Oct 31

Solutions for Everything, Answers to Nothing

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Could one day’s Financial Times be the best £2.50 humanity ever spends…?

WEDNESDAY we picked up an issue of the Financial Times, writes Bill Bonner in his Diary of a Rogue Economist – the so-called pink paper due to its distinctive color.
We wondered how many wrongheaded, stupid, counterproductive, delusional ideas one edition can have.
We were trying to understand how come the entire financial world (with the exception of Germany) seems to be singing from the same off-key, atonal and bizarre hymnbook. All want to cure a debt crisis with more debt.
The FT is part of the problem. It is the choirmaster to the economic elite, singing confidently and loudly the bogus chants that now guide public policy.
Look on practically any financial desk in any time zone anywhere in the world, and you are likely to find a copy. Walk over to the ministry of finance…or to an investment bank…or to a think tank – there’s the salmon-pink newspaper.
Yes, you might also find a copy of the Wall Street Journal or the local financial rag, but it is the FT that has become the true paper of record for the economic world.
Too bad…because it has more bad economic ideas per square inch than a Hillary Clinton speech. It is on the pages of the FT that Larry Summers is allowed to hold forth, with no warning of any sort to alert gullible readers. In the latest of his epistles, he put forth the preposterous claim that more government borrowing to pay for infrastructure would have a 6% return.
He says it would be a “free lunch” because it would not only put people to work and stimulate the economy, but also the return on investment, in terms of GDP growth, would make the project pay for itself…and yield a profit.
Yo, Larry, Earth calling…Have you ever been to New Jersey?
It is hard enough for a private investor, with his own money at stake, to get a 6% return. Imagine when bureaucrats are spending someone else’s money…when decisions must pass through multiple levels of committees and commissions made up of people with no business or investment experience – with no interest in controlling costs or making a profit…and no idea what they are doing.
Imagine, too, that these people are political appointees with strong, and usually hidden, connections to contractors and unions.
What kind of return do you think you would really get? We don’t know, but we’d put a minus sign in front of it.
But the fantasy of borrowing for “public investment” soaks the FT.
It is part of a mythology based on the crackpot Keynesian idea that when growth rates slow you need to stimulate “demand”.
How do you stimulate demand?
You try to get people to take on more debt – even though the slowdown was caused by too much debt.
On page 9 of Wednesday’s FT its chief economics commentator, Martin Wolf (a man who should be roped off with red-and-white tape, like a toxic spill), gives us the standard line on how to increase Europe’s growth rate:
“The question […] is how to achieve higher demand growth in the Euro zone and creditor countries. [T]he Euro zone lacks a credible strategy for reigniting demand [aka debt].”
It is not enough for people to decide when they want to buy something and when they have the money to pay for it. Governments…and their august advisers on the FT editorial page…need a “strategy”.
On its front page, the FT reports – with no sign of guffaw or irony – that the US is developing a “digital divide”.
Apparently, people in poor areas are less able to pay $19.99 a month for broadband Internet than people in rich areas. So the poor are less able to go online and check out the restaurant reviews or enjoy the free pornography.
This undermines President Obama’s campaign pledge of giving every American “affordable access to robust broadband.”
The FT hardly needed to mention it. But it believes the US should make a larger investment in broadband infrastructure – paid for with more debt, of course!
Maybe it’s in a part of the Constitution that we haven’t read: the right to broadband. Maybe it’s something they stuck in to replace the rights they took out – such as habeas corpus or privacy. 
We don’t know. We only bring it up because it shows how dopey the pink paper – and modern economics – can be.
Quantity can be measured. Quality cannot. Broadband subscriptions can be counted. The effect of access to the internet on poor families is unknown.
Would they be better off if they had another distraction in the house? Would they be happier? Would they be healthier? Would they be purer of heart or more settled in spirit?
Nobody knows. But a serious paper would at least ask.
It might also ask whether more “demand” or more GDP really makes people better off. It might consider how you can get real demand by handing out printing-press money. And it might pause to wonder why Zimbabwe is not now the richest country on earth.
But the FT does none of that.
Over on page 24, columnist John Plender calls corporations on the carpet for having too much money. You’d think corporations could do with their money whatever they damned well pleased.
But not in the central planning dreams of the FT. Corporations should use their resources in ways that the newspaper’s economists deem appropriate. And since the world suffers from a lack of demand, “corporate cash hoarding must end in order to drive recovery.”
But corporations aren’t the only ones at fault. Plender spares no one – except the economists most responsible for the crisis and slowdown.
“At root,” he says of Japan’s slump (which could apply almost anywhere these days), the problem “results from underconsumption.”
Aha! Consumers are not doing their part either.
Summers, Wolf, Plender and the “pink paper” have a solution for everything. Unfortunately, it’s always the same solution and it always doesn’t work.
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Sep 15

Why Commodity Prices are Sinking

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Natural resources from oil to food are falling fast in price. Why…?

Is the POST-COLD WAR global boom over? asks Donald Coxe, chairman of Coxe Advisors LLC, and a consultant to The Casey Report from Doug Casey’s research group.
Since the fall of Bolshevism, the world has seen remarkably sustained growth in international cooperation, brought about by freer trade and new technologies. Financial assets have generally performed well, increasing prosperity across most of the world. There were just two major interruptions – the tech crash in 2000, and the financial crash in 2008.
The world warmed up fast after the Cold War. Prices of most commodities rose, despite major corrections:
  • Oil climbed from $15 per barrel to as high as $140. It collapsed with the crash, but climbed back swiftly to near $100;
  • Corn climbed from $2 to as high as $8 before sliding to $3.60;
  • Copper climbed from 80 cents to $4.30 before sliding to $3
  • Gold shot up from $350 to $1900 before pulling back toward $1200.
So what’s happening with commodity prices now? Is this just another correction, or has the game really changed?
Commodity prices have risen against a backdrop of falling interest rates:
The US 10-year Treasury yielded 8% as recently as 1994, and as low as 2.1% during the crash. Recently the consensus target was 4% – before fears of outright deflation drove it to 2.4%. Bond yields have fallen below 1%. Even the bonds of the southern members of the Eurozone yield Treasury-esque returns.
Remarkably, those low yields persist even as major geopolitical outbursts have ended the mostly benign post-Cold War era. The foundations of global economic progress are being shaken by geopolitical earthquakes from Russia and Ukraine to Syria and Iraq, where a new caliphate has been proclaimed.
It seems bizarre, but the world is heading toward a revival of both the Cold War and the Ottoman Empire.
Unfortunately, these concurrent crises are occurring at a time when the great democracies’ leaders bear scant resemblance to those leaders responsible for the end of the Cold War and the launch of global cooperation and free trade: Reagan, Thatcher, and George H.W.Bush.
Mr.Obama won his nomination by voting against the invasion of Iraq. He ran on the promise of ending wars, not starting them. Now, faced with sinking popularity in an election year that could give Republicans complete control of Congress, he naturally fears dragging America into the ISIS chaos – or Ukraine.
Obama is also haunted by the collapse of his most daring and creative foreign policy achievement – the reset with Russia. Mr.Putin has doubled down on his Ukrainian attacks by warning that Russia should be taken seriously, because it is a major nuclear power and is strengthening its nuclear arsenal. Those with long memories recall Khrushchev banging his shoe at the United Nations and shouting, “We will bury you!”
Meanwhile, Western Europe’s leaders show few signs of being prepared for either crisis. Angela Merkel, raised in East Germany, is cautious to a fault. British Premier David Cameron is struggling to prevent Scottish secession and to deal with the likely return of hundreds of ISIS-trained British citizens. (Military analysts generally agree that well-funded returnees with ISIS training are much greater threats than Al Qaeda ever was…yet Cameron has failed to convince his coalition partner to support restraining their re-entry into British Muslim communities.)
The backdrop for long-term investing has, in less than a year, swung from promising to promises broken by wars and threats of more-terrifying wars.
Another unlikely threat is deflation. When central bankers have been running the printing presses 24/7…?
Most economists, strategists, and investors would have deemed deflation a near-impossibility with government debts at all-time highs, funded by money printed at banana-republic rates. Who thought that the Fed would quadruple its balance sheet? And who dreamt that such drastic policies would be sustained for six years and would be accompanied by outright deflation in much of Europe and minimal inflation in the USA?
So why have Brent oil prices fallen from $125 in two years despite production outages in Syria and Libya and repeated cutbacks in Nigeria? Are Teslas taking over the world?
The answer is that the US is once again #1 in oil production, thanks to fracking (in states that allow it). Mr.Obama likes to boast about the new US oil boom, but he has been a bystander to this petro-revolution. According to an oil company executive interviewed in theNew York Times last week, without fracking, global oil prices might be at $200 a barrel, and the world would be in a deep recession. He’s a Texan and thus inclined toward hyperbole, but his point is directionally valid.
US frackers – deploying advances in science and technology with guts and skill – have averted fuel inflation. And farmers, using the tools of modern agriculture – GMO and hybridized seed, farm machinery equipped with GPS and logistics, and carefully monitored fertilizers – have combined with Mother Nature to unleash record crops of corn and soybeans. So much for food inflation.
Capitalism is doing its job: to expand output of goods and services, thereby preventing shortages from derailing recoveries through inflation. That success story means central bankers can keep printing away.
So what should investors do? The S&P’s rally has been sustained through near-zero-cost money used to:
  • buy back stock to enrich insiders and please activist hedge funds which have borrowed big to buy big; and
  • prop up the overall market because investors have learned that buying on margin when the costs are minimal – and below dividend yields – just keeps paying off.
Stein’s law says, “If something cannot go on forever, it will stop.” Too bad it doesn’t say when.
Gold loses its luster when inflation seems to be as remote as a pot of gold at the end of the rainbow. It also loses appeal if even a concatenation of crises fails to send investors rushing into the time-tested crisis consoler.
We had predicted in February that 2014 would be the year of increasing geopolitical risks that would challenge conventional asset allocations. We see geopolitical risks expanding from here – not contracting – and stick to our investment advice that the broad stock market is precariously valued. A range of options is available for those who wish to hedge themselves against even worse news.
Gold is part of any such risk mitigation. So are long government bonds.
Most importantly, we have entered an era when wise investors will devote as much time to reading the foreign news as they allocate to reading the investment section.
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Mar 23

Cold War Lite for the Rouble

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Russia’s currency is a key player in the Ukraine crisis…

So THIS is Cold War “lite” – the Battle over the Russian Rouble, writes Gary Dorsch, editor of the Global Money Trends newsletter.
The confrontation over Ukraine has the potential for spiraling out of control and could lead to “serious problems in the heart of Europe,” warned former Secretary of State James Baker on March 9.
“It is clearly the most serious East-West confrontation since the end of the Cold War,” Baker said on Meet the Press. “For someone who was the last US-Secretary of State during the Cold War, it’s very disappointing to me to see that we’re moving now from cooperation with Russia to confrontation again. The risks are very substantial. I think we are pretty much in a Cold War Lite, right now.”
Baker said he hopes a diplomatic solution can be reached because he thinks there’s no good endgame for the Russian Federation.
In truth, the Kremlin’s tactical triumph in annexing Crimea without a shot being fired in anger has so stunnedthe West that the degree to which the West was outsmarted and out maneuvered has yet to sink in. Russia’s de-facto annexation of the Black Sea peninsula does not threaten to plunge Europe towards a new Cold War.
But it has caught German Chancellor Angela Merkel and US President Barack Obama flat footed, and they’re struggling to come up with a response to Moscow’s land grab. German Chancellor Merkel told an extraordinary EU summit in Brussels on March 9, “One can’t just go on like nothing has happened.”
All the Western political actors stepped up the empty rhetoric to a fever pitch last week, in a desperate attempt to persuade Russian kingpin Vladimir Putin out of formally annexing Crimea. Yet it was Merkel who issued the most bellicose threats, warning Moscow on March 13 that it risked “massive” political and economic damage” if it refused to change course on Ukraine, saying Western leaders were united in their readiness to impose sanctions on Russia if necessary.
“To make it unmistakably clear, no one among us wishes it will come to such measures. But we would all be ready for them and determined if they become unavoidable. If Russia continues with its policy of the past weeks, then this wouldn’t only be a disaster for Ukraine. We as neighboring states would also regard this as a threat,” Ms. Merkel warned.
However, four days later, on March 17, Russian kingpin Vladimir Putin called Merkel’s bluff. He signed a decree recognizing Crimea as an independent state following its majority vote of 97% to secede from Ukraine and to join Russia in a referendum. Defying Western protests, Putin signed a treaty on March 18, making Crimea part of Russia again.
“In the hearts and minds of people, Crimea has always been and remains an inseparable part of Russia.” Putin later told a flag-waving rally in Red Square. “Crimea has returned to home port.”
Putin showed no sign of backing down despite the threat of Western sanctions…
“The so-called authorities in Kiev have stolen power in a coup, opening the way for extremists who would stop at nothing. Our Western partners headed by the United States prefer not to be guided by international law in their practical policies, but by the rule of the gun. They have come to believe in their exceptional-ism and their sense of being the chosen ones. That they can decide the destinies of the world, that it is only them who can be right.”
Making clear the Kremlin’s determination to stop the US-led Nato military alliance from expanding further into Ukraine, Putin then declared to the Federal Assembly on March 18th:
“We do not want a military organization to be bossing us around near our fence, next to our home or in our historical territories. You know, I cannot imagine us going to Sevastopol as Nato sailors’ guests.”
In Moscow’s view, Ukraine’s role is to serve as a buffer state. The prospect ofa new government in Kiev joining the European Union or even Nato is seen as a major threat, as would be the loss of the Russian Navy’s warm-water port on the Black Sea.
While Putin was lashing out against the West in a major speech before the Russian parliament on March 18th, with old Cold War fury, currency traders were busy covering short positions in the Russian Rouble.
The sudden stability of the Rouble was also seized upon by bargain hunters, and short sellers, as a reason to buy beaten down Russian bonds and stocks. The Euro slipped 2% from an all-time high of 51-Roubles to slightly below 50 Roubles. Similarly, the US Dollar slipped about 2% from a five year high at 36.75 Roubles to as low as 35.95 Roubles.
In turn, the Rouble’s relief rally helped to knock Russia’s 10-year Treasury bond yield 27 basis points lower to 9.29% on March 20th, from a five-year high of 9.57%. Still, Russian bond yields are considerably higher than the 7.70% level that prevailed on Dec 24th. Going forward, traders expect the Russian Rouble’s exchange rate versus a basket of the Euro and US$, to be the key driver influencing the direction of Russian bond yields.
Behind the relief rally for the Russian markets were clear messages sent across the newswires that the West had grudgingly accepted the loss of Crimea, and that both sides had agreed to a cease-fire. On March 18th Putin sought to reassure leaders in Berlin, Paris, and London, that Moscow did not seek any further division of Ukraine.
“Fears have been expressed in Kiev that Russia might move on the Russian-speaking eastern parts of Ukraine, where there has been tension between some Russian-speakers and the new authorities. Don’t believe those who try to frighten you with Russia and who scream that other regions will follow after Crimea. We do not want a partition of Ukraine.”
The next day, on March 19th, US President Obama also ruled out the use of military force in the Ukraine crisis, and that the international response to Russia’s seizure of Crimea will be limited to diplomacy.
“We are not going to be getting into a military excursion in Ukraine. What we are going to do is mobilize all of our diplomatic resources to make sure that we’ve got a strong international correlation that sends a clear message.”
In Moscow, bankers were greatly relieved that the situation hadn’t deteriorated so far that Europe and the US Treasury would detonate the “nuclear option” of freezing Euros and US Dollars held in Russian accounts overseas and forcing foreign banks out of bi-lateral trade.
Instead, the EU took very mild steps of imposing travel bans and asset freezes on 21 Russian officials, while the US froze the assets of just seven ranking Kremlin officials. But the West is reluctant to take sanctions to the next level, because it could spiral into a destructive trade war that could topple Europe’s wobbly economy into a “triple dip” recession.
Cross-border trade between Europe and Russia was $460 billion last year, with Russo-German trade accounting for almost a quarter of the total dealings. Germany is dangerously reliant on Russian supply for 40% of its natural gas and crude oil needs. In turn, 300,000 German workers build vast quantities of precision machinery, chemicals and cars that are sold to Russia. This mutual economic dependency means Berlin has taken a more cautious approach toward levying sanctions on Moscow.
In the wake of the West’s initial response, which was viewed as nothing more than a light slap on the wrist directed at a specific few individuals, global stock markets rebounded sharply from the previous week’s losses. Gold prices tumbled as much as $50 per ounce. The US$-denominated Russian Trading System Index (RTS) which had slid deep into bear market territory, enjoyed a “Dead Cat” bounce from its March 14 low, rebounding as much as 12% from its worst levels.
Traders do not believe that the annexation of Crimea is enough to provoke tougher Western sanctions that would damage the Russian economy, and both sides have already agreed to a “Cold Peace” in the region.
Russia is the EU’s third-biggest customer. Western car-makers, retailers and household product companies have piled into Russia, eager to tap into Europe’s second biggest retail market and Russia’s highly educated and relatively cheap workforce. The likes of VW, Ford, GM, Renault and German engineering giant Liebherr, Boeing, Procter & Gamble, Pepsi, Unilever, Intel, John Deere, and British Petroleum, Chevron, General Electric, Caterpillar, Mars, Cargill, and Kraft Foods have invested ten of billions in production facilities in Russia and these companies are opposed to any attempt to impose biting economic sanctions on Russia. 
If the West decides to cross the line and impose really tough sanctions that actually bite, such as asset freezes on Russian kingpin Putin himself, or Russian companies and Oligarchs, Russia’s foreign ministry promised “a broad range of retaliatory measures that won’t go unnoticed in Washington. They will hit the US like a boomerang,” Moscow warned on March 20th.
That could cause even more volatility on both the Russian and European bourses. The German DAX-30 index was most affected among European stock markets, because of its leading trade position with Russia – briefly tumbling to as low as 8,900 on March 14th, for a correction 10% off its recent high. 
According to the Bank for International Settlements, the Russians had $160bn stashed away in foreign banks as of September 2013. On March 20th Mr Putin told company bosses on Thursday to bring their assets home and clean up their businesses to help Russia survive Western sanctions over Crimea and an economic downturn.
“Russian companies should be registered on the territory of our nation, in our country and have a transparent ownership structure. I am certain that this is also in your interests,” Putin told the Oligarchs. 
Most importantly, Russian banks and corporations – most of them majority owned or controlled by the Kremlin, collectively owe a staggering $700bn of debt to foreign lenders. Energy giants Rosneft and Gazprom owe $90bn combined to foreign entities; the four state banks Sberbank, VTB, VEB, and Rosselkhozbank owe $60bn. Some of this debt matures this year and next year.European banks and insurance companies are up to their eyeballs in this potentially toxic Russian debt.
When it comes due, it will have to be rolled over, and some of the companies will need to borrow more, simply to stay afloat. Alas, the current sanction regime of visa bans for the elite, asset freezes, and trade restrictions could make that difficult. Then there’s the threat, now more broadly but still unofficially bandied about, that Russian companies should simply default on this $730bn in debt in retaliation for the sanctions.
Sergei Glazyev, an economic adviser to Russian President Vladimir Putin, said on March 18th:
“If the US chooses to freeze our assets, then our equities and liabilities in Dollars will also be frozen. This means that our banks and businesses will not return the loans to American partners.”
As such, on March 13th, former Fed chief Alan Greenspan told CNBC in a “Squawk Box” interview that the West’s best options of blocking the Kremlin from further aggression, is to “affect their financial system significantly that it creates deterioration within Russia… “
Diplomacy is really far less important than the stock movements within Russia. In past confrontations there really wasn’t much of a stock market in Moscow.
“[However,] the Rouble has been deteriorating in a way that clearly has a major effect on the Russian economy, which you know is not doing well. If that happens, there will be a response from Russia, but only in that case,” Greenspan said.
The Russian Rouble has tumbled 20% against the US Dollar and has lost 27% of its value against the Euro compared with a year ago. A weaker Rouble increases the costs of imports for Russian consumers, and in turn, fans a faster rate of inflation. The Russian consumer price index (CPI) is 6.2% higher compared with a year ago. The CPI might be even higher, except for the dampening influence of a weakening Russian economy that is barely growing at a tepid +0.7% annualized rate in January.
However, a faster rate of inflation, and higher borrowing costs for Russian companies, caused by a weaker Rouble, can sink the Russian economy into a recession later this year. And that’s the secret G-7 game plan – working to weaken the Russian Rouble, in order to topple the Russian economy into a severe recession, and ultimately force the Kremlin to roll back its takeover of Crimea.
Moscow’s ability to defend it currency in the foreign exchange market, depends partly on the size of it foreign currency reserves. In an effort to preserve its FX-stash, on January 13th the Russian central bank said it would cease “targeted” interventions on the currency market as part of a strategic shift towards letting the Roublefloat completely freely. Bank Rossi was depleting its FX reserves, in order to counter net capital outflows that had reached $62.7bn in 2013, $54.6bn in 2012, and $84bn in 2011.
The Russian central bank estimates that around $50bn per year, or 2.5% of Russia’s economic output, is earned illegally in a vast underground economy, and is whisked out of the country. The dirty money enriches a smallbusiness and criminal elite at the expense of the broadercitizenry, and it flourishes because the Kremlin is unwilling to do much about cracking down on corruption, making property rights more enforceable, or making courts believable through judicial reform.Of the total illegal outflow, the central bank figures 30% is linked to trade, with 70% made up of dubious, capital transfers, through a vast state money-laundering scheme. Big state enterprises in particular are involved in shiftinglarge sums of cash abroad, and Russia’s Oligarchs use offshore centers to safeguard businesses.
Alexei Kudrin, chief economist of the Russian president’s Economic Council, said on March 13th that capital flight from Russia mightaccelerate to $50bn per quarter in 2014, if harsher sanctions are imposed onthe country over the Ukrainian crisis.
“If the sanctions only affect the accounts of certain individuals, enterprises, operations or products, this will be a mild scenario,” Kudrin said.
Still, capital flight, uncertainty and the higher interest rates needed to support the ruble will take their toll on Russia. Like the Soviet Union in the 1980s, Russia cannot afford a cold war. It said that Russia is in effect ejecting itself from the BRICS. Yet in a strange way, Moscow figures that Western sanctions on foreign bank accounts might act to discourage the vast amount of dirty money flows out of the country.
Since the Russian military invaded Crimea on March 3rd, the Russian central bank has been forced to abandon its “flexible” approach to managing its currency, and instead, was forced to burn through a sizeable chunk of its massive FX stash, selling $22bn to defend the Rouble.
Bank Rossi has also jacked-up its 1-week repo rate by 150-basis points to 7%, to tighten liquidity, saying the decision was aimed at preventing “risks to inflation and financial stability associated with the recently increased level of volatility in the financial markets.” The yield on Russia’s 3-month bank deposit rates has shot up even higher to 9.32% today, compared with around 7.25% at the start of the year.
Moscow’s ability to win the battle over the Russian Rouble, depends to a large extent on its ability to continue to rack-up trade surpluses, that can replenish its stock of foreign currency reserves. Russia earns a net $16bn per month, on average through foreign trade. Russia’s trade surpluses are largely fuels by exports of industrial commodities, such as aluminum, diamonds, crude oil, natural gas, palladium, nickel, platinum, and timber.
Russia is the world’s largest producer of palladium, used in the auto industry for making catalytic converters for gasoline-powered vehicles. Russia also controls 15% of the world’s platinum supply and is a big supplier of titanium, a vital metal used by the aerospace industry.
From less than 50% in the mid-1990s, the share of commodities in Russian exports has grown to 70% today, with oil accounting for more than half of export income.Equaling 20% of the country’s GDP and half of its economic growth since 2000, hydrocarbons provide half of the Kremlin’s budget revenues. Alexei Kudrin, former finance minister, estimated the Kremlin’s break-even price at $117 per barrel last year. The legacy of the Russian petro-gas state is the centrality of oil and natural gas revenues, which amounted to $215billion last year.
The difficulty with enacting effective sanctions against Russia lies in Western Europe, where many nations now depend on cheap Russian naturalgas to fuel their economies. Germany leads the group, purchasing 40% of its natural gas from Russia. Czechoslovakia, Finland and Ukraine, receive 100% of their natural gas from Russia. Poland receives 82% of its energy from Moscow.
Thus, Putin has been credited with strengthening Russia’s economic leverage. Though Russia still has economic challenges, Europe’s dependence on Russian gas supplies gives Putin a trump card that did not exist during the post-Soviet chaos of the 1990’s. Recently Russia’s gas champion Gazprom upped the stakes by threatening Ukraine with a repeat of the 2009 crisis over $2billion of unpaid debts. “Russia’s bet on using the gas weapon is working,” said daily business newspaper Vedomosti.
Despite sharp criticism of Russia’s takeover of Crimea, there clearly is little appetite in Europe or the US for either a military confrontation with Moscow or meaningful economic sanctions.The risk for Russia on the currency markets is cushioned by the Kremlin’s huge war chest of forex reserves — which stood at $492bn on March 14th. The economic pain imposed on both sides by Iranian-style sanctions would be extreme. Unlike Europe, however, Russia’s tolerance for economic pain is almost limitless, as has been repeatedly demonstrated throughout history. In any contest over pain thresholds, Russia would win hands down.
Disruption of natural gas supply could be even more tRoublesome, given that Russia is the world’s largest exporter, supplying more than a third of Western Europe’s gas. So Moscow has a knife pointed at Europe’s economic throat. It seems clear that no one either in Europe or in the White House has the will to take effective measures against the Russians. The media handwringing over whether Putin is “crazy” obscures the fact that Putin is a very smart power player on the world stage. Contrary to Mr Greenspan’s theory that a severe loss in the value of the Russian stock market would stifle Moscow’s aggression, it’s probable that the Kremlin’s main focus is centered on the gyrations in the prices of commodities.
Still, in order to subdue the Russian bear, Western leaders might continue to aim their gunfire at the Russian Rouble exchange rate. On the currency front, the European Central Bank (ECB) chief Mario Draghi surprised traders on March 7th when he offered a spirited defense of the wisdom of doing nothing. That was after he and his fellow policy makers had whipped up expectations for some type of intervention that would increase the supply of Euros in the banking system, in order to insure that the Euro-zone does not fall into the same deflationary rut as Japan.
An ECB source had predicted on March 3rd, there would be unanimous agreement to end so-called sterilization of the bond purchases that would inject about €175bn ($242bn) of excess liquidity into the Euro zone financial system. Strangely, the ECB opted to forgo a widely expected easing of its monetary policy. Perhaps, the ECB’s tougher than expected stance is related to the political wishes of the EU’s ruling class, which desires to keep the pressure on the Russian Rouble via the Euro exchange rate. Likewise, the Federal Reserve surprised traders on March 19th, when it shortened its timetable for winding down QE-3, and even hinted at baby step rate hikes beginning ahead of schedule around April ’15.
A tightening of excess liquidity in the Euro-zone’s and US’s banking system in the months ahead, can keep the Russian Rouble and other Emerging market currencies, pinned down at current levels, or even weaken their exchange rates further versus the Euro and US Dollar. In regards to Russia, the weaker Rouble helps the West to indirectly exert upward pressure on Russian interest rates. However, Putin is betting that his Petro state can withstand the pain, as the Fed slowly turns off the QE money spigot in the year ahead.
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Feb 14

A Blindford, a Dart, and a Winning Gold Miner Stock

Gold Price Comments Off on A Blindford, a Dart, and a Winning Gold Miner Stock
Really it’s that simple after the December sell-off, says Bob Moriarty…

BOB and BARB Moriarty brought 321gold.com to the internet more than 10 years ago, later adding 321energy.com to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy.
Both sites feature articles, editorial opinions, pricing figures and updates on current events affecting both sectors. And according to Bob Moriarty – previously a Marine F-4B and O-1 pilot with more than 820 missions in Vietnam and holding 14 international aviation records – “fact that everyone hated gold in December is a good reason for rational people to love it now.”
Indeed, as he tells The Gold Report here, many good gold mining stocks now sell for “peanuts”. All you need to pick a winner is a blindfold and a dart…
The Gold Report: Bob, in the last few weeks, Argentina and Venezuela have devalued their currencies and the central banks in Turkey and South Africa hiked interest rates. The US Federal Reserve cut its monthly bond buying by another $10 billion. What do you make of all this happening in such a short timeframe?
Bob Moriarty: In a way, I will take credit for having predicted it. The world is bankrupt, and not one government is talking about reducing expenses. They talk about austerity, but austerity means living within one’s means. Governments refuse to do that.
The Fed has three options: It can continue to taper, maintain the status quo or increase its bond buying. I think there’s a good chance it will take that third option. We need a big crash first.
TGR: What message does that send to the general market?
Bob Moriarty: It says we’ve run out of bullets, head for your bunker.
TGR: That can’t be the message the Fed wants to send.
Bob Moriarty: The message it intends to send is one thing; the message it actually sends is something else.
Events in 2008 were only the opening act. The financial instability and the pressures in the markets are far worse today than they were in 2008. We had the chance to fix things back then, but Ben Bernanke, Alan Greenspan and Tim Geithner panicked and made the situation far worse.
TGR: You sent me an article by James Gruber titled, “Welcome to Phase Three of the Global Financial Crisis“. In it, he writes, “The system broke down in 2008 and again in Europe in 2011 and now in the emerging markets in 2013 and 2014. The market reaction to the latest events has been abrupt and violent, particularly in the currency world. In my experience, markets generally cope well when there is one crisis but when there are multiple spot fires like last week, most markets don’t cope well.” Is there more to come?
Bob Moriarty: Of course things will keep getting worse until somebody understands that the real issue is debt. There are $694 trillion in derivatives. That is financial debt that can never be paid off. The world has been a giant casino for the last 20 years, and it’s all coming to a head.
TGR: How does devaluing their currencies help Argentina and Venezuela?
Bob Moriarty: It doesn’t. Every government in the world is spending money it doesn’t have. The only solution is to stop spending money. Everyone refuses to do that because governments gain power by spending money. They will spend money until they’ve bankrupted all of their citizens.
TGR: In Greece and in Spain, the European Union has implemented mandatory austerity programs to pay off their bonds. Shouldn’t Greece and Spain be seeing economic improvement now that they’ve implemented those severe austerity programs?
Bob Moriarty: There is no economic improvement. It’s all smoke and mirrors. It’s similar to climbing to the top of a 50-storey building and jumping off. Once you’ve jumped, it doesn’t matter what you do on the drop down. You’re going to hit the ground. They need to crash so they can rebuild on a solid foundation.
Calling it austerity is using semantics to play with the citizenry. If one honest politician stood up and said, “We’re spending more money than we have. We need to stop,” that would put us on the way to curing the problem. But the politicians keep pretending there are other solutions.
President Obama’s charade in the State of the Union message was interesting. He was a Constitutional law professor before going into politics, yet in his speech he said the president of the US can unilaterally change the minimum wage. Did he ever read the Constitution?
TGR: Apparently, he does have the ability to change it, but only in upcoming, new federal contracts.
Bob Moriarty: There are three separate branches in the American political system: the executive, the legislative and the judicial. The president of the US does not make laws; he enforces them. His ability to do something is not the same thing as it being legal. All federal financial bills have to start in Congress. The president of the US simply cannot change the minimum wage. It’s not part of his job.
TGR: Wages earned by low-wage workers aren’t increasing at the same rate as inflation. As a result, the minimum wage today doesn’t give the same amount of purchasing power as it did when it was first implemented. Should the minimum wage be hitched to inflation or should it just be abolished?
Bob Moriarty: If you make the minimum wage $10.10/hour, people who are gainfully employed at $8.50 have lost their jobs. All minimum wage laws do is eliminate jobs.
If minimum wage laws worked and helped people, we should pay everybody $100/hour. But as soon as you say $100/hour, everybody says, nobody can afford that, which is true. There are people who cannot afford $10.10/hour. There are workers not worth $10/hour.
In the EU, seven countries do not have minimum wage laws, 20 do. In the seven countries without minimum wage laws, the unemployment rate is just over 8%. In the 20 countries with minimum wage laws, the rate is over 11%. Minimum wage laws, no matter how well intentioned, cost an economy jobs.
The economic stability of any country is based on the number of people in its middle class. There are rich and poor people in every society. That is as true as it is meaningless. The key to economic and political stability is the size of the middle class.
The policies of George Bush, which have been compounded by Barack Obama, have destroyed the middle class.
TGR: How have they done that?
Bob Moriarty: First, people can’t save money. If you save money at 0.25%, you’re insane; inflation robs you of your real wealth. Second, taxes have increased. There are something like 48 separate taxes in Obamacare that have nothing to do with healthcare.
The Affordable Care Act, Obamacare, is the nail in the coffin of the middle class. It is a giant payoff to the insurance companies. The insurance companies are protected under law. They are allowed to collude and do things no other industry can. As a result, the US has one of the least effective healthcare systems in the world and the most expensive. We need to burn the healthcare system down and start all over again. The insurance companies have the American public’s throats in a death grip and they’re killing us.
TGR: Following on the general topic of insurance, you’ve talked about using precious metals as an insurance policy in a crisis. Do you mean the metal, the equities or a combination of both?
Bob Moriarty: I see the physical metal as an insurance policy. Once investors have that policy in place, the equities are what they do with their investments. There are some wonderful companies selling for peanuts now that will do well no matter what happens – inflation or deflation.
TGR: How much of a portfolio needs to be in precious metals to have a good underlying insurance policy?
Bob Moriarty: That depends on the person and the amount of money available. Everybody has a different level.
If my total worldly assets were $1000, I would put all of it into silver or gold coins. If I had $100,000, I’d probably put half of it into silver and gold. If I had $1 million, the percentage would be 5-10%.
I was recommending metals even when gold was $268 per ounce and silver was $4 per ounce. All investments go up and down, and investors have to be prepared for that, but that doesn’t change the fact that metals are the best insurance policy.
TGR: I have my insurance policy; I have my gold and silver coins. Where should I look for gold mining and precious metals stocks
Bob Moriarty: You need two things: a blindfold and a dart.
TGR: But you just said there were some really special companies selling for peanuts.
Bob Moriarty: Yes, but the way to pick them is with a blindfold and a dart. 
TGR: Are some opportunities better than others, or do you believe the entire sector will improve? After all, some analysts say that part of the sector needs to go bankrupt.
Bob Moriarty: I can name five or six people who said, in the last three weeks, that we’re at a bottom and it’s safe to buy.
My questions to them are:
  • What were they saying in April 2011 when silver was at a very clear top?
  • What were they saying in June 2013 when it was clear to some of us that the metals were at a bottom?
Bottoming processes last a long time. Silver and gold were at a bottom from the middle of 2000 until the end of 2011. Any one date in that 18-month period was a bottom.
I have a bunch of stocks that are up 50% since 1st December 2013. I think it’s clear that we’ve had a major bottom. This is an incredible opportunity, and the longer people whine about how gold could go lower, the better it is. It’s called climbing the wall of worry.
TGR: You also are excited about copper. Why is that?
Bob Moriarty: A lot of people think the copper price will go down with the rest of the base metals. I disagree. I’ve seen some incredible copper projects in the last six months – very high-grade projects that are reasonably priced to go into production. There are 10 or 20 companies that had projects of low-grade that were going to cost a lot of money. At least 6 to 10 are in the Middle Cauca belt in Colombia, which has enormous resources that, unfortunately, will always be uneconomic.
TGR: Copper is the canary in the coal mine. If we’re going to have a deflationary environment and economies are contracting, it would seem more logical for the price of copper to go down. What makes these particular copper projects good investments?
Bob Moriarty: If copper goes down, they’ll be more valuable. Because these are all high-grade projects, a lower copper price is good for them, because a lower price will drive the marginal producers out of business. The ideal situation is a company that will make money no matter what the cost of copper is.
TGR: Bob, thanks for your time and your insights.
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Dec 10

Ageing Bull

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Will the least loved bull market in history throw a taper tantrum…?

IT HAS been dubbed the “Least Loved” Bull market in history, writes Gary Dorsch, editor of the Global Money Trends newsletter.
The US-stock market rally is now 57-months old, and over this time period, the S&P500 index has climbed a “wall of worry”, rising +170% from its 9 March 2009 low, and hitting an all-time high, above the 1800-level. But only this year, did it begin to earn the grudging respect of smaller retail investors.
They’ve plowed $175 billion into equity funds so far this year, after withdrawing $750 billion in the previous six years. The “Least Loved Bull” now ranks as the fourth biggest percentage gainer in history. If it can manage to avoid a -20% swoon over the next three months, it would become only the sixth Bull market to celebrate its fifth birthday.
It’s managed to accomplish this impressive feat, amid the weakest US-economic recovery from a recession since the 1930’s. Since Barack Obama took office as president, the pre-tax profits of Corporate America have doubled to $2 trillion per year. However, for Middle America, real disposable income has declined.
The median household income fell to $51,404 in Feb ’13, or -5.6% lower than in June ’09, the month the recovery technically began. The average income of the poorest 20% of households fell -8% to levels last seen in the Reagan era. Higher paying jobs lost during the “Great Recession” are being replaced by lower paying, or part-time jobs in the Obama recovery, which hurts the middle class. Hourly pay grew by just +2% /year, on average, for the past 4 years, the weakest 4-year stretch on record.
According to the latest data from the Census Bureau, the US has already passed the tipping point and is officially a welfare society. Today, more Americans are receiving some form of means-tested welfare than those that have full-time jobs. No, that’s not a misprint.
At the end of 2011, the last year for which data are available, some 108.6 million Americans received one or more form of welfare. Meanwhile, there were just 101.7 million people with full-time jobs, including both the private and government sectors. The danger is the US has already developed a culture of dependency. No one votes to cut his own welfare benefits. Thus, the vast wealth on Wall Street hasn’t trickled down to Main Street. Instead, shareholders reaped the rewards of increased profitability, at the expense of workers.
Federal and state governments have spent a combined $5 trillion on various welfare programs over the past five years. However, that pales in comparison to the Fed’s handouts to investors on Wall Street. US-equity values have increased $14 trillion over the past 57 months.
Across the Fortune-500 companies, the average chief executives pockets 204 times as much as that of their rank-and-file workers, that’s disparity is up +20% since 2009. Perversely, the compensation of the S&P500 chieftains is often linked to the ruthless slashing of jobs and wages in order to increase the companies’ profitability. In theory, that boosts stock prices, and CEO’s collect about 90% of their compensation through the exercise of stock options.
The widening gulf between the struggling masses, and soaring corporate profits, CEO pay and the stock portfolios of the Ultra-rich, is the result of policies being carried out by central banks and their political masters around the world for the benefit of the financial elite.
This year, the Fed is printing $85 billion every month to buy Treasury bills and mortgage-backed securities. Similar measures are being carried out by the Bank of Japan. The European Central Bank, and the Bank of England are keeping their lending rates pegged near zero percent to support the banking Oligarchs. This coordinated policy is intended to channel speculative funds into the stock markets, inflating share prices, while, state treasuries are saddled with even bigger debts, and leaving the working class to foot the bill.
On Wall Street, the Nasdaq-100 index is +32% higher compared with a year ago, and is trading at its highest levels in 13 years. The S&P500 index is +27% higher, enjoying its best year since 1998, even though S&P500 company profits are only +4.5% higher than a year ago, on average, with revenues up just +3%.
Small-caps, whose fortunes are largely linked to the US-economy, outperformed the Multi-national large caps by a large margin. The Russell-2000 index soared +35%, its best year since 2003, and is trading at 75-times its 12-month trailing earnings, even though the US-economy is on pace to generate growth of only +2.3% for 2013.
Furthermore, the money-minting bull has gone 790 days without a drop of -10% or more – ranking as the third longest streak ever. Since 1928, there have been 94-corrections of -105 or more, occurring 322-calander days apart, on average. Many traders suspect the Fed is clandestinely buying stock index futures to enable the market to defy the law of gravity.
Still, no matter how profitable, popular, or resilient – the bull market won’t live forever. The average lifespan of a bull market is 58-months, as in four years and ten months, which would be reached in early January. Of the five bull markets that made it to their fifth birthdays, they posted gains of +21% in Year Five, on average.
The current bull is up +27% this year.
Traders need to keep their fingers on the pulse of the aging bull rally as it enters its retirement years. Nobody rings a bell to let everyone know when to run for the exits before the bull eventually dies. However, the most common causes of death for bull markets are well-known, such as:
  • overvaluation – when stocks are selling at dangerously high price-to-earnings ratios;
  • “A can’t-lose, stocks-can-only-go-up” mentality also signals market mania and trouble ahead;
  • the onset of economic recessions and job losses, frequently preceded by a sharp rise in interest rates;
  • less frequent are unexpected events with shock value, known as “black swans,” which rattle investors.
Over the past few years, whenever the stock market suffered a -5% pullback, traders didn’t panic. Instead, they figured the Fed would ride to the rescue, with the “Bernanke Put,” by injecting more of the performance-enhancing and life-sustaining QE-drug. The Fed’s massive injections of liquidity – funneled into the coffers of the Wall Street banks, were a shot of adrenalin that artificially inflated the stock market, but bypassed the vast majority of Americans. There is also the invisible hand of the Fed, through intervention in the stock index futures markets that provides a safety net for the financial aristocrats.
Traders began to notice the US stock market performed better and suffered short lived pullbacks of -5% or slightly more, and lasting for about one month, from peak to trough, then took 2-months to recoup the losses, while the Fed was inflating the money supply.
For instance, over the past 18 months, the high octane MZM money supply increased $1.3 trillion to as high as $12.2 trillion. At the same time, the combined market value of NYSE and Nasdaq listed stocks increased +$6.5 trillion to an all-time high of $24 trillion. That’s a super charged beta of 5-to-1. Belatedly, the small retail investor began to recognize that the stock market is ruled by the Fed, not by fundamentals. Everyone wanted to jump on the QE bandwagon, after super-dove Janet Yellen was anointed as the next money printer in chief at the Fed.
The Fed has turned the rules of the game – upside down, making bad economic news a reason to buy stocks, and good economic news a reason to sell them. Good news is construed as a reason to sell stocks, if traders think the Fed might use the data as an excuse to scale down the size of its QE injections. For example, the Dow Industrials dropped -700-points in mid June, after Fed chief Ben “Bubbles” Bernanke hinted at winding down its money printing operation. In simple terms, what matters most to the stock market is the easy money flowing from the Fed, and to a lesser extent, the profits and buybacks of the listed companies.
On Nov 12, Dallas Fed chief Richard Fisher admitted:
“We’ve changed and impacted the markets because of our intervention and I understand there’s sensitivity, but markets should also bear in mind that this program cannot go on forever.”
However, what matters most, is not what is actually the case, – but what traders believe is the case, and how they choose to act on that thinking. It doesn’t necessarily need to be true to matter; sometimes, it just needs to be believed by enough people. In the case of Bernanke, Yellen and Chicago Fed chief Charles Evans – the widely held belief is that their hard core addiction to QE is unshakeable, – as is the unrelenting pressure from the White House to monetize the Treasury’s debts.
Could the QE-Infinity crowd be in for a rude awakening in the weeks or months ahead?
On Nov 14, Morgan Stanley chief James Gorman told viewers of CNBC:
“Everyone has had ample warning that the Fed is going to taper quantitative easing. And the markets can expect to see it happen in the next couple of months.”
Expectations that the Fed would scale down QE has already rocked the G-7 government bond markets and the precious metals this year. The yield on the US Treasury’s 10-year note has surged 120-basis points (bps) higher compared with a year ago, to 2.85% today. In turn, Treasury bond yields in Australia, Canada, and England also climbed higher, mostly in lockstep, while the price of gold has tumbled -29% and Silver fell -44% from a year ago.
Taper Tantrum could begin on Dec 19. “If it hadn’t been for the debt ceiling debacle and government shutdown, the Fed would have tapered already. I would expect it definitely in the first half of next year,” Gorman told CNBC.
“We know we’re going to have tapering. We know we’re living in an artificial state of excess liquidity right now. If someone is surprised by this over the next couple of months – and it will occur over the next couple of months – then shame on them. There’s been plenty of warning here.”
Gorman believes it’s best for economies to be allowed to stand on their own and “demonstrate they truly are recovering,” and for tapering to happen. “It’s a good outcome,” he argued. Stated by the chief of a Treasury bond dealer – it’s wise to heed Mr Gorman’s warnings.
The Bernanke Fed might decide to pull the trigger on “Tapering,” as early as the Dec 18-19 meeting, now that it has ample evidence of a labor market that is steadily generating 180,000-jobs per month. A private survey by payroll processor ADP said on Dec 4 that companies and small businesses added 215,000 jobs in November. And ADP said private employers added 184,000 jobs in October, much stronger than its initial estimate of 130,000. Last month, Labor Department apparatchiks said public and private employers added an average of 202,000 jobs a month from August through October. That was up from of 146,000 from May through June. As such, the Fed could soon begin to unwind QE-3.
Perversely, the US jobless rate could fall substantially early next year as belt-tightening in Washington throws 1.3 million long-term unemployed Americans off the benefit rolls. The loss of benefits would mean these workers are no longer considered to be part of the labor force. As such, economists estimate this could lower the jobless rate as much as half a percent to 6.8%, and bringing the Fed closer to its self imposed threshold of 6.5%, that it said could trigger a hike in the overnight federal funds rate. Of course, the Fed can always move the goal posts to accommodate the wishes of the White House and the Richest-1% of investors.
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Oct 11

Gold Price Tipping Point

Gold Price Comments Off on Gold Price Tipping Point
Are real interest rates anywhere near 2% yet? That’s what counts for the gold price…

GOLD TOOK quite a beating in September, bucking its seasonal average monthly return of 2.3 percent, writes Frank Holmes at US Global Investors.
The political battle between President Barack Obama and Congress, China’s Golden Week, and India’s gold import restrictions likely weighed on the metal.
September’s correction only adds to the negative sentiment toward the precious metal. The assumption from many market pundits is that gold is no longer attractive as an investment. With rising rates and continuing low inflation, US investors believe they have a solid case for selling their holdings.
However, this could be a premature assessment, causing these bears to potentially lose out on a lucrative position. Allow me to use an ice cube to explain.
One of the strongest drivers of gold’s Fear Trade is real interest rates. Whenever a country has negative-to-low real rates of return, which means the inflationary rate (CPI) is greater than the current interest rate, gold tends to rise in that country’s currency.
Our model tells us that the tipping point for gold is when real interest rates go above the 2-percent mark.
Consider the ice cube, which shows how new equilibriums can have significant effects. At 31 degrees, H2O is a solid chunk, but when the temperature increases, the mass slowly begins to turn into a liquid. Above 32 degrees, ice changes form from solid to liquid, but it’s still made of hydrogen and oxygen.
Because money is like water, when many other economic dynamics, such as population growth, urbanization rates and changes in government policies, reach their tipping point, the velocity of money tends to be altered.
As global investors, we watch for changes in these trends to know how to invest in commodities and markets, find new opportunities and adjust for risk.
So, how close to gold’s tipping point are we? In other words, what is the real interest rate today? As you can see below, Treasury investors continue to lose money, as the 5-year bill yields 1.41 percent and inflation sits at 1.5 percent. This is nowhere near the 2 percent mark.
I would be worried about gold if real interest rates solidly crossed the 2 percent threshold for an extended amount of time, because it would have a dramatic effect on gold as an asset class. In a high interest rate environment, gold and silver lose their attraction as a store of value.
In order for that tipping point to happen, rates would need to continue rising above inflation, and inflation would need to remain low. These are the forecasts made by many gold sellers today; however I wouldn’t get too trigger happy just yet, as recent data challenges these assumptions.
Take the monthly unemployment figure, which is one of the primary indicators the Federal Reserve studies when evaluating the economy. But depending on the definition of an unemployed person, the numbers reveal different results.
The official U3 unemployment rate, the exact figure Ben Bernanke uses, tracks the total unemployed as a percent of the civilian labor force.
The broadest gauge calculated by the Bureau of Labor Statistics (BLS) is the U6 unemployment rate. For this number, the BLS adds in all those people who are marginally attached to the labor force, plus people working part-time but want to work full-time.
What does “marginally attached to the labor force” mean? These people are neither working nor looking for work but indicate they want a job, are available to work and have worked during some period in the last 12 months. These marginally attached people also include discouraged workers who are not looking for work because of some job-market related reason.
Then there’s a measure of the labor market the BLS tracked prior to 1994. This is the seasonally-adjusted alternate unemployment rate that statistician John Williams of ShadowStats continued to calculate. It’s basically the U6 plus long-term discouraged workers.
While the figures closely followed one another from 1994 through 2009, there’s recently been a shift. U3 and U6 have been trending downward over the past few years, whereas Williams’ ShadowStats unemployment rate shows a noticeably upward trajectory. Perhaps the official unemployment figure overstates the health of the economy?
Based on the jobs market, a limited housing recovery and regulations that have been slowing down the flow of money, the Fed may have no choice but to raise rates very gradually to keep stimulating the economy.
Then there’s the suggestion of inflation manipulation. Even though the US has been reporting a low inflation number, things feel more expensive to many Americans. Disposable income has been growing less than inflation in recent years; perhaps that’s why many people feel “squeezed.”
Also consider Williams’ chart below. It shows monthly inflation data going back for more than a century. The blue and grey shaded areas represent BLS’ historical Consumer Price Index (CPI). You can clearly see the wild swings of inflation and deflation, especially during World War I, the Great Depression, and World War II, as well as the stagflation of the 1970s and early 1980s.
However, shortly after disco, bell bottoms, and episodes of “All in the Family” faded from memory, the US adjusted CPI, not once but twice, first in the early 1980s and again in the mid-1990s. If you use the pre-1982 calculation, you end up with a much different inflation picture. This is the area shaded in red.
Way back in 1889, statistician Carroll D. Wright, in addressing the Convention of Commissioners of Bureaus of Statistics of Labor, talked about the impartial and fearless presentation of its data, using the above play on words. He said:
“The old saying is that ‘figures will not lie,’ but a new saying is ‘liars will figure.’ It is our duty, as practical statisticians, to prevent the liar from figuring; in other words, to prevent him from perverting the truth, in the interest of some theory he wishes to establish.”
Wright’s speech seems particularly relevant today.
For patient, long-term investors looking for a great portfolio diversifier, a moderate weighting in gold and gold stocks may be just the answer. And, today, when looking across the gold mining industry, you’ll find plenty of companies that have paid attractive dividends, many higher than the 5-year government yield.
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Oct 10

A Pause, Not the End for Gold & Silver

Gold Price Comments Off on A Pause, Not the End for Gold & Silver
Why the bull market in gold and silver is taking a break…

GREG McCOACH is an entrepreneur who has successfully started and run several businesses in the past 30 years.
For the last 14 years, he has been involved with the precious metals industry as a bullion dealer, investor and newsletter writer, also publishing Mining Speculator, and writing a weekly column for Gold World.
Here he tells The Gold Report why he things gold and silver prices are only taking a pause, not suffering the end of their long bull markets…
The Gold Report: You wrote recently, “The 2008 crisis will pale in comparison to what is now on the horizon.” Given that the 2008 crisis nearly destroyed the world economy, how bad will the next crisis be?
Greg McCoach: The derivative issues were never fixed after the last crisis. In essence, the laws were changed so that the banks didn’t have to keep derivative liabilities on their books. That way, bank stocks could soar again. But the banks have acted even more recklessly since 2008 and are now in bigger trouble. The recent White House meeting with all the big financial players should be a warning to investors that something big is about to hit. The media touted this as a meeting to discuss the debt ceiling, but I would say it was about the crisis that is about to envelope the big banks again. Barack Obama didn’t run that meeting, JP Morgan Chase ran the meeting and told everyone what was coming. The banks don’t have the capital to cover their interest rate derivative problems that are as big as the Pacific Ocean. I would tell investors to expect ten times worse conditions from what we saw in 2008.
TGR: I’ve read that even if only 4% of the derivatives held by the banks are at risk, and only 10% of that goes south, it would completely wipe out the net worth of the top five banks.
Greg McCoach: At this point, the acceleration of what I consider tyrannical measures on the part of the US government has reached such a degree it’s obvious that something is coming. Why would it buy billions of rounds of hollow-point ammunition? Why is it buying millions of ready-to-eat meals? Why would it take all these extra security measures? Obviously, the US government knows more than the general public does and it reveals something is wrong and the government is worried about it.
TGR: We had this situation after the scandal with HSBC where the US Department of Justice admitted that criminal acts were probably committed, but prosecution would be unthinkable because the big banks cannot be allowed to fail.
Greg McCoach: Well, that pretty much tells the story right there. The bureaucrats, Rebooblicans and Dumocrats, as Jim Willie says, don’t represent the people of America anymore. They represent themselves and their elitist banker puppeteers. They’re trying to control the message and all the outcomes. It’s a train wreck in process, but you have to tip your hat to them – they have been able to keep it together for so long. We could have experienced the end game at multiple occasions in the past 12 years, but it now seems to me that the limits of their good fortune are quickly coming to a close.
If you’re just watching CNN and FOX News, you’re oblivious to what’s really going on. But if you’re a thinking person, you should start getting together food storage and get your investments in line for the major problems ahead. I can’t tell you when it’s going to happen because I don’t have a crystal ball, but it’s not a matter of if this is going to happen; it’s just a matter of when.
TGR: What will be the warning signs of the next crisis?
Greg McCoach: The warning signs are all around us right now and have been for the last six months. The big meeting at the White House with all the financial people I already mentioned was a huge sign. The erratic behavior lately of the US government with the Middle East, particularly Syria, is also a sign. In recent weeks we have heard about a worldwide currency reset that is to take place in the very near future. This is telling those who have ears to listen that the Keynesian fraud of creating monies out of this air has reached a limit so they need to reset.
All of this means that we’ll wake up one morning and life will be very different. You’ll see markets performing erratically. You’ll see civil unrest. Most people think it will have something to do with another banking crisis, a derivatives situation. It could be a new war. I think things could happen quickly and take us down a very dark path. All we can do is prepare for ourselves and our families. You have got to own physical gold and silver that is in your possession.
TGR: The macroeconomic indicators suggest that the prices of gold and silver should be much higher than at present. Why do you think that 2013 looks to be the year that the bull markets in these metals ended?
Greg McCoach: I don’t think the secular precious metals bull market has ended. I think we’re just taking a pause. I liken this to the move that happened in the 1970s when we made the US Dollar the official reserve currency of the world, and people could again own physical gold and silver. The gold price went from $35 per ounce all the way up to $195 per ounce. Then it collapsed to $105 per ounce. A lot of people thought that was it for gold. But then it ran to $855 per ounce.
Since then, we’ve hit $1950 per ounce, which was then corrected back to the $1200-1,300 per ounce level. We’ve been bouncing around $1200-1400 per ounce, and I believe this is just setting us up for the foundation of the next big move in gold, which will take us to much, much higher levels. I’m thinking $3500-5000 per ounce. It will be associated with collapsing currencies, the devaluing Dollar, problems in the banking sector, etc.
TGR: What will be China’s role in this?
Greg McCoach: China is the world’s biggest producer of gold, and now it is becoming the biggest holder of gold. It is dumping US Treasury bills and buying anything it can get its hands on.
TGR: Is there no question in your mind that gold and silver are bargains now?
Greg McCoach: Absolutely. People should be lining up to buy on this dip. This is a great opportunity. Nothing has fundamentally changed. Has the government started to become fiscally responsible? I laughed out loud when I heard about this “taper” of quantitative easing. What a complete joke. This should show thinking people the gig is up for the financial fraud being perpetrated at the Federal Reserve.
TGR: Many people argue that interest rates can’t go up because then the US won’t be able to pay its debt, and the whole derivatives market will be threatened.
Greg McCoach: If interest rates go up they are damned. If interest rates go down they are damned. Either way the Fed is screwed because of the derivative situation with their largest banks. I would expect interest rates to move in the direction that allows their banks and the US government to survive the longest, but there is no way out of this that I can see.
TGR: What do you think of the argument made by the Gold Anti-Trust Action Committee that the big banks and the central bankers are suppressing the prices of gold and silver?
Greg McCoach: The government doesn’t like rising gold and silver prices because it tells the public that something is wrong. Now, does the government come into our market and play games? Absolutely, but I don’t really pay too much attention because, ultimately, I believe free markets will dictate the course of the metals prices. It’s yet another sign on just how out of control the powers that be are when they seek to control the outcome of everything. They think they are God, but they’re about to find out otherwise.
TGR: You wrote on Sept. 20, 2013 that you’ve lost confidence in “a recovery this fall in our overall junior mining stock market.” If you are right, doesn’t this mean that many juniors won’t survive? And if this occurs, will it make the survivors stronger?
Greg McCoach: Absolutely. This is an unfortunate chain of events, but in many regards it needed to happen. There were just too many junior mining companies. There are only so many talented teams of professionals in the industry that know how to make the discoveries that can be developed into producing mines. When you look at the monies that have been raised in this sector in the last 5-10 years, we have very little to show for it. All the low hanging fruit has already been discovered.
So this “wipeout,” as I’m referring to it, has been very difficult on investors, people employed by mining companies and newsletter writers like myself. I was hoping we would have a recovery this fall. The early signs in July and August seemed to indicate one because the strongest companies started to move and in many cases doubled from their lows in late June, early July. That is usually a sign that things are going to float again, but it all fell apart in September.
TGR: You have recommended that investors reduce their portfolios “to just a few of the highest quality stocks as we await the recovery.” What are the criteria that determine the highest quality stocks?
Greg McCoach: Companies with plenty of cash on hand that don’t need to raise money right now. It is almost impossible to raise money in this sector at this juncture. Look for companies that are producing from high-grade projects with low costs, companies that will make money even if gold and silver go down further from current levels.
Even with companies like these, there is always something making things more difficult. There are a lot of great companies I like in Mexico, where the politicians are trying to change the laws to charge more taxes. Politicians have an insatiable appetite for other people’s money. It will affect companies in Mexico with low-grade projects to the point it may force them out of business.
TGR: When do you think the market will turn around?
Greg McCoach: Things are not going to get better at least until 2014, and in the meantime a lot of juniors hanging by their fingernails are going to go out of business. That will solidify the market for the survivors. Maybe that is as it should be. I do believe that monies we’ve lost in this sector in the last two years can quickly be made up if investors maintain a position, or build positions, during these low times in the highest quality companies. Because when the market does recover, it is going to be a screamer.
TGR: Many long-time investors in the junior space have been so battered over the last couple of years that they’ve given up. What is the best reason for people to stay invested in juniors?
Greg McCoach: I can’t blame people for getting so frustrated. They’ve taken horrendous losses; we all have. Some of the sharpest people I know in this business have been hammered. And when you suffer a lot, you tend to say, “Hey, I don’t want to do this anymore.” Those who can gut it out, however, those who have the fortitude and the understanding have to dump the garbage. Just take the pain, and get it over with. Realign portfolios to the highest quality and build positions in companies that can make up for a lot of lost ground when the market recovers.
TGR: Greg, thank you for your time and your insights.
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Oct 07

Why the Fed Didn’t Taper QE

Gold Price Comments Off on Why the Fed Didn’t Taper QE
Why did the US Fed back-pedal, and fail to taper QE…?

NOWADAYS the sitting members of the inner circle at the Federal Reserve are nothing more than political lackeys, writes Gary Dorsch, editor of the Global Money Trends newsletter.
The Fed members conduct the nation’s monetary policy, at the beset of whatever political party happens to hold the upper hand in the legislature. In his May 29th speech titled “Central banking at a Crossroads”, former Fed chief Paul Volcker lamented that the Fed had been hijacked by the Treasury and the White House. In calling for the Bernanke Fed to begin rolling back QE3, Volcker said:
“There is something else beyond the necessary mechanics and timely action that is at stake. The credibility of the Federal Reserve, its commitment to maintain price stability and its ability to stand up against pressing and partisan political pressures is critical. Independence can’t just be a slogan.”
Today’s reality is however that the Fed has become the “fourth branch of the US-government.” Acting in strict secrecy, the Fed determines “target rates” for unemployment and inflation, manipulates interest rates, grows the money supply, rigs the value of the stock market, and regulates the nation’s banks. And there is no longer any pretense of an allegiance to “Moral Hazard”. Congress and the American people are left in the dark.
Nowadays, the ruling leaders of the Democratic Party are utterly opposed to auditing the Fed, because they realize the central bank is the goose that lays the golden eggs. For the past 10-months, the Fed has been buying $45 billion of US Treasury notes each month, and thereby financing the expansion of the US welfare state, at historically low interest rates.
Whoever the President picks to run the Fed should be expected act in accordance with the wishes of the White House and the Treasury. On Oct 1st US President Barack Obama told NPR News that “Ben Bernanke has done an outstanding job. He’s maintained confidence. And whoever I appoint will continue many of the smart policies that Ben Bernanke’s made.”
The code words “maintaining confidence,” refers to the Fed’s ability to keep the stock market climbing along an upward trajectory, even amid anemic economic growth. 
Bernanke has engineered the fourth biggest Bull market in Wall Street’s history. There’ve been pullbacks and short-lived corrections along the way, but the Fed has always kept its foot pressed firmly on the monetary accelerator, and kept the speculative juices flowing. Over the past one and half years, the Fed has increased the high octane MZM money supply by 10% to an all-time high of $12 trillion. In turn, traders have bid-up the combined value of NYSE and Nasdaq listed stocks to a record $22 trillion. That’s great news for the richest 10% of Americans, who own 80% of the shares on the stock exchanges.
As for Bernanke’s successor, the only qualification is a readiness to monetize the Treasury’s debt, and to funnel even more money into the financial markets, through its clandestine activities. The CBO has warned the ruling political class and the Fed that if Treasury yields move back to their averages in the 1990s, it’s a scenario that would add $1.44 trillion in interest costs over 10-years. The Fed can’t let that happen – after floating a big Trial balloon – it balked at Tapering QE, to keep interest rates low.
However, the higher the stock market climbs – the greater the chance of a sharp correction along the way. On October 2nd, the US Treasury chief Jacob Lew and President Obama with the key members of the “Plunge Protection Team” (PPT) at the White House, in an effort to plot future strategies on how to deal with any possible shakeouts in the stock market, when bearish news arrives.
The meeting included the elite of the financial aristocracy – the CEOs of J.P.Morgan Chase, Goldman Sachs, Citigroup, Deutsche Bank, and Bank of America, Morgan Stanley, and Wells Fargo. The PPT aims to have a rescue plan in place, if upcoming negotiations over the debt ceiling with the House Republicans get deadlocked.
Still, the wealth that’s building up on Wall Street is not “trickling down” to the struggling masses on Main Street. Pushing up equity and home prices is mostly benefiting the wealthiest of Americans. The Fed’s own Survey of Consumer Finances in 2010, the last year for which data are available, explains why.
It shows that the Top 10% of US income earners had financial assets totaling $550,800, or 20-times the holdings ($27,550) of the other 90 per cent. The Top 10% of the wealthiest Americans own 80% of the shares listed on the NYSE and Nasdaq, while the median equity holdings of the rest of the population was only $17,700, hardly enough to make much of a difference in one’s lifetime. That’s because half of the US-citizenry owns no equities at all and can’t participate in the Fed’s easy money give-away.
Thanks to the Fed’s QE-schemes, wealth inequality in America is at its widest since the 1920s, in both relative and absolute terms. Last year, the real median household income in America was $51,017 for a 5% drop from 2008. On the flip side, the Top 1% owns 42% of America’s wealth and raked in 95% of all income gains since 2008, while scoring an average income of $717,000 per year.
Corporations and wealthy individuals are increasingly using political campaign contributions to control the government. Their PAC contributions exploded during the 2012 elections, virtually hijacking the politicians to move Washington towards a government of “the Ultra-Rich, by the Ultra-Rich, and for the Ultra-Rich.”
Prior to the era of “Zero Interest Rate Policies” (ZIRP), central bankers mostly preferred to operate under the cloak of obfuscation – keeping traders confused and guessing about their next adjustments of the overnight loan rate. A select clique of Treasury bond dealers was usually privy to the inner thinking of the central bank, since they took great risks in underwriting the government’s debt. Bond dealers are tipped off first, and only afterwards, are leaks released to the financial media, and disseminated more widely to the general public – with a vague clue of what might happen next.
And so it was on May 12th, and with the yield on the US Treasury’s 10-year T-note hovering around 1.65%, that the Fed leaked a story to the Wall Street Journal. It strongly suggested that it was thinking about how to wind down its massive purchases of $85 billion per month of Treasuries and mortgage-backed securities (MBS).
“Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The start time has yet to be determined,” wrote the WSJ‘s Jon Hilsenrath.
That story lifted 10-year T-note yields about +50-basis points (bps) higher to just above 2%. One month later, on June 7th former Fed chief Alan Greenspan jolted bond yields higher, by telling listeners to CNBC that the Fed should start tapering its QE3 scheme without delay.
“My view is the sooner we come to grips with this excessive level of assets on the balance sheet of the Federal Reserve, which everyone agrees is excessive, the better,” he said. “I think a gradual withdrawal from QE is adequate, but we’ve got to get moving. I think we’ve got to do it even if we don’t think the economy it is strong enough.”
The resulting speculation that the biggest buyer of T-bonds could soon begin to withdraw from the marketplace, triggered an upward spiral in 10-year T-note yields to as high as 2.25% the following week.
The notion that Greenspan was acting as a mouthpiece for the Fed, was given extra credence when on June 19th Fed chief Bernanke ended weeks of speculation by saying the US central bank would likely slow its bond-buying program later this year and end it next year if the economy continues to improve.
Bernanke said the reductions would occur in ”measured steps” and that the purchases could end by the middle of 2014. By then – he thought unemployment would be around 7%. Bernanke tried to explain that any reduction in the Fed’s $85 billion-a month in bond purchases would be like a driver letting up on a gas pedal rather than applying the brakes. He stressed that even after the Fed ends its bond purchases, it will continue to maintain its vast bond portfolio, to help keep bond yields down.
The sudden and unexpected threat of Fed Tapering of QE rocked the global bond markets, sending yields significantly higher in the developed markets and sharply higher in the Emerging markets. Government bond yields in Australia Britain, Canada, Hong Kong and US all moved upwards by +135-bps to +170-bps, and in close synchronization. Ten-year bond yields in mainland China rose +85-bps to as high as 4.25%. Despite repeated assertions by Fed officials that they are committed to ZIRP for the foreseeable future, hints of QE tapering triggered sharp losses in emerging-market currencies and capital markets – a harsh reminder that if the Fed unwinds its super easy monetary policy, there are large unintended spillover effects on capital flows to emerging markets.
After telegraphing to the global markets an impending shift in Fed policy for four months, the time had finally arrived for the Fed to take its first baby step towards tapering QE3. Traders were convinced that tapering would begin at the Sept 18th meeting. However, the Fed got cold feet, and balked.
Citing a recent “tightening of financial conditions” – caused, at least in part, by expectations of tapering, “The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” the Fed said. Yields on the Treasury’s 10-year note subsequently fell to as low as 2.60%, from as high as 3% earlier.
More surprisingly, Bernanke signaled an even bigger retreat from Tapering, by backing away from other red-lines, such as the 7% unemployment rate threshold for ending bond purchases and a 6.5% jobless rate for hiking the federal funds rate. Thus, we can expect that US-government apparatchiks that fudge statistics, to paint a picture of the US-economy that’s muddling along at a +2% growth rate. That’s good enough to keep the stock market buoyant while helping to keep a lid on long-term bond yields.
In one respect, the T-bond markets appear to be misguided, at least temporarily. Bond yields have surged higher even though commodity indexes are tumbling. Earlier this week, the price of Corn fell below $4.50 per bushel, to its lowest level in 3 years. Corn, America’s biggest crop, has slumped -36% so far this year. Soybeans have slumped to $12.65 /bushel, down sharply from as high as $18 /bushel last summer. With the price of coffee languishing at $1.14 /pound in the wholesale market, there’s no sign of inflation in the food prices.
Likewise, unleaded gasoline futures on the Nymex have slumped to $2.60 per gallon, and natural gas is buried at $3.50 per mBtu. Overall, the Continuous Commodity Index (CCI – a basket of 17-equally weighted commodities) is trading 12% lower than a year ago – not only signaling a lack of inflationary pressures, but also the possibility of deflation taking hold. By keeping QE3 intact at $85 billion per month, the Fed might be trying to push back against the possibility of falling consumer prices – or deflation.
A second possible reason for the Fed’s backtracking was the upward spiral in 30-year mortgage rates to as high as 4.80%, on average, at just the hint of tapering. In turn, applications for loans to purchase homes plunged, with refinancing activity fell to its lowest in more than four years – the Mortgage Bankers Association (MBA) reported on Sept 11th. That put the MBA’s activity index at its lowest since November 2008 and the depths of the financial crisis. Higher interest rates could undermine the housing market – that’s counted upon to buoy household spending and generate construction jobs.
Wells Fargo says it expects mortgage originations to drop nearly 30% in the third quarter to roughly $80 billion. J.P.Morgan meanwhile has said it expects to lose money on its mortgage-origination business in the second half of the year, and that mortgage originations are on pace to drop as much as 40% from the first half of the year.
J.P.Morgan, Bank of America, Wells Fargo and Citigroup already have cut more than 10,000 mortgage jobs this year, with JPM accelerating plans to cut as many as 15,000 jobs in its mortgage division by the end of 2014. This evidence of an economic slowdown was coming into focus, one week ahead of the Fed meeting – which put a yellow caution flag out for the Fed.
A third possible reason that led the Fed to put Tapering on ice was the rout in the Emerging markets, especially those countries with large current-account deficits, and large foreign capital flows relative to the size of their financial markets. Among the most vulnerable are Turkey, South Africa, Brazil, India, and Indonesia – a group that Morgan Stanley dubbed the “Fragile Five”.
Emerging markets (ex-China) are supposed to be more resilient now because they have $5.6 trillion in reserves. But selling FX reserves also means draining the supply of local currency – a quasi form of monetary tightening. And emerging nations make-up about half of the world economy, upon which US multi-nationals increasingly depend for sales growth. 
One of the most startling developments in global equity markets this year was the sharp contrast in performance between developed and emerging markets. Through July 31, 2013, Emerging markets lost 8.4%, while developed markets gained 14.5% and the S&P500 index gained 19.6%.
Moreover, the larger, more established BRIC markets (Brazil, Russia, India, and China) led the retreat. The MSCI BRIC Index declined 11.2% this year through July. Whereas the BRIC countries were an engine of growth for the world economy, that engine began to sputter, especially after the Fed signaled tapering QE.
In the case of Brazil, fears of Fed tapering lifted the US Dollar from as low as 1.96 Brazilian Reals, to as high as 2.45 Reals, a gain of +25%. In turn, a weaker Real fueled an accelerating inflation rate and forced the Bank of Brazil to hike its overnight Selic rate, from 7.25% in April to a 16-month high of 9% on August 28th, seeking to rebuild confidence in the currency. 
Defending the Real helped to cap the surge in Brazil’s 10-year bond yield, which hit a high of 12.37% in August, after starting the year at 9.15%. Brazil’s central bank left the door open for more rate hikes by reiterating that the latest increase is part of an ongoing rate-adjustment process. On August 22nd Brazil’s central bank announced a currency-intervention program to inject $60 billion worth of US Dollars and insurance into the foreign-exchange market by year-end, a move aimed at bolstering the Real, after it slipped to near five-year lows.
However, the Fed’s surprising retreat from Tapering was the Real’s most important savior, as the US Dollar fell towards 2.20 Reals today, down from a 5-year high near 2.45 Reals in August.
While couching its retreat from Tapering, in terms of the need to bring down unemployment, the major concern of the Fed is not the worsening plight of millions of working people, but rather the need to keep equity prices perched in the stratosphere. Instead of standing outside of financial markets and simply acting as a lender of last resort, the Fed and other central banks are massively intervening to keep the markets propped up. Significant “tapering” is therefore dangerous – it would bring about a collapse in inflated bubbles in numerous NYSE and Nasdaq-listed companies.
Meanwhile, it now looks as though QE Infinity is the “New Normal.”
“A government unable to reduce its debt will be on the lookout for cheap ways to fund its profligacy. Financial repression is one way of doing so,” according to HSBC Chief Economist Stephen King. “Quantitative easing pushes down bond yields – even when fiscal policy is out of control. It allows governments to avoid being punished by markets for lack of fiscal discipline. Repression allows governments to delay austerity and to fund excessive borrowing at very low cost. Seen this way, repression is not so much a mechanism designed to reduce government debt but, rather, a way to live with it.”
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