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Optimisim, Pessimism, & Reality


September 10, 2009
When analyzing information found on The Financial Panner, as well as other outlets, it is *extremely* important to try and rise above the simple conjecture that this is simply “doom and gloom”.

While it may indeed be true that the symptoms of the macro-economic disease that plagues the US lean towards that direction – the “doom & gloom” label makes it rather easy to quickly dismiss the brass-tax reality.

To those who are on the fence, consider the following:

Was not the fact that our government essentially said the economy would collapse unless banks got 700B last September financial “doom and gloom”?

Is not the fact that the FDIC has had to manage the failure of 100+ banks of various sizes this year alone, putting them well on course for a government bailout, financial “doom and gloom”?

Is not the fact that an unknown portion (per the previous point) of the enormous ~650 Trillion Dollar derivates market is causing a majority of banks and financial institutions to be technically insolvent financial “doom and gloom”?

Is not the fact that calculating unemployment the way it was done approximately a decade ago would put it at ~20% versus ~10% not financial “doom and gloom”?

The point is that “doom and gloom” in some respects has already arrived.

Continuing to listen to the perma-bulls on TV (something that per a recent poll ~66% believe is false) and *hoping* will not change reality. For further evidence of this, listen to this rare and open argument between Steve Leisman and Rick Santelli on CNBC! Santelli attempts to inject some significant *truths* and then says “Now give me the propaganda!”

The more pragmatic way to become a perma-bull is to take a hard look at the facts, surmise where they lead, and execute a sound investment strategy based upon fundamentals.

UPDATE: Audit the Federal Reserve

http://www.auditthefed.com

9/8/09 Peter Schiff on Fox Business: Gold to $2000 and Beyond!

http://www.youtube.com/watch?v=1–fHTF-0Gs

What’s Behind Gold’s Recent Rise (9/4/09)

http://www.youtube.com/watch?v=qF7iaq52nM8

Gold Rally Signals Move Away From Currencies, Greenspan Says (9/9/09)

http://www.bloomberg.com/apps/news?pid=20601083&sid=acrGvxBXPDfk

  • Gold prices that jumped above $1,000 an ounce this week are signaling that investors are buying metals to hedge against declines in currencies, former Federal Reserve Chairman Alan Greenspan said.
  • “What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment,” Greenspan said.

Forget gold. Silver is shining bright. (9/8/09)

http://money.cnn.com/2009/09/08/markets/thebuzz/index.htm?postversion=2009090821

  • All that glitters isn’t necessarily gold. If you want a really hot metal, check out silver.
  • Yeah, the price of gold rose above $1,000 an ounce Tuesday. And Gold is now up more than 5% in the past month and nearly 15% this year. But silver has done even better as of late.
  • Silver is a component for products ranging from batteries and semiconductors to solar panels and water purification systems. That means that there are more than just inflation concerns driving up the price of silver.
  • “There is such a high demand for industrial use of silver. So a lot of companies, particularly in Asia, are gobbling it up in order to get their economies growing again,” said David Beahm, vice president of economic research with Blanchard & Co., a New Orleans-based investing firm that specializes in gold and other precious metals.

Barrick to sell $3 billion in stock to buy back hedges (9/8/09)

http://www.reuters.com/article/ousivMolt/idUSTRE58767F20090908

  • Barrick Gold (ABX.TO) will issue $3 billion in stock to eliminate all of its fixed-price gold hedges and a portion of its floating hedges, taking a $5.6 billion hit to third-quarter earnings, the world’s top gold miner said on Tuesday.
  • For Barrick, which expects gold prices to keep rising, the deal should remove what has been a big drag on its shares, the legacy of the company’s past reliance on hedging, a practice it abandoned in 2003.
  • During times of weak prices, gold miners often sell a portion of their future production to protect, or hedge, against the possibility that prices will fall.
  • When prices rise, as they have done since 2001, the company suffers because value of the future production they’ve sold does not increase with the gold price.

Dollar Is Near Lowest in Almost Year as Borrowing Costs Plunge (9/10/09)

http://www.bloomberg.com/apps/news?pid=20601087&sid=aMjc5oqgd2Fg

  • The dollar traded near the weakest level in almost a year against the currencies of six major U.S. trading partners as record low borrowing costs encouraged investors to sell the greenback and buy higher-yielding assets.

Dollar hits low for year as gold tops $1,000 (9/8/09)

http://finance.yahoo.com/news/Dollar-hits-low-for-year-as-apf-3658622448.html?x=0&.v=1

  • The dollar fell to a low for the year Tuesday as gold prices shot above $1,000 an ounce before giving some ground and investors switched funds into riskier investments.
  • The dollar index fell as low as 77.05 against a basket of six major world currencies that includes the euro, yen, Canadian dollar, British pound, Swedish krona and Swiss franc. That’s its lowest since last September.
  • The price of gold, meanwhile, shot past $1,000 an ounce for the first time since February. Gold for December delivery peaked at $1,009.70, the highest since March 2008, on the New York Mercantile Exchange before falling back to settle at $999.80. Gold is often used as a hedge against inflation and a weak dollar.

U.N. body calls for dollar’s reserve role to be dropped (9/8/09)

http://www.marketwatch.com/story/un-body-calls-for-dollar-reserve-role-to-be-axed-2009-09-08

  • A United Nations panel weighed into the dollar reserve currency debate, arguing for a new system of soft pegs to correct severe deficits in debtor nations like the U.S. and surpluses in countries like China.
  • “An economy whose currency is used as a reserve currency is not under the same obligation as others to make the necessary macroeconomic or exchange-rate adjustments for avoiding continuing current account deficits. Thus, the dominance of the dollar as the main means of international payments also played an important role in the build-up of the global imbalances in the run-up to the financial crisis,” the U.N. said.

Fed buys $4.95 billion in Treasurys (9/8/09)

http://www.marketwatch.com/story/fed-buys-495-billion-in-treasurys-2009-09-08-118190

  • NEW YORK (MarketWatch) — The Federal Reserve Bank of New York bought $4.95 billion in Treasurys on Tuesday, in its only scheduled buyback for the week. Dealers submitted $14.486 billion in debt maturing between 2016 and 2019 to the Fed. When the central bank last bought in this range, it purchased $7 billion.

Senate must raise debt ceiling above $12T (9/7/09)

http://thehill.com/homenews/senate/57493-senate-must-raise-debt-ceiling-above-12t

  • The Senate must move legislation to raise the federal debt limit beyond $12.1 trillion by mid-October, a move viewed as necessary despite protests about the record levels of red ink.
  • The move will highlight the nation’s record debt, which has been central to Republican attacks against Democratic congressional leaders and President Barack Obama. The year’s deficit is expected to hit a record $1.6 trillion.
  • Congress has little choice. Failing to raise the cap could lead the nation to default in mid-October, when the debt is expected to exceed its limit, Treasury Secretary Timothy Geithner has said. In August, Geithner asked Senate Majority Leader Harry Reid (D-Nev.) to increase the debt limit as soon as possible.

China, Bernanke, and the price of gold (9/7/09)

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100000821/china-bernanke-and-the-price-of-gold/

  • China has issued what amounts to the “Beijing Put” on gold. You can make a lot of money, but you really can’t lose.
  • Mr Cheng was until recently Vice-Chairman of the Communist Party’s Standing Committee, and is now a sort of economic ambassador for China around the world – a charming man, by the way, who left Hong Kong for mainland China in 1950 at the age of 16, as young idealist eager to serve the revolution. Sixty years later, he calls himself simply “a survivior”.
  • What he said about US monetary policy and gold – this bit on the record – would appear to validate the long-held belief of gold bugs that China has fundamentally lost confidence in the US dollar and is going to shift to a partial gold standard through reserve accumulation.
  • “Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market,” he said.

China alarmed by US money printing (9/6/09)

http://www.telegraph.co.uk/finance/economics/6146957/China-alarmed-by-US-money-printing.html

  • The US Federal Reserve’s policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.
  • Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy drive, said Beijing was dismayed by the Fed’s recourse to “credit easing”.
  • “If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.
  • China’s reserves are more than – $2 trillion, the world’s largest.
  • “Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets,” he added.

Hong Kong recalls gold reserves, touts high-security vault (9/3/09)

http://www.marketwatch.com/story/hong-kong-recalls-gold-reserves-from-london-2009-09-03

  • Hong Kong is pulling all its physical gold holdings from depositories in London, transferring them to a high-security depository newly built at the city’s airport, in a move that won praise from local traders Thursday.
  • “Central banks are increasingly aware of the importance of having gold reserves at time of financial crisis and having it easily available at their own disposal,” he said.

U.S. Dollar Will Weaken, Currency Crash Possible, Roubini Says (9/4/09)

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.SW_71xPhjA

  • The dollar will weaken and the U.S. risks seeing a crash of the currency unless it does more to control the deficit and reduce debt, said New York University Professor Nouriel Roubini, who predicted the financial crisis.
  • “If markets were to believe, and I’m not saying it’s likely, that inflation is going to be the route that the U.S. is going to take to resolve this problem, then you could have a crash of the value of the dollar,” Roubini said in an interview today in Cernobbio, Italy. “The value of the dollar over time has to fall on a trade-weighted basis, but not necessarily relative to euro and yen.”
  • Roubini said he didn’t see a risk of a dollar crash in the “short term.” The value of the U.S. currency relative to currencies such as the yen or the euro “cannot change too much compared to current levels because if the dollar were to weaken a lot and the euro strengthen a lot, that’s going to warp any chance for the European economy to recover, same argument as to the yen,” he said.
  • “Most of the adjustment of the dollar in the future has to occur relative to China, relative to emerging Asia and relative to some of the other commodity exporters in the world, whether these are advanced economies or emerging markets,” he said.

China pushes silver and gold investment to the masses (9/3/09)

http://www.mineweb.co.za/mineweb/view/mineweb/en/page33?oid=88452&sn=Detail

  • Apparently China is pushing the idea of buying gold and silver for investment purposes to the general population in the way that Western television sells soap powder. If 1.3 billion Chinese citizens start buying gold and silver, even in tiny quantities, imagine what that will do to the market!
  • The report notes that China’s Central Television, the main state-owned television company, has run a news programme letting the public know how easy it is to buy precious metals as an investment. On silver investment the announcer is quoted as saying ” China has introduced its first ever investment opportunity for silver bullion. The bars are available in 500g, 1kg, 2kg and 5kg with a purity of 99.9%. Figures show that gold was fifty times more expensive than silver in 2007, but now that figure has reached over seventy times. Analysts say that silver has been undervalued in recent years. They add that the metal is the right investment for individual investors and could be a good way to cash in.”
  • If the Chinese are indeed beginning to buy gold and silver as the quoted report suggests then this has to be a strong signal that prices are going to rise, and perhaps rise dramatically, in the relatively near future. We await comment from other China watchers for confirmation of the gold and silver buying spree, but with global gold production at best flat and probably in decline, even a small increase in Chinese buying could have a substantial impact on gold and silver prices.

Gold May Break Out to Record, Grabham Says: Technical Analysis (9/1/09)

http://www.bloomberg.com/apps/news?pid=20603037&sid=aqg7fd0Bs6lU

  • Gold may advance to a record $1,325 an ounce if it first breaks out of a symmetrical, triangular pattern, a move that may occur in the next one or two weeks, Standard Bank Group Ltd. said, citing trading patterns.

Beijing’s derivative default stance rattles banks (8/31/09)

http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSSP47327420090831?pageNumber=1&virtualBrandChannel=11604

  • A report that Chinese state-owned companies will be allowed to walk away from loss-making commodity derivative trades provoked anger and dismay among investment bankers on Monday as they feared it may set a damaging precedent.
  • The State-owned Assets Supervision and Administration Commission, the regulator and nominal shareholder for state-owned enterprises (SOEs), told six foreign banks that SOEs reserved the right to default on contracts, Caijing magazine quoted an unnamed industry source as saying in an article published on Saturday.

Highlights from “The International Forecaster” newsletter (9/9/09)

Published and Edited by: Bob Chapman

Check out or Subscribe to The International Forecaster

  • In 2009, China opened up various exchanges for investment in both gold and silver to the Chinese public, who previously were not allowed to invest in gold and silver. The opening of silver exchanges to the Chinese public is the most recent development and was accompanied by a ban on silver exports. The Chinese government is actively touting both gold and silver as an investment to the Chinese public, and with good reason. The yuan, like the dollar and virtually all other paper currencies, with the exception of the euro, are one hundred percent fiat currencies backed by absolutely nothing but government promises which aren’t worth the powder to blow them to hell. Even the euro’s gold backing is pathetic at best. Initially it was a respectable 15%, but the backing is probably now about half of that due to Washington Agreement gold sales and surreptitious gold leasing.
  • The Chinese government knows that if they do not allow the public to protect their new wealth with gold and silver, a decline in the yuan due to hyperinflation caused by massive government stimulus and an ongoing bailout and subsidization of mass failure in their banking and corporate sectors due to declining exports and trillions of dollars worth of spurious loans undergoing increasing rates of default, loans which often were given to Chinese communist party members, could very well lead to revolution. Chinese government officials are now attempting to protect themselves by dumping large portions of their dollar denominated reserves for gold and silver, as well as for commodities such as copper and oil, and they want the Chinese public to be able to do the same with gold and silver, for maximum possible protection – and, more importantly, for avoidance of revolution. We believe that the Chinese government has acted far too late, but it’s better than doing nothing. We also applaud their attempt to protect the wealth of their people, even though it is self-serving.
  • Now, suddenly, we hear that China is considering walking away from responsibility on certain OTC derivative contracts held by foreign banks as counterparties, which contracts cover various commodities, in the event that those contracts result in losses to their sovereign wealth funds. You may recall from prior discussions in the IF that these unlisted OTC derivative contracts include massive short positions in both gold and silver, but especially in silver, and are used to back the listed COMEX short positions of the large commercials in both gold and silver. In other words, the CFTC is allowing COMEX commercials to justify their ludicrously concentrated short positions in both gold and silver by backing those positions with contracts about which the CFTC has no direct knowledge, over which they have no regulatory authority thanks to the Commodity Futures Modernization Act, and which the CFTC knows are backed by foreign governments outside the jurisdiction of the US who can renege on those contracts with impunity!!! How’s that for reckless regulation of commodities by the CFTC?! And now everyone’s worst fears are about to be realized as China announces its intention to renege!!!
  • These two developments, namely the Chinese government’s promotion of gold and silver to its public as an investment, along with its intention to renege on its OTC derivative contracts covering certain commodities, are obviously interrelated. If you are going to ask your public to invest in gold and silver in a massive way in order to save both your and their bacon, while at the same time diversifying a goodly portion of your trillions worth of dollar-denominated paper assets into physical gold and silver, you might expect that this would put massive upward pressure on gold and silver prices. But if you also had massive holdings of short positions in OTC derivative contracts covering both gold and silver, would you not be shooting yourself in the foot?!!! So now we can understand why the Chinese have decided to renege. Otherwise, they are caught in a trap!
  • So now the COMEX gold and silver commercial shorts, the owners of the COMEX exchange, and all the past CFTC officials who allowed this nefarious paper fraud in gold and silver to rise to new criminal heights based on bogus backing by unregulated derivative contracts written and guaranteed by an often contentious and even hostile foreign government, are all doing double shots in their knickers. If the very angry, and very duped, Chinese renege, the entire COMEX is going down, big-time baby!!! The whole system is about to blow if the Chinese renege on these contracts!!! We wonder what the Chinese want in return for not reneging! Whatever it is, we can guarantee you that the US government is not going to like it very much.
  • Without the Chinese OTC derivative backing, all COMEX gold and silver positions would be totally naked. That is because COMEX inventory reports for both gold and silver are a total fairytale fraud. Despite many hundreds of requests for physical delivery which were satisfied over the course of many months, the gold and silver inventories reported by COMEX have remained unchanged. The COMEX even had to enlist the help of the ECB and the Canadian mint to satisfy those requests for delivery, thereby demonstrating that what the COMEX reports as inventory is nothing but a phantasm. We recommend that any and all COMEX gold and silver positions be abandoned as being outright naked and fraudulent.
  • Take physical delivery of your gold and silver bullion from COMEX if they have any, or take your ETF share in lieu of physical delivery and convert it into bullion immediately, and take physical possession of it. Do not trust any bank, any mint or any ETF or pooled fund to hold your gold and silver. Otherwise you potentially face a total loss of principal
  • Here it is, early Tuesday morning, and spot gold has already crossed the 1,000 barrier like it did not even exist to over 1,007+ while silver has soared above 16.75 and narrowed the gold to silver ratio to just below 60 for the first time in many months. Looks like the Chinese announcement to renege on commodity derivative contracts is sending both gold and silver on a tear, especially silver. One, two and three month lease rates for both gold and silver are now all in negative territory, gold for the past week and silver for the past month. This is unprecedented, and it shows you just how desperate the cartel has become. The only way they can lease gold and silver now over the short term is to actually pay people to lease it from them and sell it into the market. Anyone who leases gold and silver right now has to be both a raving psychopath and a total glutton for punishment. Needless to say, all these developments are totally bullish.
  • On Friday federal regulators seized five more banks in four states, bringing the total for the year to 89. The five banks that the FDIC seized are:
    – First Bank of Kansas City, with $16 million in assets and $15 million in deposits.
    – Vantus Bank of Sioux City, Iowa, with $458 million in assets and $368 million in deposits.
    – InBank, or Oak Forest, Ill. With $212 million in assets and $199 million in deposits.
    – Platinum Community Bank of Rolling Meadows, Ill., with $346 million in assets and $305 million in deposits.
    – First State Bank of Flagstaff, Ariz., with $105 million in assets and $95 million in deposits.
  • The FDIC found buyers for all or part of four of the banks but will have to pay out insured deposits from Platinum Community Bank. The takeovers are expected to cost the FDIC insurance fund about $400 million.
  • According to Washington sources, FDIC officials privately briefed people in the private equity business and other financial firms, this week, that the FDIC will run out of funds by Sept. 15, and will have to dip into the $500 billion credit line from the U.S. Treasury, meaning we’re back to more concealed bailout activity funded by U.S. taxpayers.
  • There is no question the stock market is far overpriced and is due for a massive pullback. The number of companies defaulting on debt is at record levels. Over 200 borrowers with debt of $450 billion have defaulted on debt. That beats the record set in 2001.
  • That leads us to $11 trillion in short-term government debt. The interest on that debt is $340 billion, or a 3.04% rate of interest. Our current president says in ten years $9 trillion will be added bringing that debt to $20 trillion. In ten years that is more than $600 billion a year. No nation can survive such debt not to mention mandated payments such as pensions, Social Security, Medicare, Medicaid, etc. That takes the number to over $100 trillion. The debt service will be 30% or more of the budget if nothing is added to debt via shortfalls to mandated programs.
  • The flipside of maintaining high deficits is that if they are not continued the economy will fall into deep depression. This monetization and debt will eventually take down the bond market. Presently the Fed is keeping the bond market from going lower and keeping interest rates lower. They cannot do that indefinitely. Witness what has begun to happen in the gold and silver markets. The treasury and the Fed eventually lost control.
  • The undertow is deflationary; there is major worldwide overcapacity and low capacity utilization, high and rising unemployment worldwide, falling real incomes and more ongoing deleveraging going on constantly. What people miss is that deflation is being held at bay by massive money and credit creation. The minute that stops the bottom will fall out and deflation will take over. As a result of the program set in place by G-20 there has been and will continue to be inflation. It is a question of overkill because the central banks never knew when enough is too much. That is why we could easily face hyperinflation.
  • Massively increasing debt and monetization is a toxic cocktail that will present us with the worst of all worlds. It will push up interest rates and lead to hyperinflation. As rates rise private borrowers will be crowded out by government borrowing. We predict that long-term rates will be substantially higher by the end of 2010. Real rates at higher levels are a real threat to any kind of economic recovery. Worse yet, government shows no sign of cutting spending. They could fix that by ending our wars. Cuts have to be made. The deficit is out of control. If taxes are raised we’ll fall deeper into depression. Thus, part of the solution is simple, stop the wars. Mainline accepted economists do not agree with this formula, because if they espoused this they would lose their jobs. Unless we see major lending by banks or another $2 trillion stimulus package we will fall right back into depression and hyperinflation.
  • At the rate America is going we will, as we predicted long ago, become a second world country if we do not legislate tariffs on goods and services to level the playing field. If we do not enact such a law American workers will be making $2.00 an hour like the Chinese, Indians and Mexicans. Such an outcome would drop federal tax revenues by 2/3’s from current levels, making debt default certain. As we said prior to the last election with the exception of a handful throw them all out of office. If we do not the only result that can be expected is revolution.
  • A recent radical report from the UN conference on Trade and Development (UNCTAD) says the system of currencies and capital rules, which bonds the world economy, is not working properly, and was largely responsible for the financial and economic crisis. They continued that the dollar, which acts as the world’s reserve currency, should be replaced. They call for a new Bretton-Woods type system of managed international exchange rates. The problem is they will produce another fiat currency without gold backing, and that too will go down in flames.
  • U6 (Comprehensive or Broad) Unemployment hit 16.8%, a record. The workweek at 33.1 hours is a record low. Aggregate hours worked declined 0.3%. There will be no job growth until hours worked and the workweek increases significantly. The Household Survey showed job losses of 392,000. 9.1million are working part time but want a full time job. One year ago the number was 5.9 million. Teen unemployment of 25.5% is a record.
  • The ridiculous Net Birth/Death Model fabricated 128,000 jobs. We noted that since January 2008, there is over a 4 million job discrepancy in small business jobs between ADP and BLS.
  • John Williams: Monthly Payroll Decline Was 300,000, Net of Renewed Seasonal Factor Games John sees total unemployment (U6 plus ‘discouraged’) at 21.1%.
  • Fla. Unemployment Borrowing May Top $1 Billion – Florida has become the 19th state to borrow money to keep unemployment benefits flowing after the trust fund ran dry. (http://www.propublica.org/feature/fla.-unemployment-trust-fund-to-borrow-billions-831)
  • The U.S. dollar reached its lowest point against the euro this year due to a myriad of forces including rising global stocks and commodities prices, low interest rates, and investors diversifying out of Treasury debt and into other assets including U.S. stocks with the Dow Jones industrial average approaching 9500 in late afternoon trading.

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