Britain At Risk Of Worse Deficit Crisis Than Greece

Britain At Risk Of Worse Deficit Crisis Than Greece

By Edmund Conway and James Kirkup | 18 February 2010

Britain is at risk of a Govenment deficit crisis worse than that of Greece, sparking serious fears over the economic stability of the country. Economists said that the scale of the shortfall in the budget could this year mount to above £180 billion— higher than even the Chancellor's forecast of a record £178 billion. In surprise news which sent the pound sliding on Thursday, official figures showed that the Government borrowed £4.3 billion last month. It was the first time since 1993 that the public finances had gone into the red in January— a month in which tax revenues usually push the Exchequer into the black.

Such a deficit would, at 12.8 per cent of British gross domestic product, be even greater than the deficit faced in Greece, which is facing a full-scale fiscal crisis and may need to be bailed out by fellow euro nations or the International Monetary Fund. The public borrowing figures coincided with further bad news from the housing market, as the Council of Mortgage Lenders reported that mortgage lending dropped last month by 32 per cent, hitting the lowest monthly total in a decade. The Bank of England also reported a decline in lending to businesses, indicating that the economic slowdown is far from over.

The poor economic figures came as a major blow for the Chancellor, Alistair Darling, coming a month ahead of the Budget, which he had hoped would provide proof that the economy was finally on the mend. The news also came ahead of Gordon Brown's unofficial launch to the Labour election campaign, which the Prime Minister hopes to base on his party's economic record and policies. Mr Brown will tomorrow (Sat) launch Labour's election slogans for the general election, still pencilled in for May 6. They are: "Ensuring the recovery"; "Protecting frontline services"; "Standing up for the many"; and "Protecting future jobs and new industries".

Despite growing warnings from economists and business leaders that the size of the deficit poses a grave threat to Britain's economic future, Labour says public spending should not be cut before 2011/12. In a speech in London today (Fri), the Prime Minister will insist that the Conservatives' plans to tackle the deficit by cutting spending this year would undermine the recovery. "Instead of helping a recovery, their hatred of government action would risk the recovery," Mr Brown will say. "Instead of defending ordinary families, they would kick the ladder of opportunity away from ordinary families."

The Office for National Statistics said the Government had never before had to borrow cash in January, adding that the shortfall meant it had now borrowed some £122 billion this year, equivalent to around £2,000 for every man, woman and child in the country. The scale of the debt has been far greater than in previous recessions because the recession has brought with it a collapse in tax revenues, particularly from 'the City' [[the UK's equivalent of U.S.'s 'Wall Street': normxxx]], and a sudden increase in social benefits payments to the unemployed and disadvantaged. Jonathan Loynes of Capital Economics said that although Britain's national debt was far lower overall than that of Greece, the UK deficit— the rate at which it is borrowing [and adding to the debt] each year— may now be even greater.

He said:

"With the budget deficit heading towards 13 per cent of GDP this year, and perhaps exceeding that of Greece, it is clear that a more credible plan to restore the public finances to health will be required shortly after the general election to keep the markets and rating agencies at bay."

A host of economists and businessmen have urged the Government to slash the deficit faster and deeper than it currently plans, with 20 leading academics warning last weekend that without action on the public finances, Britain could face a crippling fiscal crisis. The Conservatives have warned that Britain could sacrifice its top credit rating unless the next Government takes drastic action. Shadow Chief Secretary to the Treasury, Philip Hammond, said:

"These appalling figures— showing the first January deficit on record— illustrate the scale of Labour's debt crisis. "The Prime Minister must now heed the advice of leading economists and business leaders and set out a credible plan to get the deficit under control, starting this year to put Britain back on her feet. The longer he delays, the more the recovery and our credit rating will be put at risk."

In the wake of the statistics, Treasury officials spent much of the morning calling round 'the City', urging major investors not to panic. However, the Government's cost of borrowing, as signified by the interest rate it pays on its bonds, rose to 4.1 per cent— the highest level in 15 months. A Treasury spokesman said:

"These figures keep us on track to meet our pre-Budget report forecast the pre-Budget report predicted a sharp decline in self-assessed capital gains tax and income tax receipts paid this financial year, with January being the most important month for these receipts; that fall is evident in today's figures."

Owen James of the Centre for Economics and Business Research said:

"In the wake of the continuing problems for Greece, international investors are wary of economies with large deficits. Despite the fragile nature of the recovery, Britain must avoid the predatory eyes currently focused on the likes of Portugal, Spain, Italy and Ireland. "It is imperative that appropriate action to reduce public borrowing is taken by the next government; we are sceptical on whether the pre-election Budget will contain sufficient actions to appease market concerns. Today's data underlines the need to make clear commitments on future policy."

James Knightley, an economist at ING Financial Markets said: "Given the concerns about public deficits around Europe at the moment, this could put the UK back in the spotlight".

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Ignore The Illusion Of 'Spring'

Ian Gordon: Ignore The Illusion Of 'Spring'

Source: Interviewed by Karen Roche, Publisher, The Gold Report 22 February 2010

Never mind that fruit trees are blossoming all over the Northern Hemisphere. It doesn't matter that Punxsutawney Phil of Pennsylvania saw his shadow on February 2. We're in for a lot more of a long, harsh Winter— a real whopper in terms of the Kondratieff cycle that the Longwave Group's Ian Gordon has become expert at analyzing and interpreting. In this exclusive interview with The Gold Report, Ian pulls no punches about the dreadful times ahead as economies wring out decade's worth of accumulated debt. The only gleams shining through in his dreary forecast: ample opportunities in precious metals equities.

The Gold Report: According to your analysis based on the Longwave Principle, we are in a period of the cycle when the economy dies, the stock market crashes and we enter depression. Could you provide readers who may not be familiar with the Longwave Principle a high-level description of this concept?

Ian Gordon: The basis of the Longwave Principle is the Kondratieff Cycle. Russian economist Nikolai Kondratieff developed his thesis on this in the 1920s. The cycle lasts approximately 50 to 60 years. I call it a lifetime cycle, because we live only one cycle in a meaningful way. For that reason, it is also very difficult for anyone to recognize where we are in the cycle because we haven't lived it that period before.

For example, we are now in the depression stage, but no one really refers to it that way. I do believe we are in depression because the real number on U.S. unemployment is somewhere around 17%. That to me is a depression.

TGR: You call this period the Winter.

IG: I've broken the cycle into the four seasons, and others have done the same— with Spring being the birth and rebirth of the economy, Summer being the time when the economy reaches its fruition, Autumn being the feel-good period. Kondratieff called Autumn the plateau period because it's when the economy levels out and it's also the season— always— of massive speculation in stocks, bonds and real estate.

There are indications of each season changing, and you have to know where you are in a cycle to be able to predict where you're going. At the Longwave Group, we've been able to demonstrate with a lot of comfort where we are in each of the seasons, when we change seasons and so on.

TGR: And the debt created in the previous period, Autumn, led to this depression stage?

IG: Debt is a major part of it. Speculation is also a contributing factor. We went into Autumn between 1980 and 1982 and similarly between 1920 and 1921. Four events anticipated each of those Autumns. One was a peak in interest rates, second was a peak in prices, third was a bear market in stocks and fourth was a recession.

And then you go into this massive speculation in stocks, bonds and real estate in the Autumn because once the Federal Reserve takes interest rates quite dramatically down from the peak, money floods into the banks. It's also the season when you get the biggest build-up in debt. Any debt chart in the United States, for instance, shows that the debt really starts to take off at the beginning of Autumn.

When the big speculative bull market ends, it indicates that we're going into Winter. And Winter is when all the huge debt that's been built into the economy is wrung out, through either payback or— in most cases— bankruptcy. Creditors and debtors alike suffer very, very much during the Winter period. It causes a crisis in the banking system because banks are the biggest creditors. If you look at the last Winter after the 1929 stock market peak, 10,000 U.S. banks failed by 1933. In fact, when Roosevelt became president, he closed all banks for 10 days and sent in examiners. Banks deemed to be okay were allowed to reopen, and basically the doors stayed closed on the rest.

So, we're now in the Winter. I've argued the real peak in the stock market occurred in 2000; that was certainly the speculative peak on the NASDAQ. At that time, too, consumer confidence peaked. Alan Greenspan decided he didn't like Winter and to save the American economy from a depression, he cut interest rates from 6% to 1%, and pushed enormous amounts of money back into the banking system to try to refloat the economy.

He did that to some extent, but in effect, he really built up the debt level to absolutely unmanageable proportions and particularly in the housing market, which resulted in this huge speculative phase in real estate. That housing market bubble burst, and it has a lot further to go on the downside. The stock bear market that began after the NASDAQ peak— and it has never gotten anywhere close to that level since— began for the Dow in October 2007.

TGR: If we infer that each season lasts about 15 years, give or take five, we're pretty much halfway through Winter now. Is that right?

IG: I don't think we are. This is the first Kondratieff Winter in which the entire world has been subjected to a fiat system. It's so much easier through the printing process to try to stave off the bad days. As I've said, Greenspan made it appear that Winter hadn't started by printing all this money. And we did have a bear market. The Dow dropped— what?— 35%, and the NASDAQ dropped almost 80% into 2002.

TGR: You indicated that the major thing that happens during Winter is debt gets taken out, either through bankruptcy or payback. Where does hyperinflation fit in that picture?

IG: I am very much a deflationist. Taking the debt out of the system is in itself a deflation process. You can see it in falling housing prices. As debt comes out of the housing and mortgage markets, it deflates prices. We're going to see the same in stock prices. Wealth is being reduced considerably, and that is deflationary.

A lot of people who argue for inflation say that all the money being printed eventually has to go through the banks back into the economy. But it's like being on a treadmill. You're running as fast as the treadmill goes, but you don't get anywhere. The Federal Reserve is printing copious amounts of money trying to re-start the economy. Unfortunately, the rate of debt being taken out of the system eventually will overwhelm their ability to do that.

TGR: Your Winter Warnings indicates that as we move through this collapse, China will become a scapegoat in terms of other governments implementing policies that will harm Chinese exports. If the Chinese GDP is growing and they're already becoming less reliant on exports, could they have a milder Winter than Europe and the U.S.?

IG: I think perhaps the Chinese Winter will be the worst of all, and again we have a parallel. China is the U.S. of the '20s. The U.S. came out of World War I as the world's largest creditor nation, with a major significant growth in its industrial prowess— all of which China is today. At that time, the U.S. government was paying down debt, and it wasn't that significant anyway. And now, the Chinese government doesn't have much debt; either. But in the U.S., corporations and consumers of the "Roaring '20s" built up huge amounts of debt. You see parallels in the housing market in the '20s to what we see today in China. A lot of suburbs were developed because people had automobile or railway access to the suburbs. At the same time, we had a major development of skyscrapers in city centers, monstrous buildings carrying monstrous debt.

China is in that kind of process. What happens when you get so wealthy, you're exporting so much, particularly to the United States, the Chinese government takes the U.S. dollars and credits the bank with renminbi. The bank has all this money on hand. So a local businessman goes to the bank and says, "I want to build a factory and build toys for Toys 'R' Us in the United States". The banker says, "Fine". He has all this money; he makes the loan; the borrower goes and builds his factory. Somewhere across town, someone else goes to another bank and does the same, and again and again with different borrowers and lenders. It's the mal-investment that occurs when you have so much money floating in the system.

TGR: And then what?

IG: Eventually, the United States, the biggest importer of Chinese products, cannot continue buying at that level. Despite the pace of growth in China's economy, it still takes probably at least 50 years, maybe more, to develop a middle class. Those are the people who have the wherewithal to spend. So, it's going to take China a long, long time; it's still very much an agrarian economy.

For these reasons, I think China's banking system will go the way the U.S. banking system did in the '30s, and the whole economy will go into a collapse. But out of it, she will rise as did the U.S. as the greatest economic, financial and political power. She will be the future world leader.

TGR: You went into gold early on, back in 2000, but you've also said that cash is one of the best investments. What makes cash a good investment during the Winter period?

IG: Because it's deflationary. The value of everything your cash can purchase is going down, so you can buy more. For instance, when we were renting a house in Phoenix, we were told you can buy 4,500-square-foot homes here for $150,000. You can't even build them for that kind of money today. If you have $1 million in cash now, it might buy you one really nice home where I live in White Rock, BC, but in four or five years' time, it might buy you five of them. We're seeing that in all sorts of things; even automobiles are getting cheaper.

TGR: Why wouldn't U.S. investors have all their money in gold? And when they need to pay bills, they convert it into cash? That's assuming that gold ultimately will retain its value, whereas all fiat currencies are going to come down.

IG: I don't know that all currencies are going to come down relative to each other. For years I said the Euro was a cobbled political currency that would never survive a Kondratieff Winter. And we're starting to see that's likely to happen. Everybody is trying to pick the winner. Right now they're picking the U.S. dollar. Before they were picking the Euro. Except maybe the renminbi, all the currencies are vulnerable. Definitely the yen is very vulnerable because the ratio of debt to GDP in Japan is so massive already.

TGR: So if the currencies are all vulnerable, should we put all of our cash into gold and basically liquidate it for cash when we need it?

IG: One problem with that is we don't know how the government will respond to those who own gold. It's dangerous to put all of your eggs in one basket. You'd be trusting the politicians not to do what Roosevelt did in 1933. After he confiscated gold, Americans kind of got around it by investing in gold companies. They were very profitable, and all the money, all capital ultimately flowed to gold because it was the only thing people trusted. It was going to gold because that's where people wanted to be.

That led to a major number of discoveries made, including, in Canada, all along the Abitibi Greenstone Belt and in British Columbia. They couldn't have been made without money. By 1940, according to the U.S. Bureau of Mines; 9,000 gold mines were operating in the United States. Of course, those were the ones that people reported. People panning gold up in Alaska didn't tell anybody that they were an operating mine. They were just hoarding the gold.

TGR: So, it's a combination of owning gold and gold stocks. Or should we say precious metals— we'll expand it out to silver. Should our portfolios consider other elements?

IG: As for silver, it didn't really work as a monetary instrument in the early 1930s. Although at that time U.S. coinage from the dollar to the dime was minted in silver, so there was certainly hoarding of silver coinage during the last depression. During this depression silver may well take on a monetary role, since the price of gold might take that metal out of reach of many people. I think only the precious metals work— again because of the stock market debacle that I see occurring. We know that investing in precious metals worked in the '30s. People were pushing their money into gold stocks because they wanted to be in gold in any shape or form.

TGR: Because you're suggesting that all gold companies will increase in value during this timeframe, should the average investor be concerned about which specific gold companies to invest in?

IG: Certainly the producing companies will go up with the rising price of gold. Don't forget in the early '30s the gold price was fixed at $20.67 and it wasn't raised to $35 until 1934. But even so, people were investing in the gold companies, both explorers and big producers such as Homestake.

Today, I tend to put my money into the juniors because that's where I see the leverage to a rising gold price. But you've got to be very, very selective and very cautious. You have to evaluate management of these companies. In Canada, particularly in Vancouver where most of the junior precious metals companies are situated, we're living with these people. It's very tough in the United States, where you have to rely much more on what others tell you. Fortunately, a lot of very reputable newsletter writers and so on are trying to do a good job in their recommendations.

TGR: What's your strategy for finding good junior prospects?

IG: I try to find companies that will make me 10 times my money in two years. I'm not going to say that happens every time, but it has happened fairly frequently. We've had a number of 10-baggers. A few of those that give you 10 times your money can make up for a fair number that are wrong.

TGR: Where do you hunt?

IG: I look at companies that others are ignoring or have lost interest in because people feel they haven't accomplished much. I also look at companies where I really like the management— managers who are truly committed to their shareholders and not themselves. And through the years, when I invest in a company, I tend to stay in it if I can see a double in 10 months.

In 2002, I bought a company, Nevsun (TSX:NSU; NYSE.A: NSU), in a financing, at 60 cents. Within 18 months, it had gone to $9.50. I sold it at about $6.50 or $7, though, because I couldn't see it doubling within 10 months. But I did get 10 times my money.

TGR: Could you share any examples that are interesting as we look into the future?

IG: I've basically been with Timmins Gold Corp. (TSX.V:TMM) since they were doing the seed financing. They're just putting a mine into operation in Mexico, where they're going to produce between 80,000 and 100,000 ounces at just over $400 an ounce. Right now they have only about 600,000 ounces there, so it's a mine life of only about five years. However, the exploration potential there is quite significant, and I really can see that mine operating probably three times longer.

In addition, Timmins Gold also has some other excellent potential exploration properties in Mexico. So I like this company a lot; I like the management a lot. A very good Mexican contingent, including the president, gives them a lot of help strategically in the country.

TGR: Any others?

IG: There's a little company, Golden Goliath Resources Ltd. (TSX.V:GNG), that's been out of favor for a long time that I really like, and feel could do really well for investors. I did the IPO for this company in 2000. We had committed to raising $3.5 million at 50 cents based on a group of properties in the Uruachic Mining District in Chihuahua, Mexico. It was a real struggle for me. If you can believe, no one had an interest in gold stocks in 2000. Then Agnico-Eagle Mines (TSX:AEM) became an investor, and as a result we were actually able to raise the IPO from $3.5 million to $4.5 million. That was one of the things that I felt very proud about.

TGR: Are they making good progress on their properties now?

IG: The last two years they've been concentrating on a property called Los Bolas. With the help of Marc Legault, Agnico-Eagle's chief exploration officer, who is also a director of Golden Goliath, they're starting to put together a really good base, more silver than gold. According to an independent report, based on exploration to date that deposit could contain better than 100 million ounces of silver. The deposit is open at depth and in both directions and could grow substantially. And they have now discovered a new area with gold mineralization on Los Bolas, the Filo de Oro zone.

TGR: So Agnico-Eagle remains involved?

IG: Yes. Agnico Eagle holds about 10%. I like the fact that Agnico-Eagle is involved in a hands-on basis. They see it as a really important because Urihuacic is not that far from Penas Altos, the Agnico-Eagle mine that is either in production or shortly going into production. Golden Goliath's biggest shareholder is Sprott Asset Management, which holds 18.4%.

TGR: Any more companies you could tell us about?

IG: I think Underworld Resources Ltd. (TSX.V:UW), in the Yukon not far from Dawson City, has 43-101 resource of a million-plus ounces already. I like the management. I think this company's going to certainly grow its already significant gold discovery. Another company I like is a smaller one, which may catch people by surprise because they won't recognize it.

That's Lincoln Mining Corporation (TSX.V:LMG), which has properties in Nevada, California and Mexico. They are permitting for putting a small mine into production on one of their Nevada projects, where they have about a half-million ounces. The property in California is an old past-producing mine. They also have a great property in Mexico called La Bufa, which is surrounded by Gammon Gold Inc. (NYSE:GRS; TSX:GAM). In fact, Gammon has a property right in the middle of La Bufa, and then Gammon Gold staked all around Lincoln's property.

Barkerville Gold Mines Ltd. (TSX.V:BGM) is an interesting story because it's an old discovery, an historic little gold mining town in British Columbia. This company, which used to be called International Wayside, has 60 kilometers of land holdings close to Barkerville, and I think there were up to eight producing mines on its properties. Three of those mines were discovered— here we go again— in the 1930s, during the last Kondratieff Winter. It's just going back into production, small-scale production, 50,000 ounces of gold a year. But it has tremendous upside exploration potential. That's another pretty exciting one.

One more that I'd like to discuss— African Queen Mines (TSX.V:AQ). The company has a property in Mozambique, which is highly prospective. It has returned great metal values in chip samples along the 12 km belt. African Queen has also acquired the right to earn in on a Newmont property called Noyem, which is situated along the Ashanti Gold Belt in Ghana. There is already a gold resource on the property.

I think that it is important that your readers do their own due diligence on these companies. They are very speculative and may not be suitable investments for everyone. They should consult with their investment advisor before making any investment decision.

TGR: In 2008, we saw junior gold stocks, all gold stocks, go down. Fund managers were selling anything they could because they needed cash. You're predicting another major financial collapse in the U.S. Why will it be different this time?

IG: I think the run to gold will become very extreme this time around, but in many cases these gold stocks today haven't recovered from their highs of early 2008 anyway. If you look back on the past Winter, when the Dow lost 48% of its value between September and November of 1929, Homestake crashed. But in subsequent downs, Homestake went up. I feel that will happen again.

TGR: What would you do?

IG: Let me put it this way. I have almost 100% of my investment money in these kinds of stocks. I don't really have much cash sitting in my investment accounts.

TGR: How long do you think the Winter is going to continue? And when do you guesstimate this next crash will hit? When was the next rally in the last Winter?

IG: The stock market recovered 50% of its losses in a rally into April of 1930. That's very similar to the rally we went through from March 2009 to mid-January this year. Now, we're on the downturn again in the market, and I am predicting that this one will take us down to somewhere about 5250 on the Dow either this year or early next year. And then we'll get another rally. Hope springs eternal.

But then I think the whole stock market bottom will be reached in 2012. The only reason I am picking 2012 is I am a huge fan of a great cycles guy who died in 1955, called W. D. Gann.

TGR: Oh, yes.

IG: He did a lot on anniversaries and so on, and 2012 happens to be the 30th anniversary of the 1982 bottom, which was the beginning of the big speculative Autumn bull market. And it's the 10-year anniversary of the first bottom, in 2002. The market peaked in 2000 and dropped in 2002. It's also the 80th anniversary of the 1932 Winter bear market bottom, after the Dow had dropped 90% from its 1929 high.

That's why I wrote a piece on my website called "This is It" in 2007, and one of the things that convinced me was when I saw those Bears Stearns funds sort of going bankrupt in July 2007. That was the 20-year anniversary of the '87 crash, the 100-year anniversary of a big market crash back in 1907, the 150th anniversary of a big 1857 crash. All these Gann kinds of numbers came in at the same time in 2007. That was so compelling that I was absolutely convinced that 2007 was the end. And that's proved to be correct.

TGR: So you're saying the market is going to be drop by half this year.

IG: Yep. I think we're going to have a crash in stock prices this year. But I am staying long in my gold stocks.

TGR: Will this Winter end in 2012 then?

IG: No, it's just the bear market bottom. Remember the bear market bottomed in 1932. But the Great Depression didn't really end until World War II. The Winter continued even though the bear market had bottomed.

A globally renowned economic forecaster, author and speaker, Ian Gordon is founder of the Longwave Group, comprising two companies— Longwave Analytics and Longwave Strategies. The former specializes in Ian's ongoing study and analysis of the Longwave Principle originally expounded by Nikolai Kondratieff. And with Longwave Strategies, Ian— who believes that the precious metals sector will continue to provide very secure investment options— assists select precious metal companies in financings. Eric Sprott, Chairman, CEO and Portfolio Manager at Sprott Asset Management, describes Ian as "a rare breed in the investment advisor arena". He notes that Ian's forecasts "have taken on a life force of their own and if you care to listen Ian will tell you how it will all end".

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Our World Balances On A Sea Of Debt

Darius Guppy: Our World Balances On A Sea Of Debt

What is needed is a root and branch re-evaluation of that most curious of cultural inventions – money, argues Darius Guppy

By Darius Guppy, Telegraph.Co.UK | 22 February 2010

Darius Guppy: Since serving his prison sentence he has slipped, quite deliberately, off the radar Photo: PA

In the year 1994 there resided in the cell next to mine a certain 'Tommy.' Now Tommy had been imprisoned for counterfeiting Dutch Guilders to such a high standard that he had fooled the banks themselves. As was customary among prisoners who became friends, Tommy allowed me to read his legal papers and I quickly became fascinated by the Judge's sentencing speech, the gist of which was that Tommy's activities had been "parasitical". By creating money out of little more than thin air he had reduced the purchasing power of more deserving members of society. What would happen if everyone behaved like him?

Immediately I thought of arguments used, in a different context, by Thatcherites and [conservatives] in general regarding inflation. Inflation, just like counterfeiting, dilutes the value of the community's hard-earned wealth and as such constitutes a terrible social evil. Creating too much money— 'real', just as much as 'fake'— can wreck an economy. Such indeed was the reasoning of the Nazis when, during World War Two they came up with a plan— that came close to implementation— to ruin Britain's economy by flooding the country with near perfect counterfeit bills.

A lot of nonsense has been written and said about the world's current economic woes— how the crash is the fault solely of the banks and how, by implication, Governments are blameless and in particular how it could all have been avoided and will indeed be made right by 'greater financial regulation', and so on. All of which constitutes a classic example of what the philosopher Alasdair MacIntyre terms "the fallacy of managerial expertise": an attempt by 'experts' to blind us with science in order to justify their own over-paid existences and to mask their actual confusion. After all, if they had been so skilled, then why is it that not one of them— either politician or finance minister or financial journalist or just plain financier— was able to predict the current debacle?

These 'experts' will tell you that the present difficulties are simply the result of abuses and excesses in a system that is 'basically sound'. In short, all that is required is for a few [minor] faults to be corrected. But do not believe them. For, the reality' is that the problem is systemic and a little tinkering here or there will achieve nothing in the long term.

In fact, what is needed is a root and branch re-evaluation of that most curious of cultural inventions— money— how it is created, how it circulates within an economy and how it can best be used to serve the interests of the community itself. [[I.e., the age old question of is it right that the creator of a product consider himself lucky if he earns a mere 1% of what the exploiter of that product can? That a popular media star earn 100 times the income of a teacher? Even the greatest teacher? But the bankers— the creators of this 'virtual' wealth— earn most of all, perhaps as much as 1000 or even 10,000 times what the rest of us earn.: normxxx]]

To begin then, the experts owe it to the people to explain to them in the simplest terms how it is that money actually works. Such is the task I propose to undertake in this essay and for this it seems to me that the layman must grasp two fundamental concepts above all others:

First, that 'legal tender' and 'money' as a whole should not be confused with one another. In particular, were one to ask the man on the street— indeed were one to ask most politicians and even most bankers— who it is that actually creates the money which rules our lives they would no doubt reply "the State".

And in this they would be wrong.

For while it is true that Governments create legal tender— which is to say the physical notes and coins that circulate in an economy— that legal tender represents, at its absolute highest, only 3 per cent of the total money in circulation in the global economy. It is in fact the commercial banks, largely unaccountable and privately owned, that create the world's money in the manner I will describe below.

Indeed, even were Tommy responsible for printing every single note in circulation throughout the world his power to dilute the rest of our wealth would amount to only a tiny fraction of that of the real manufacturers of money— which leads us to the second most fundamental point of all— that the activities of my friend Tommy and the activities of the bankers are in essence identical: the creation of money— which is to say claims on the rest of us— out of nothing.

Without knowing it, therefore, Tommy's judge punished him for usurping not so much the role of the State as the role of the banks. More to the point, the very same mistake— namely the mis-identification of where money truly originates— has been made by virtually all our politicians, economists and financial commentators.

Consider the absurd contradiction at the heart of neo-liberal, Monetarist, Thatcherite economics which has constituted the Western orthodoxy for the past few decades: to emphasise on the one hand that the 'money supply' should be brought under control whilst simultaneously allowing banking— where the money is actually manufactured— to run absolute riot!

To grasp how the global fraud works we will need to step back in time and imagine ourselves next to the original goldsmith-banker. Now our goldsmith-banker has a vault in his business premises and in this vault ten of his customers each deposits a bar of gold weighing 1 kilogram— for safekeeping and in the hope of a return for 'lending' our banker their gold and thereby depriving themselves of the benefits they would enjoy had they elected to spend their wealth in the here and now.

Classical economic theory would have it that our banker fulfils a useful social function— namely bringing together those who have a surplus of money with those who have a deficit but who, despite this, nevertheless have the energy, work ethic and vision to make a profit for all concerned out of this union. In short, our banker lends the ten gold bars in his vault to certain of his other customers who in turn use this wealth to embark on profitable ventures, ventures that generate a surplus— say 10%— by the end of year one. Happily, the vault now contains eleven gold bars out of which our banker can pay his depositors and himself a reasonable return.

This process, which for obvious reasons depends first and foremost upon economic 'growth', continues apace and is refined, at least to begin with, in ways that appear eminently logical. In particular, our banker soon questions the wisdom of keeping all or even most of the gold bars in his vault where security is a concern. Likewise, the procedure of having to descend to the vault and withdraw the gold bars and transport them to different parts of the country and carve them up into smaller units becomes too burdensome. The picture is further complicated when one appreciates that by now thousands of banks have sprung up all over the place and have begun to lend to each other.

At this point therefore he comes up with an idea— to create a token, a token in itself valueless, such as a piece of paper, that will represent a given quantity of the gold either in his own vault or held to his account at some giant, more secure vault— a precursor to Fort Knox if you like. Such a token can then be circulated and exchanged within the economy in a manner that is relatively hassle-free. Historians credit one of the first examples of such an instrument— the cheque— to the Knights Templar. In this way, a pilgrim could encash a cheque drawn on a European preceptory at a Templar branch in the Holy Land, upon safe arrival there.

So far so good. And good it remains just so long as for the face value of each of the pieces of paper in circulation there exists a corresponding amount of gold sitting in a vault somewhere that can be accessed in the real world. At this juncture therefore the virtual and real economies are able to advance pretty much in lock-step. However, it is at this precise point that something truly wondrous and truly diabolical occurs.

For our banker and his banker friends make an imaginative leap. Experience has taught them that the bearers of the pieces of paper which they have created rarely attempt to claim the gold their paper— or their 'money'— represents en masse. Our banker reasons thus:

"just so long as the pieces of paper that my friends and I have put into circulation are not encashed simultaneously then it is largely academic how many such pieces we create. If, for example, we have 1 kilogram of gold in our vaults and we issue ten pieces of paper to ten different clients each with a face value equivalent to that 1 kilogram, then so long as two people do not come to the bank on the same day demanding their gold we will be able to keep out of trouble. Clearly, the most crucial part of our scheme is to create a culture of confidence. The bearers of our pieces of paper must feel secure about our ability to convert their paper back into their gold, or real wealth. Best therefore to give names to our institutions such as 'prudential', 'guarantee', 'trust', 'security', 'fidelity' and so on."

The reader will appreciate the beauty of the scheme: for now, instead of earning interest on a single piece of paper our banker can earn interest on ten such pieces of paper! [[Or, in the pre-crisis economy, as many as 50 such pieces of paper; i.e., those lovely banks were operating at as much as 50 to 1 'leverage': normxxx]] Moreover, whilst charging interest on these ten pieces of paper, he has only to pay out a reduced rate of interest on the single gold bar that has been deposited with him! And, incredibly, this is indeed exactly what happens.

Currently the average fractional reserve requirements for 'commercial' banks amount to under 10% which means that for every dollar (or equivalent) the banks have on deposit they can lend out at least ten such dollars— [['investment' banks are not so limited and on average use a 33 to 1 ratio, but can (and some have) go as high as 50 to 1: normxxx]]— virtual dollars which they summon from nowhere— and on which they charge interest.

Just as incredibly, this fact— the key to understanding how the international financial system actually operates and why the world is in such a mess— is discussed virtually nowhere in mainstream circles: not in The Financial Times, not in The Economist, not in the broadsheets, not in Parliament, not in The City and not in the economics departments of most Universities. Either the process is basically unknown in these circles, therefore— a sign of mediocrity or incompetence— or it is indeed understood but kept deliberately quiet— a sign of wickedness.

Let me repeat: supposedly 'sovereign' Governments— representatives of their people, at least in theory— do not control the single most important mechanism when it comes to their economies: namely the production and distribution of money. That role has been diverted in large measure to the banks which manufacture money out of nothing and charge interest on that conjured-up money. In fact, beyond a pathetic interest rate cut here and a token cut in VAT rates there our politicians have zero real power when it comes to directing their country's economy.

Only in a world of lies and illusions, a world in which actors [and other media stars] become our leaders and our heroes, could such sorcery be possible. The picture has of course become a great deal more complicated. Soon pieces of paper are not even any longer required and, instead, mere entries on a bank's ledger will suffice. Eventually, a further layer of virtuality is added when computers emerge and with them 'credits in cyberspace'.

Likewise all sorts of financial instruments and 'products' are devised by the experts— Collateralised Mortgage Obligations, Put and Call Options, Floating Rate Notes, Preference Shares, Convertible Bonds, Semi-Convertible Bonds and endless other 'derivatives'— But in essence these additions constitute mere variations of the same basic Three Card Trick. Moreover, the illusion becomes self-reinforcing.

Those involved in the process, sitting behind their computer screens, shuttled from one air-conditioned capsule to another, stressed by the pressure and the volatility of the hallucinogenic nightmare they inhabit, yet sheltered from the tactile realities of the outside world, no longer control the beast they have created. How far removed from the days when wheat landed on the docks and merchants met in coffee houses and bazaars to haggle over things they could touch and feel. It may be argued that while it is true that money is manufactured in the manner I have just described— in other words by creating loans to the banks' clients— surely just as much money is destroyed every time a loan is repaid?

This is true to an extent. However, the point to be grasped is that while 'money' is indeed created and destroyed in vast amounts every second of the day, the interest on that money remains un-destroyed and accumulates within the system— and at a compounded rate, moreover. The reader will appreciate the problem and how it is that the process described is far more inflationary and far more parasitical than the activities of all the Tommys in the world put together. For while that money, which by now has mutated into a vast mutual-indebtedness monster, grows exponentially, the wealth it is supposed to represent cannot [possibly] grow at the same pace for very long.

In short, while there is no limit to the number of zeros we can create on a computer— zeros which represent claims on us and on everything we own— there is a very real limit to the amount of oil in the ground, the amount of wheat in the fields and the amount of livestock in our farms. Granted, the discovery of a continent here, a technological invention there and an increase in efficiency somewhere else in the society can accommodate the growth in the real economy that is required to keep pace with the growth in the virtual one, but only up to a point. Which is of course precisely why an economic 'explosion' invariably begins with the discovery and opening up of just such continents from the early 16th Century on and is reinforced with the advent of the industrial revolution. [[The most recent invention being the Internet and the most recent 'innovation' being the financial 'derivative'— which latter permitted the complete fungibility of all forms of debt throughout the world: normxxx]]

Capitalism, banking, and growth become inseparable. But in a world bounded by the real, logic dictates that the virtual economy must eventually peel away from the real one and sooner or later the day of reckoning arrives— when the gulf that separates these two economies is too large to be sustained— for no power on earth can match the power of compound interest in the 'ether'.

Consider the well-known tale of the Chinese Emperor and his opponent at a game of chess to whom the Emperor asks what reward would satisfy him in the event his victory. The opponent, his subject, replies that a single grain of wheat, doubled for each of the 64 squares on the chess board, would suffice. The Emperor, imagining that he has a good deal, plays on and loses, only to learn that he now owes his adversary the equivalent of 2000 times the current annual worldwide production of wheat.

Such are the miracles of compound growth. Such too is the reason why financiers have been able to award themselves increasingly astronomical sums. For their virtual printing presses are calibrated to an exponential production while no such calibration applies to the real Mother Earth.

It was the 1921 winner of a Nobel Prize for Chemistry and not for Economics, Frederick Soddy, who was among the first to articulate the mechanism by which money is created by the banks and how it mutates into debt in the ways I have described and his arguments have been developed over the years by thinkers such as Herman Daly and Richard Douthwaite.

In fact, the reasoning can be extended to cover not only bankers but the entire financial sector. A company makes a certain profit; a multiple of many times can be applied to that figure to arrive at a 'value' for that company (the price-earnings ratio)— based, as ever, on the assumption of 'future growth'. That value can then be leveraged yet further for it to raise debt against its share price and so on and so forth. Taken to ever more ethereal extremes, such super-ovulation can mean that a single company with nothing more than an idea to be applied to the internet and a [gross income/revenue] less than your average Fish 'n Chips [[i.e., your corner 'fast food' palace: normxxx]] can create yet more tokens— share certificates— worth several times the entire annual production of diamonds for the continent of Africa, a process known, retrospectively, as the dotcom bubble.

There are a couple of features which should be immediately apparent. First, such a system constitutes, in effect, a redistribution mechanism from the poor to the rich— which is of course precisely why the banks and Western Governments are so desperate to ensure its survival and the hegemony which results from it. Money breeds yet more money and develops a quality akin to matter— the larger the agglomerations, the greater their gravitational pull or, as the Bible puts it: "unto he that hath shall be rendered and from he that hath not shall be taken away, even that which he hath". [Matthew 25:29]

Indeed, contrary to what they may tell you, the banks never really want their loans to be repaid at all. Just so long as the interest is paid, it is in fact to their benefit for the capital to remain outstanding on their books as 'assets' and for the debts to be rolled over. Every time the IMF or World Bank extends a line of credit to some impoverished nation, are they being 'charitable' therefore or are they merely perpetuating the enslavement?

Second, such a system relies entirely, as do all Ponzi schemes, on the assumption of continued [[and accelerating: normxxx]] positive growth, hence its inherent instability. Once that growth is even threatened, the edifice collapses. Householders in Britain today will appreciate such a phenomenon— the result of 'leverage'— only too well: put up 10 per cent for a property and borrow the rest from the bank. That property's value need rise by only 10 per cent and you have doubled your equity. But on the flip side that value need fall by only 10 percent and you are wiped out.

Which in turn explains precisely why a contraction of a mere 2 or 3 percent in the global economy leads not to a correspondingly minute fall on international stock markets, but to financial Armageddon. Likewise with the banks— lend at ten times [[or even to 50 times: normxxx]] more money than you possess and when the economy grows— or at least pretends to grow— Porsches galore. But when the lack of growth is exposed, it requires only 11% of the loans on your books (in value terms) [[or, in the extreme, as little as 2%: normxxx]] to be bad and you are bust. The truth is not that these institutions have suddenly become insolvent therefore, but that they were never really solvent in the first place since the assumptions on which they were founded could not [ultimately] apply in the real world. Simple false-accounting has meant that by rolling over their debts they have been able to keep them on their books as 'assets' rather than losses and forestall the evil hour.

There is an overarching name for the process I have outlined— 'usury'— and our predecessors from the Ancient and Medieval worlds appear to have appreciated much better than us its ultimate destination: ruin for all (even the innocent). In sum, I have argued that both the analyses of the current economic crisis and the sticky-plaster remedies advanced by the politicians, the financial journalists, and the financial industry itself to counter that crisis are woefully inadequate because they fail to grasp what is in fact a simple and devastatingly effective swindle, a swindle largely invisible because it has become so deeply embedded in our culture.

The consequences of that swindle, in particular the desperate need for unbridled economic growth [[largely so that the rich can garner vastly greater fortunes: normxxx]], the consumption, wastage, and the environmental and cultural despoliation which it engenders, together with some possible antidotes worthy of consideration, must be dealt with separately. In the interim, suffice to say that some original and radical thinking, the type of thinking one encounters nowhere in any of the political parties, will be required. Readers of the Telegraph in particular should take note— a degree in PPE or History and a few A-Levels in the Bleedin' Obvious will not make the problems go away.

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Strong Rebound? Not In Rail Traffic, Pal

Strong Rebound? Not In Rail Traffic, Pal

By John Shipman | 18 February 2010

An Association of American Railroads report today has some interesting nuggets that add more texture to the state of the current economic recovery.

Still empty and idle.

In "Great Expectations: Railroads and U.S. Economic Recovery," the railroad trade group notes US rail carload traffic was down 16.1% last year vs 2008, and off 18.2% vs 2007. AAR said last year's carload total was the lowest for U.S. railroads since before 1988, when it started keeping track. And "freight rail traffic today remains well below 2008 levels," AAR adds. Not a good sign. As the trade group says, "demand for rail services occurs when there is demand for the products that railroads haul," which is pretty much everything. "In other words, if America is not building or buying, railroads are not hauling," AAR says.

And while there have been some signs of pickup in volumes, the massive amount of mothballed railroad equipment— freight cars, locomotives— speaks to the anemic demand still pervading the economy. As Dow Jones Newswires' Bob Sechler reported, 440,000 freight cars were in storage as of February 1st, or 28% of the North American fleet. During healthy times, AAR says, 2% to 3% of the fleet might be in storage. The group says railroads have also had to park "several thousand locomotives," and together with the freight cars, "the industry has assets worth approximately $43 billion new standing idle."

Is That A Picture That Fills You With Visions Of A Robust Economic Rebound, Citizens?

[ Normxxx Here:  In 'olden times' (before the Age of the Internet and computers 'everywhere'), Freight Car Loadings used to be a key leading indicator [1] of the economic health of the country.  ]

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Market Observations

Market Observations
Click here for a link to complete ORIGINAL article:

By Chris Puplava | 17 February 2010
Co-Manager of PFS Group's Precious Metals Managed Account, Energy Managed Account, and Aggressive Growth Managed Account.

Today's commentary lacks a central theme and instead really is a "Market Observation". Often at times it is useful to remove one's opinions from the investment equation and instead listen to what the market is saying, gleaning useful information in the process, rather than having a preconceived notion of how the markets should be acting. Below are of few items that should be of interest on a range of topics. Let's dive in.

Watch The Credit Markets

While reviewing the various markets (stocks, currencies, bonds) one thing that popped out at me was the potential for a head and shoulders bottom formation (H&S) in the long end of the U.S. yield curve. While there is the potential for a H&S bottom in long term interest rates— as Martin Goldberg often says, "A pattern isn't completed until it's completed"— we would need to see a decisive break above the necklines for both the 10-year and 30-year UST rates. If a H&S bottom does materialize in long term interest rates, it would have a dramatic ripple affect in the economy.

For one, it would likely mean the nearly 30-year secular bull market in bonds is over and would lead to sharp losses for fixed income investors. It would also likely cripple any housing recovery as higher interest rates will decrease the affordability for housing, leading to higher interest rates in general, which would increase the borrowing costs for all forms of debt for consumers and corporations, decreasing purchasing power, profitability, and so on and so on. The implications for such a breakout would be huge; so keeping an eye on long term interest rates should be on every investor's watch list. So far the 200 day moving average (200d MA) is rising for both the 30-year and 10-year UST, signifying that the trend is currently 'bullish' for both rates [[bearish for the economy, stock and bond prices, and PMs: normxxx]], and the 200d MAs have held for both rates since the stock market bottomed last year.

Source: Stockcharts.com

What is interesting to note is that the recent rise in long term interest rates since last summer happens to coincide with a potential peak in Chinese holdings of US Treasuries (UST). Chinese holdings of USTs peaked at $801.5 billion in May of 2009 and have declined by $46.1 billion to $755.4 billion in December of last year. Could it be that the U.S. is just about to realize there is a limit to the amount of debt our government can dump on the market and expect foreigners to soak up? There is clear resistance on the 30-year rate between 4.7%-4.8% (red line) while there is also a 'bullish' trend line support connecting the 2008 and 2009 lows, with both lines converging to signal that we will have a breakout or breakdown in the 30-year rate soon.


Click Here, or on the image, to see a larger, undistorted image.
Source: Bloomberg

Chinese purchases of UST holdings year-over-year (12-Mo rate of change) has slowed to the lowest rate since 2001. For the first time since 2001, Chinese holdings of USTs have fallen below their twelve month moving average, possibly signifying a change in appetite by the Chinese for US debt. This would be a major development as the Chinese have been one of the biggest sources of soaking up the debt issuance by the Treasury. If the Chinese merely maintain or decrease their UST holdings— or even just decrease their rate of new purchases— you can be sure that such a development would pressure long term interest rates higher, possibly helping to lead to a H&S bottom in long term interest rates. As mentioned above, the ramifications would be significant for such a development— so watching the monthly TIC flows will be important in the months ahead.


Click Here, or on the image, to see a larger, undistorted image.
Source: Bloomberg

State Of The States

Much of the financial press has been fixated on Greece over the last few weeks; but others have rightly pointed out that the individual states within the U.S. are in even graver duress than Greece or any of the other 'PIIIGS' (Portugal, Ireland, Iceland, Italy, Greece, Spain). One barometer to measure stress in the credit markets is by looking at the level of credit default swaps (CDS), which are used as insurance against default on debt instruments. As can be seen below, an equally-weighted composite of the CINN states (California, Illinois, New Jersey, New York) I created, shows a greater degree of stress than is seen by the Euro Zone GDP-share weighted composite of the PIGS. The recent rally in the stock markets over the last week has seen a decline in the CDS for the PIGS composite, but the CINN states CDS composite remains elevated as investor concerns over municipal debt for the CINN states remains high.


Click Here, or on the image, to see a larger, undistorted image.
Source: Bloomberg

Each day I browse over the details of the various economic reports that come out as well as a few of my own economic indicators and one development that stood out like a bright flashing red light was the sharp downturn in the Philadelphia Fed State Coincident Indexes (PFSCI). I've created a slight derivation of the Philly Fed's data by looking at the percentage of states showing increasing economic activity over the prior month, which is shown below. What the PFSCI shows is that during a recession the percentage of states showing increasing monthly economic activity declines sharply, but also recovers sharply after a recession ends. Typically the recoveries are "V"-spike events in which the percentage of states showing rising monthly economic activity increases dramatically and then stays in elevated territory for the bulk of the next ensuing economic expansion. Mid-cycle slowdowns such as was seen in the mid 1980s and mid 1990s never saw the PFSCI dip below 75%, meaning less than 25% of the 50 states were showing decreasing activity while overall national economic breadth was strong and improving.


Click Here, or on the image, to see a larger, undistorted image.
Source: Bloomberg

"The Great Recession," as some call the recession that began in December of 2007 witnessed the lowest reading on record of 0% in February of 2009 for the PFSCI. Beginning in June of last year the PFSCI began to increase sharply as is the norm in post-recessionary environments. However, for the first time in the history's data the PFSCI stopped dead at 48% in November and then plunged to 20% in December. Never in the prior four recessions did the PFSCI rally from a bottom and not breach the 50% expansionary mark, nor reverse course so quickly. While a single data point does not make a trend, we need to watch this closely because if the PFSCI remains in deeply depressed territory it would indicate that the recession that began in 2007 is not over; or, if the recession ended in 2009 as some maintain, then we could be witnessing the quickest double-dip recession seen in the last 100 years.

When the PFSCI breaks above the 50% mark it symbolizes expansionary growth in a manner similar to the ISM diffusion indexes, where levels above 50 mark expansion while levels below 50 mark a contraction. Below is a table that summarizes when the PFSCI broke the 50% demarcation line, both from above and from below, along with the dates for the beginning and end of the last several recessions. What the table shows is that the breaking of the 50% mark to the downside is seen, on average, one month after a recession begins, while breaking above the 50% mark occurs 1.25 months after a recession ends. As the PFSCI has yet to break above the 50% mark and is actually currently still below prior recessionary troughs, it would tend to imply that the state of the states is not as rosy as some maintain and the economic headwinds that states have been grappling with since 2008 remain, such as high unemployment, and declining sales and income tax receipts.

Field of Uncertainties: If you provide it, will they come?

The title above came from an article penned in January. It was suggested that "this time may be different," in which consumers and corporations do not follow the historical economic script in which they return to the debt trough once banks make credit easier to obtain by lowering lending standards and after the Fed helps drive interest rates lower. The Fed's Senior Loan Officer Opinion Survey on Bank Lending Practices for January came out and showed a significant decrease in the net percentage of banks tightening lending standards as the credit crisis crescendo of 2008 eases.

This is the hallmark that is seen as prior recessions begin to fade, but what we are not seeing is an equivalent improvement in the net percentage of banks reporting stronger demand for loans. Loan demand for prime mortgages did break into positive territory last year but has since fallen back again into negative territory, and demand for other types of loans remains depressed as the net percentage of commercial banks are showing weaker demand for loans despite easier lending standards. [[One could also argue that while banks are no longer tightening standards and qualifications, they have not yet begun to ease.: normxxx]]


Click Here, or on the image, to see a larger, undistorted image.
Source: Federal Reserve


Click Here, or on the image, to see a larger, undistorted image.
Source: Federal Reserve

Despite the allure of low interest rates and [perhaps less onerous] lending standards, the U.S. consumer has virtually no plans to go on a spending spree for autos, homes, or major appliances according to the Conference Board's Consumer survey. The depressed demand for spending or taking on new debt has led loans and leases on the books of commercial banks to decline by the steepest year-over-year rate of change in more than a quarter century. Not the stuff of a vibrant recovery.

Source: The Conference Board


Click Here, or on the image, to see a larger, undistorted image.
Source: Bloomberg

Sentiment

Talk about a 180 degree "U-turn"! The extreme bullish sentiment for gold and the euro and bearish sentiment for the USD prevalent in middle to late 2009 has been completely reversed to show extreme bearish levels for gold and the euro and reached a bullish extreme for the USD. If one is in the bear camp these sentiment readings may indicate that the first leg down since the January 2010 top is nearing completion as the market was oversold recently and sentiment has swung to levels often associated with intermediate bottoms in gold, the euro, and indirectly the stock market. However, if one is in the bull camp then the current situation offers an opportunity to pick up stocks after a correction before the market heads higher. Whether you are in either camp it probably makes sense not to become overly bearish at this stage in the game as much of the bullish exuberance present at the January highs has now been completely wrung out.


Click Here, or on the image, to see a larger, undistorted image.


Click Here, or on the image, to see a larger, undistorted image.


Click Here, or on the image, to see a larger, undistorted image.

Cyclical Bull/Bear Market Signals

To finish off today's article, a quick peak at some indicators that have helped identify turning points between bull and bear cyclical markets to see if any signals have been given after the swoon to last week's lows in the market. Looking at the S&P 500 15/40 weekly EMA signal system as well as the stock/bond ratio 15/40 weekly EMA signal system shows that no sell signals have been given and the trend remains bullish until proven otherwise. Additionally, bear markets are often associated with the 14 week RSI dipping into bear territory below 50 (red boxes below), and last week's lows never saw the 14-week RSI on the S&P 500 dip below 50, with the 50 mark acting as support.

The January 2010 top may in fact prove to be THE top for the March 2009 cyclical bull market, but it is perhaps wise to wait for confirmation before ringing any bear market alarm bells. A break of the 15 week EMA below the 40 week EMA for the S&P 500 and the stock/bond ratio, along with a decline below 50 on the 14-week RSI would provide solid corroborating evidence that the present cyclical bull market is over. However, if these indicators hold in bullish territory, the bulls still have the upper hand and the recent correction would prove to be a buying opportunity rather than the start of a new bear market.


Click Here, or on the image, to see a larger, undistorted image.
Source: Stockcharts.com

Christopher M. Puplava


  M O R E. . .


Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Greece Turns The Euro Into A "Carry Trade" Currency

Greece Turns The Euro Into A "Carry Trade" Currency
Click here for a link to complete ORIGINAL article:

By Gary Dorsch, Editor, Global Money Trends | 20 February 2010

Last year's parabolic rallies in copper, gold, Brazilian and Russian stocks, and the Australian dollar, are running out of steam. Suddenly, there are eerie reminiscences of scarier days gone-by. Volatility has returned to the money markets, amid worries about a possible "double-dip" recession for the world economy, capital flight from European sovereign debt markets, monetary tightening in Australia, China, and India, and the President Obama's backing for the "Volcker rule,"— which calls for a clamp-down on the speculative trading binges of the Wall Street Oligarchs.

As fate would have it, on February 6th, many of the world's top central bankers were huddling in Sydney, Australia, for two-days of secret talks. European Central Bank chief Jean-Claude Trichet, New York Fed chief William Dudley, the governor of the People's Bank of China, Zhou Xiaochuan, and the Bank of New Zealand's Alan Bollard were all in attendance, while global commodity and stock markets were skidding lower, in their first significant correction since last June. Spooked by fears that Greece or Dubai World would default on their debt repayments, Australia's ASX-200 Index fell below the 4,500-level, losing 10%, of its value in three-weeks, due to rapid unwinding of Aussie/ yen carry trades. There were equally sharp downdrafts on Wall Street, the Nikkei-225 Index in Tokyo, and the Hang Seng index crashed below the psychological 20,000-mark. Sovereign debt fears hammered the Australian dollar to 78-yen from above 85-yen a few weeks earlier. It began to feel like 2007-08 all over again.

ECB chief "Tricky" Trichet didn't have a chance to sip champagne or dine with his G-20 cohorts. Instead, he was flying back to Brussels to attend an emergency meeting. The worst of the global carnage hit the stock markets of Greece, Portugal, and Spain, three heavily indebted Euro-zone countries whose ability to re-pay lenders, including $331 billion owed to German banks, $307-billion owed to French banks, and $156 billion owed to British banks was in doubt. Swiss banks hold 47-billion Euros of Greek debt, equal to 12% of Swiss GDP. Furthermore, there's an outer ring of fire surrounding Club-Med that could spread to Eastern Europe.

Greece is the weakest link in the Euro-regime, and it's in the eye of the storm, owing 300 billion Euros of outstanding debt. Athens doesn't have an independent central bank that can simply print drachmas to pay-off its debts, so without a bailout from its wealthier neighbors, it could default on €50 billion ($72 billion) of debt coming due this year. But given the enormous amount of loans extended to Club Med from German and French banks in particular, Athens is betting that German Chancellor Angela Merkel and French President Nicolas Sarkozy have little choice, but to pay the tab for Greece's flamboyant spending.

The size of Greece's debt is roughly equal to that of fallen Lehman Brothers, whose bankruptcy in Sept 2008, ignited the explosion of $400 billion of credit default swaps (CDS), linked to its debt, and nearly led to the collapse of Wall Street titan Morgan Stanley. At the height of the panic, CDS rates on Morgan Stanley's debt soared to 1,200 basis points, and MS's bonds fell to 50 cents on the dollar. Thus, European leaders are keen to prevent a replay, this time with Greece's budget woes spreading to Portugal or Spain, which in turn, could reverberate around the globe.

"Euro-area member states will take determined and coordinated action, if needed, to safeguard financial stability in the Euro area as a whole," warned EU President Herman Van Rompuy on Feb 11th. "Greece won't be left alone, but there are rules that must be adhered to. On this basis we will agree on a statement," Germany's Merkel added. "The International Monetary Fund stands ready to help with its debt crisis," said IMF chief John Lipsky on Jan 30th.

The CDS market is a hotbed of speculation, where bankers and hedge funds, can bet on the price of contracts, without transparency, and without actually holding the underlying bonds. By whipping-up hysteria of a looming sovereign default in the media, and driving-up the cost of insuring debt in the CDS market, speculators can weaken confidence in a government bond market, and drive-up interest rates. "This is an attack on the Euro-zone by certain interests,— political or financial,— and often countries are being used as the weak link of the Euro zone," said Greek Prime Minister George Papandreou at the World Economic Forum in Davos on Jan 28th. "We are being targeted, particularly with an ulterior motive or agenda, and of course, there is speculation in the world markets," he said.

Through the rigging of the opaque CDS market, speculators were able to conjure-up fears of a Greek default on its debt, while aiming to profit from short sale positions in Greek bonds or equities. Traders also profited by short selling the Euro against the Australian dollar and the Brazilian real. Since Dubai World requested a moratorium on $4.1 billion of debt payments on Nov 28th, the Euro has also fallen 10% against the pitiful US dollar, sinking to a low of $1.3580 on Feb 17th.

Under the weight of rising interest rates, the Athens stock exchange index lost a quarter of its value over the past three-months. Hard times lie ahead for Greece, with EU heads of state and parliaments calling for harsh austerity measures in return for bailout money. Greek President George Papandreou has been forced to call for across-the-board freeze on Greece's public sector wages along with a cut in allowances, which amounts to a wage cut of 4 percent. He's also called for pension reform, which entails raising the retirement age, as well as higher fuel taxes.

But Greece's largest labor unions, which equal half of the country's 5-million-strong workforce, are joining forces for a strike to protest cuts to their wages. Although Greece's deputy finance minister says Greece should mimic Ireland and Latvia, and slash spending and wages savagely, at the end-of-the-day, Bonn and Paris must deliver the bailout money to protect the interests of their largest banks, and avoid the systemic risk posed to the entire European monetary union. While, Greece, Portugal, Ireland, and Spain are the most vulnerable, even Germany, the Euro-zone's locomotive, has a public debt expected to reach 90% of GDP this year, and a budget deficit expected to reach 6% of GDP in 2010— figures that put Berlin in non-compliance with the stability pact. All that's left to be worked out are some cosmetic concessions to be offered by Greece, to make the cost of financing its bailout more palatable to its resentful Euro-zone neighbors.

With the Euro sliding against all currencies, amid capital flight from Euro-zone bonds, traders turned to gold as a safe haven from a potential banking or currency crisis. There are also signals that an outbreak of inflation in the Euro-zone is looming on the horizon. For gold bugs, the most electrifying bolts of energy were reports that the China Investment Corp (CIC), the trading arm of Beijing's $300-billion sovereign wealth fund, recently bought 1.45-million SPDR Gold Trust shares (NYSE: GLD), or 0.4% of the total shares outstanding, for a cash outlay of $155-million.

Traders also learned that Beijing dumped $34 billion of US-Treasuries in December, trimming its total holdings down to $755 billion. China is now the second-biggest holder of US Treasuries, after Japan, a sign the Chinese Politburo is alarmed by America's out-of-control fiscal policy. Looming over the debt crisis in Europe is the far greater crisis of the world's biggest debtor,— the United States. President Obama's latest budget projects a shortfall of $1.6 trillion, equivalent to 11.4% of GDP, the highest since the end of World War II. This approaches Greece's deficit ratio of 12.7% of GDP, and their 13.3% deficit, while the budget, moreover, projects trillion dollar deficits for years to come. Washington responded to the financial crash of 2008, by essentially bankrupting the Treasury, and the country, in order to preserve the wealth of Wall Street's financial elite.

China's investment in the Spider Gold Trust (GLD), was timed after a 15% correction in the spot gold price, to below $1,100 /oz. Interestingly enough, on Dec 2nd, Hu Xiaolian, the PBoC's currency chief, warned speculators that Gold prices were too high at $1,225 /oz and said traders should be careful of a bubble bursting. "We must keep in mind the long-term effects when considering how to use as our reserves. We must watch out for bubbles forming, and be careful in those areas."

Xiaolian's comments coincided with a peak in gold prices at $1,225 /oz, before panic selling set-in the following day. That day US Labor department reported much better than expected employment figures, sending US Treasury yields 50 basis points higher. The PBoC itself triggered a second wave of selling in gold, when it hiked its bank reserve ratio for its largest banks to 16%, aiming to slow its M2 money supply growth rate from 29.5% last October, to 18% in the year ahead.

After shaking the speculative froth off the gold market, Beijing began buying GLD for its strategic reserves. Beijing is also buying gold quietly from its local miners. But a second hike in the PBoC's reserve ratio to 16.5% on Feb 12th, failed to put a lasting dent in the gold market, as traders reckoned that the Greek tragedy would further delay the ECB's plans to exit from its ultra-easy money policies. As a result, gold was able to break the bearish grip of a declining Euro and stronger US-dollar.

CIC, whose chairman is the former Communist Party of China insider Lou Jiwei, has been quietly accumulating stakes in natural resource companies, including Canada's Kinross Gold, Teck Resources, Potash of Saskatchewan, Brazilian iron ore and nickel giant Vale, Euro-zone steel producer ArcelorMittal, and other mining and energy related companies, such as US-natural gas producer Chesapeake Energy, the US Securities and Exchange Commission has revealed.

A surprise move by Beijing to revalue the yuan by 5% or more this year would provide Chinese importers with greater purchasing power of industrial commodities, helping to keep raw material prices high. This is creating a headache for the ECB, since a weaker Euro is pushing-up the cost of imported crude oil, and key metals, such as copper, nickel, platinum, and zinc, used in manufacturing. And historical price charts show a close correlation between the year-over-year change in commodity markets, and the Euro-zone's Producer Price Index.

A serious outbreak of inflation lies ahead for the Euro zone, especially for imported goods, due to the devaluation of the Euro, and the upward surge in the Dow Jones Commodity Index, now running +16% higher than a year ago. After a series of rapid-fire rate cuts to a record low of 1%, the ECB now finds itself far behind the "Inflation Curve," but can't tighten its monetary policy, in reaction to the upward surge in commodities markets, as it did in the past.

Instead, the ECB's hands are tied by the Greek tragedy, and instead, must rely on government apparatchiks at EuroStat, to fudge (mute) the official inflation numbers, in order to buy precious time, for its ultra-easy money policy. However, the surge in global commodity inflation has already swept across the English Channel. British consumer price inflation surged to +3.5% in January, far above the Bank of England's 2% target in January, forcing BoE chief Mervyn King to write a public letter of apology, for the insidious side-effects of QE.

Soon, even the apparatchiks at EuroStat would be forced to admit that the PPI is turning sharply higher. In turn, sentiment towards Euro-zone bonds could sour further, amid a steady erosion of the Euro on global currency markets. ECB officials would argue that a 10% jobless rate, and vast amounts of unused capacity in the economy, will contain inflationary pressures, but such arguments are starting to fall on deaf ears, as Asian demand buoys global commodity markets.

Former Bundesbank hawk Otmar Issing has warned on Feb 15th, that bailing out Greece would deal a "major blow" to the Euro's credibility. "The viability of the whole framework— nothing less— is at stake. Financial assistance for countries that violated the terms of their participation in EMU would be a major blow for the credibility of the whole framework. Such principles do not allow for compromise. Once Greece is helped, the dam would be broken. The question is whether monetary union can survive," said Issing.

Nerve wracked Euro investors are scanning their radar screens, and have found a safe haven from the Greek debt bomb. The Euro has slipped to a new 10-year low against the Aussie dollar, after losing a quarter of its market value from a year ago. Carry traders are having a field day, borrowing vast quantities of Euros at 1%, and lending in Aussie dollars at 3.75%, or Brazilian reals at a higher interest rate of 8.75%, while pocketing huge profits from the "commodity currency" gains.

There's a good chance the interest rate spread between the commodity currencies and the Euro will widen further, after the Australian jobless rate fell to an 11-month low of 5.3%, and Australian employers added 194,600 jobs over the past five-months. In recent days, the central banks of Australia and Brazil have stated that the task of moderating inflation would require gradual rate hikes. In Sydney, the 12-month forward market is pricing in 100 basis points of RBA's rate hikes to 4.75%, and in Sao Paulo, Brazil, traders are predicting 150 basis points of tightening in the overnight Selic rate to 10.25 percent.

In the case of Australia and Brazil, their economies are linked to surging Chinese demand for commodities, especially coking coal, crude oil, and iron-ore. If the ECB doesn't act to defend its currency soon, by draining liquidity, the Euro could become the top "carry trade" currency, usurping the US dollar for short selling strategies. Minutes of the Fed's meeting in January indicated that several Fed officials want to start draining the US$ liquidity swamp, by selling mortgage backed bonds, sooner rather than later. If correct, the US-dollar could move still higher, and the Euro would fall further (below US$1.35). In a deleterious cycle, the Euro-zone economy would stumble into the dreaded trap of "Stagflation".

  M O R E…

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.