7aVAKL6qYw

http://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=97226&sn=Detail&pid=1

See disclaimers on the sidebar.

Disclosure: long gold and silver mining shares.

Lies and omissions

http://usawatchdog.com/real-deficit-numbers-and-real-consequences/

The reason why I ask is the government uses accounting gimmicks to make just about every number it puts out look better than what it really is. For example, the most recent Consumer Price Index for inflation was officially 2.7%; but if you compute inflation the way Bureau of Labor Statistics did it in 1980, the inflation rate would be 9.7%. The same goes for unemployment. Officially, it stands at 10%; but if computed the way BLS did it prior to 1994, it would come out to 21.9%. (source: shadowstats.com)

I asked economist John Williams of shadowstats.com to weigh in on last year’s record $1.4 trillion of red ink for the “real” deficit number. Williams told me, “It was closer to $2 trillion because they knocked off $500 billion with accounting gimmicks.”

In its latest budget, the White House is projecting $1.56 trillion in red ink, and that is another new record! What will the “real” deficit be when the year is over? Williams says, “With a weaker than expected economy, the 2010 deficit likely will top $2 trillion…”

No matter how the government does its accounting, the actual deficit will have to be financed. America will have 3 choices: (1) raise taxes to the moon in a very bad economy, (2) get foreigners to buy more debt, and (3) monetize the debt. (print money to pay the bills) Williams chooses what’s behind door #3. In his latest report he says, “…worse-than-projected borrowing needs for the U.S. Treasury likely will trigger increasing flight from the U.S. dollar. At such time as that moves to a panicked level, and U.S. Treasuries increasingly are dumped or otherwise shunned, the Fed will have little choice but to monetize the Treasury debt, becoming the buyer of last resort for Treasuries. Those circumstances should lead to mounting inflation woes and flight-to-safety outside the U.S. dollar, particularly to hard assets such as gold and silver…”

There is another possible consequence to record deficits–higher interest rates! Countries around the globe with high deficits are starting to see interest rates rise. For example, Greece is facing a huge debt load and interest rates there are skyrocketing. In a recent article from “Money and Markets,” analyst Mike Larson put it this way, “Imagine what would happen if Uncle Sam’s borrowing costs shot up like they have in Greece — by 60 percent! Imagine what that would mean for the cost of car loans, mortgages, and other products whose rates track Treasury yields! And imagine the impact on an economy still struggling to recover from the Great Recession! This is the next big story that few people are talking about.”

The founder of “Money and Markets,” Dr. Martin D. Weiss, went on to say, “…unless the Obama administration and Congress can somehow ax the budget or find a new gusher of revenues — both extremely unlikely anytime soon — collapsing U.S. bond prices and sharply higher long-term interest rates are unavoidable.”

The most recent record breaking budget does not take into account what we will spend in the continued bailout of failed mortgage giants Fannie and Freddie. The two were nationalized last year and, on Christmas Eve, the Treasury decided to give them both unlimited bailout funds for the next three years! There is a total of $8 trillion in liability.

So, it looks like higher inflation or higher interest rates or both are coming.

Lies, lies and more unemployment statistics

Uh-oh, more jobs were lost than what old official unemployment statistics showed. The new revision coming out this week will detonate like a big turd bomb.

http://www.bloomberg.com/insight/birth-death-model.html

Every American should read this

Bob Fanning summarizes how big Banksters and our complicit Government have hookwinked US taxpayers in the biggest heist known to man. It's a long read, and if you don't understand some of it, ask questions. Make it your mission to find out what's going on.

It's also a reminder you should have paid more attention in school. Actually, I take that back. They didn't teach us this in school. We were taught that our government would have our best interests at heart.

http://www.takeitbackday.org/Website_Summary.php

Tax hikes coming for the middle class

This will not be good news to constituents, so perhaps it's why this Reuters article was pulled. Is the US Government resorting to censorship?

http://www.powerlineblog.com/archives/2010/02/025513.php

Debt time bombs

Our nation's fiscal problems are now reaching the mainstream press. Paul Farrell argues most will filter out the bad news until it's too late, due to our natural (false) optimism as investors. The take-away message? Like the Boy Scouts: Be Prepared.

http://www.marketwatch.com/story/our-debt-time-bomb-is-ready-to-go-ka-boom-2010-02-02

America's bankruptcy

Porter Stansberry has made some prescient forecasts in the past. He declares the United States is bankrupt in his most recent call.

http://www.thedailycrux.com/content/3989/Porter_Stansberry/eml

AIG bonuses

Unemployed? Try getting a job at AIG or Goldman Sachs, where they are paying themselves hundreds of millions and billions in bonuses. These are the same firms who needed a bailout just to stay alive. Apparently our tax dollars are being put to good use, lining the pockets of bankers gone wild.

http://www.washingtonpost.com/wp-dyn/content/article/2010/02/02/AR2010020203036.html

Volcker says let 'em fail

Paul Volcker, former Fed Chairman and current adviser to President Obama, told the Senate Banking Committee that hedge funds and private equity funds should be allowed to profit and fail on their own, without government support.

Which is how capitalism should work, and hence, sound policy. The problem is that charities, foundations, schools, churches, states, and municipalities who speculated in over-the-counter (OTC) derivatives will go bankrupt when these toxic assets sink in value. Why exactly did these entities "invest" in these swaps? Who was minding the fence?

http://www.bloomberg.com/apps/news?pid=20601103&sid=axxnPYqTocfY

The Last Days of Lehman Brothers

AIG bailout

Taxpayers bailed out AIG, which eventually meant these banks got life preservers. The question is: at what cost? Click on the chart to zoom in.

Colorado Springs literally turning off the lights.

Colorado Springs is slipping into third-world status due to cuts in basic public spending.

http://www.denverpost.com/news/ci_14303473

Community business leaders have jumped into the budget debate, some questioning city spending on what they see as "Ferrari"-level benefits for employees and high salaries in middle management. Broadmoor luxury resort chief executive Steve Bartolin wrote an open letter asking why the city spends $89,000 per employee, when his enterprise has a similar number of workers and spends only $24,000 on each.

Officials across the city know their phone lines will light up as parks go brown, trash gathers in the weeds, and streets and alleys go dark.

Peramivir sales in Japan

Shionogi announced Peramivir sales targets for their fiscal year ending March 31, 2010.

http://www.shionogi.co.jp/ir_en/news/detail/e_100126.pdf

Based on conservative estimates of 700,000 doses at $34 per dose to $64 per dose, Shionogi expects revenue of between $23.8 million and $44.i million. With an assumed 20% royalty split, BioCryst Pharmaceuticals (BCRX) revenue from Shionogi sales in Japan over the next two months is between $4.76 million to $8.82 million. These revenue figures flow straight to the bottom line, and with 38.2 million outstanding shares, the earnings per share from Japanese revenue over the next two months is significant.

Sales figures do not take into account milestone payments due BCRX, and do not include the manufacturing mark-up from sales of Peramivir Active Pharmaceutical Ingredient (API) to Shionogi.

As noted, Peramivir is gaining traction worldwide, as regulatory approvals and emergency use authorization (EUA) have been secured in North America, Asia, Europe, the Middle East, and Latin America.

See sidebar for disclaimers.

Disclosure: long BCRX shares.

The crack spread

I posted a blog entry on January 19 on the increasingly uneconomical industry of petroleum refining in the US. A consequence of refineries moving offshore due to shrinking profit margin are higher prices across the energy complex.

According to the Energy Information Administration's (EIA) "Derivatives and Risk Management in the Petroleum, Natural Gas, and Electricity" publication, a "crack spread" is the following:

Refiners’ profits are tied directly to the spread, or difference, between the price of crude oil and the prices of refined products. Because refiners can reliably predict their costs other than crude oil, the spread is their major uncertainty. One way in which a refiner could ensure a given spread would be to buy crude oil futures and sell product futures. Another would be to buy crude oil call options and sell product put options. Both of those strategies are complex, however, and they require the hedger to tie up funds in margin accounts. To ease this burden, NYMEX in 1994 launched the crack spread contract. NYMEX treats crack spread purchases or sales of multiple futures as a single trade for the purposes of establishing margin requirements. The crack spread contract helps refiners to lock-in a crude oil price and heating oil and unleaded gasoline prices simultaneously in order to establish a fixed refining margin. One type of crack spread contract bundles the purchase of three crude oil futures (30,000 barrels) with the sale a month later of two unleaded gasoline futures (20,000 barrels) and one heating oil future (10,000 barrels). The 3-2-1 ratio approximates the real-world ratio of refinery output—2 barrels of unleaded gasoline and 1 barrel of heating oil from 3 barrels of crude oil. Buyers and sellers concern themselves only with the margin requirements for the crack spread contract. They do not deal with individual margins for the underlying trades.

Traders are profiting from the closure of American refineries, as the crack spread is widening. However, the bottom line to US consumers and businesses are higher energy prices going forward.

http://www.bloomberg.com/apps/news?pid=20601109&sid=amg1Ou18W4wY&pos=15