Strongbow Exploration Inc. (CVE:SBW) reports that exploration is underway at its Midway gold project situated in South Carolina, USA.
Feb 08
Buy Silver today, and a US vacation home could prove much cheaper – soon…
Feb 07
Last month’s official report on the US financial crisis even missed Lee Harvey Oswald…
Jan 11
Getting air-time on US finance TV now means saying the Gold Price is a bubble…
Dec 29
Ultra-conservative strategies advised as US debt spirals…
Dec 22
So what might the position limits proposed to US regulator the CFTC actually achieve…?
Dec 21
Supreme Resources Ltd (CVE:SPR) reports that applications have been submitted to the Securities Exchange Commission to be quoted & reporting on the OTC Securities Market of the USA
Nov 26
Inflation? Why, it’s just what we always wanted…!
WITH THE U.S. markets shut down for Thanksgiving and a game of football, there was no Wall Street ‘lead’ for the local bourse to follow yesterday, writes Greg Canavan of Australia’s Sound Money, Sound Investments.
Just as well then that Reserve Bank governor Glenn Stevens gave investors something to focus on. In his ‘Opening Statement’ to the House of Representatives’ Standing Committee on Economics, Mr Stevens told the assembled bureaucrats that the price of money in Australia is just about right. The vibe of the speech was that rates would stay where they are for the time being, but further increases down the track were still on the cards.
Stevens is concerned about the cost of labor, which has a major bearing in the cost of money:
"Growth in labor costs, however, is no longer declining, but rising. The overall pace could not be described as alarming at this stage, but the turning point is behind us."
Wages are a big deal in the inflation equation. Price rises without compensating wage increases are actually deflationary. If the price of your electricity bill goes up (and it certainly has in New South Wales lately) for a given disposable income you have less to spend elsewhere. That’s not inflationary.
But if you bargain for a wage increase and do not increase your output, THAT is inflationary. Wages are the biggest expense for businesses so wage pressures are generally followed by price rises. Hence Stevens’ legitimate concerns.
So if the unions, the great protector of the worker, continue to have success in fighting for higher wage claims without offsetting productivity gains, you can expect to see inflationary pressures strengthen, and interest rates to rise again next year.
Speaking of productivity, or lack of it, we should point out that the government is contributing heavily to the upward pressure on wages. The latest figures from the ABS show that full time adult total earnings for the public sector rose a hefty 6% for the 12 months to August 2010 on a trend basis. This compares to private sector growth of 4.3%. The problem is, government workers do not produce anything of value. The productive part of the economy, the private sector, sustains the public sector via the taxes they pay. So the fact that wages are rising faster in the non-productive part of the economy is troubling.
What’s also troubling for Stevens and his mission of guessing the right level for the price of money in Australia is China. What happens there is the wildcard for interest rates. Credit conditions in Australia are very weak and do not call for interest rate tightening at all. Credit growth is down to an annual rate of 3.3% (all due to housing, by the way) while growth in M3 money supply is 5.8%.
The inflationary impetus is coming from China. While Stevens didn’t mention China directly, he mentioned its proxy, the ‘terms of trade’ on a few occasions.
"Measured in nominal terms, the rise in GDP is running at about 10% per annum just now, because of the rise in the terms of trade."
China’s credit boom (where growth in bank lending reached 33% in late 2009 and is still buzzing along at around 18%) is clearly spilling over into Australia via record high iron ore and coal prices.
As Stevens’ points out, this is due to very strong demand for steel. We all know the emerging economies are growing strongly/industrializing, hence the demand for steel.
But what is really causing it? If the developed economies of the west are struggling to recover from the credit crisis and experiencing below average levels of demand, why are the developing nations growing so fast? After all, isn’t the west meant to be the buyer of the emerging markets’ goods?
In China at least, the answer comes down to the lending binge that kicked off in late 2008. This was an unprecedented attempt to reflate the Chinese economy during the deflationary shock of the credit crisis.
It certainly worked. Get a load of this. In 2009, China’s banks lent out a whopping 9.6 trillion Yuan, equivalent to around US$1.44 trillion. The lending target for this year is 7.5 trillion Yuan (US$1.13 trillion) but that looks like being exceeded easily.
As the Chinese bureaucrats are now finding out, once a credit boom takes hold it is very hard to stop.
The majority of these loans are going into ‘fixed asset investment’. According to an article in Fortune: ‘Fixed-asset investment accounts for more than 60% of China’s overall GDP. No other major economy even comes close. And of that fixed investment, slightly less than a quarter is attributable to new real estate investment.
Fixed-asset investment means buildings, road, property. Tangible, ‘fixed’, objects. There’s your steel demand right there. That’s certainly good for Australia now and it is giving Stevens plenty of food for thought when it comes to setting interest rates. But surely he must be wondering what happens when the Chinese lending and fixed asset boom ends, as it surely will. (Or is it different, this time, in China?)
One thing is for certain. The bureaucrats in Canberra wont be asking Stevens about Australia’s very heavy reliance on China’s ongoing boom. More than likely they’ll be playing politics (it’s what they do) and asking why banks can’t make the price of money for housing cheaper than it should be.
After all, no one wants to see the end of a boom, especially politicians.
Buying Gold or physical Silver Bullion today…?
Nov 24
Hyperinflation is not simply inflation times 10. In fact, it’s when real prices fall…
SO the FEDERAL RESERVE’s second-round of quantitative easing, announced on November 3rd, was a shoo-in – a fait accompli – already decided when the policy team first sat down the previous day, writes Adrian Ash at BullionVault.
How come? As the minutes released this week show, Brian Sack – manager of the New York Fed’s System Open Market Account (SOMA) – opened the meeting. And asked to judge the matter, he told the 64 other policy-wonks gathered in the Eccles Building that his team "could purchase additional longer-term Treasury securities at a pace of about $75 billion per month while avoiding disruptions in market functioning."
Moreover…
"Implementing a sizable increase in the System’s holdings of Treasury securities most effectively likely would entail a temporary relaxation of the 35% per-issue limit on SOMA holdings under which the Desk had been operating."
Hey presto! The following day, and after apparently intensive debate, a monthly target of $75 billion in Treasury bond purchases – plus a relaxation of the 35% limit on Fed holdings of any particular bond issue – was announced.
Does that make the Fed meeting a sham? No matter. "It’s not as if the Fed is doing anything radical," says Princeton professor Paul Krugman. It’s simply looking "to boost the flow of economy-wide spending by changing the mix of privately-held assets," agrees Berkeley professor Brad DeLong.
"It buys government bonds that pay interest in exchange for cash that does not. That is totally standard."
But totally standard where, exactly?
Sure, buying and selling government debt in the open-market is how central banks control short-term interest rates. That’s why the Fed Funds rate is a target, and the actual outcome in the marketplace is instead known as the Effective Fed Funds. Bidding short-term bills higher (or lower) in price, the New York Fed thus pushes down (or up) the interest rate paid on those bills. But stuffing the market with money, in contrast, is a very different aim. Not least when you do it by buying longer-term bonds. And by only buying, rather than fine-tuning purchases with sales. And by doing it amid the heaviest net issuance of government debt in history. And by doing it so hard that, despite that record issuance, you still need to break your own limit on the proportion of any individual maturity-date you’re allowed to own.
So again, we ask here at BullionVault: Where in the world is such money creation "totally standard"…?
"I think using quantitative easing is a perfectly legitimate thing to do. And for heaven’s sakes, it’s not as if we’re in any danger of inflation any time soon."
– White House advisor and former director of the Congressional Budget Office, Alice Rivlin, speaking to CNBC on 15 November 2010
"We have no ‘dangerous flood of paper’…On the contrary, our paper [money] circulation, though it shows a terrifying array of billions, is really not excessively high…"
– Vossische Zietung newspaper, 16 August 1922
"Several [Fed policy] participants saw a risk that a further increase in the size of the…monetary base could cause an undesirably large increase in inflation. However, it was noted that the Committee had in place tools that would enable it to remove policy accommodation quickly if necessary."
– Federal Reserve minutes from 3 November 2010
"Even if the quantity of money were three times its present size, it would constitute no real obstacle to stabilization…"
– Berliner Börsener newspaper, 18 August 1922
Okay, so pasting a couple of quotes next to each other doesn’t mean the United States is headed straight for wheel-barrows and stormtroopers. Like everyone agrees, 1,000,000% inflation looks a long way off right now. But no central bank ever began a hyper-inflationary policy because it feared inflation. Such disasters always come because of vanished credit and economic depression. And whether in Germany nine decades ago, or in Argentina twenty years back, or in Robert Mugabe’s Zimbabwe around the turn of this century, stuff actually gets cheaper – not more expensive – in real terms during hyperinflation. It’s just that the local currency falls in value faster still, turning the "money illusion" we’re all prey to into a livid nightmare.
Hence the daily flood of French citizens across the border at Strasbourg each day during the early stages of the Weimar madness, emptying the stores with their highly-prized Francs. Hence the real-estate bargains snapped up by wily speculators during Argentina’s last-but-one collapse. Hence the zero-change in inflation – net net – for US Dollar earners during the early phase of Zimbabwe’s hyperinflation, followed by massive a deflation, in US Dollar terms, even as prices in the local currency soared.
On the ground, amidst these crises, it was monetary contraction – not soaring prices – that most worried policy-makers. "The lack of money [now] has a worse effect than the devaluation itself," said one Berlin newspaper in summer 1922, as the Weimar Republic began to run the presses 24/7.
"The government printed notes to satisfy everyone," writes Adam Fergusson in his history of the disaster, When Money Dies, "telling itself that as the granting of credit…had so greatly decreased, the actual currency in circulation had to be so much greater."
But let’s not get perverse. The latest flat-lining in America’s official Consumer Price Index does not mean that hyperinflation is in fact underway. The critical factors to watch out for remain a collapse in tax revenues, plus demands for immediate payment from foreign creditors. It bears repeating nevertheless, however, that – contrary to the worldview presented by academic economists and professional wonks – demand-push inflation is not how hyperinflation begins. Real values in fact fall as a genuine currency crisis takes hold.
And the fact that the Federal Reserve is so dead-set on its "emergency" response that it scarcely needs to meet to agree it, doesn’t mean the Fed actually knows what it’s doing.
Ready to Buy Gold today…?
Nov 23
But it might just create a chance to Buy Gold and other hard assets on the cheap…
WELL THIS should be interesting, writes Dan Denning in his Daily Reckoning Australia.
The EU/IMF bailout of Ireland is not going off without a hitch. The UK’s Telegraph reports that the Green party, which currently forms the junior half of Ireland’s coalition, might withdraw that support and call for new elections in January. This would call into doubt the ability of the current government not only to execute a deal with the EU and the IMF but also to pursue its four-year austerity program.
What a mess! We’ll get to how Ireland and Australia are similar in a moment. But first, please recall the words of the great philosopher of the New York Yankees, Yogi Berra. He once said, "When you come to a fork in the road, take it."
Today’s fork in the financial road leads down two different paths. One path is continued US Dollar devaluation and a strategic migration to emerging market assets (under the assumption that the BRIICS nations will eventually have to allow for currency appreciation…or face rampant food and fuel inflation). This trade favors Buying Gold, commodities, and tangible assets in general.
But remember what happened in 2008? The Global Financial Crisis actually led to a massive rally in the US Dollar. Emerging markets got hammered. The "risk" trades financed with cheap greenbacks were reversed and commodities took a shellacking as well.
Could that happen again? The boys at Knight Research think it’s going to happen again, but even bigger and badder this time around. In a recent research note, they wrote:
"We believe the structural and cyclical terms of global trade have finally reached their tipping point. This will catalyse a wholesale change in sentiment and a historic repositioning of risk assets. The emerging market global growth story is over."
This is the fork Murray has been preparing for in the Slipstream Trader for our subscribers It would mean falling indexes in Australia, which would of course mean falling components of those indexes. Knight Research elaborates on this fork:
"The game is over. Presently, we believe that the broad-based resurgence of investor confidence in the emerging market and secular bull market in commodities will end badly; proving that the rally which commenced in Q2 2009, was in fact an ‘echo bubble’ facilitated by massive-and unsustainable-stimuli from the Chinese government.
"We believe that the end of the Great Consumer Credit Cycle and the vast structural differences in the terms of trade between the United States, the EU, and China, have finally caught up with the secular bull thesis on emerging market and commodities.
"Quite ironically, the Fed’s aggressive policies will likely prove to be the catalyst which breaks China’s unbridled expansion of credit and non-economic growth, ushering in a wholesale rebalancing of risk assets."
This is not a lukewarm prediction. It would quite obviously be mega bearish for the Aussie Dollar and for commodities. And thus far, there’s not much evidence to support that giant reversal is afoot that is more bearish for emerging markets than it is for the US Dollar. It’s a fork in the road, though. So we have to take it and see where it leads.
There ARE a few factors supporting the "Game Over" theme. One is that Ireland’s woes are not the last o the Eurozone’s problems. There is Greece. There is Spain. And really, Ireland is not even done and dusted yet. To some extent, Euro weakness is dollar bullish and contributes to the "Game Over" theme.
But the bigger factor is Chinese tightening, or just your basic traditional popping massive credit bubble. There are early signs of that. Last week China raised reserve requirements on banks again. And Citigroup agrees with our assessment that rising food prices in China could be bearish for metals.
China’s State Council is talking a big game on controlling inflation. Does it mean China is quickly shifting away from a bias toward export growth toward an inflation fighting bias? That’s the big question. If it does mean that, you can expect lower commodity prices.
For example, three-month copper on the London Metals Exchange fell overnight. The news preceding the drop was that refined copper imports to China fell by a third last month. Comex December copper traded lower too, near $3.75/lb.
We’re going to have Dr. Alex what he thinks about this. But we can guess. He probably loves it. He just got back from another site visit in Africa to a copper project. If you’re a Diggers and Drillers reader don’t worry. You’ve already read about this company. It’s not a new recommendation.
Alex has done his homework on the companies he’s recommended. Weakness in the copper price invariably follows through to the shares. If you’re a secular metals bull, you believe this lowers your average purchase price on the shares most likely to benefit from rising prices.
If you’re a bear on copper, well…you’re a bear. Go dance. Alex, of course, has taken the other fork in the road. This fork is for those who’ve realized the end of the Dollar Standard in the global money system is likely to be bullish for real assets, despite your reflexive US Dollar rallies. Europe’s chronic and structural problems add an element of Dollar support. But the long term story on this fork is to favor "real assets" over paper money.
Which brings us back to Ireland and Australia. Irelands bank’s went all in on the Irish property market. When the bubble burst, the banks were left holding the bag (a huge mortgage book). The bag was so heavy, in fact, it broke their back. So the government had to pick them up. And the bag was too big for the government to pick up too, especially given rising borrowing costs for countries at Europe’s periphery.
Could that ever happen in Australia? Could banks with massive over-exposure to domestic property be caught out by losses and unable to borrow from overseas except at much higher rates? And could the government be forced to step in and cover the bank at the cost of its own good credit?
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