Monday, November 30, 2009

Move Over King Dollar for Gold is Emerging as the New Flight-to-Safety Trade, as it Begins to Decouple from the Dollar

Off late we have been noticing an interesting phenomenon. Gold seems to be decoupling from its negative correlation with the dollar. Is gold on the path to replacing King Dollar as the New Flight-to-Safety Asset? We certainly think so, and in the paper below we examine the evidence. (For our email/feed subscribers - please click on the link below to view the paper).
Gold Decoupling From the Dollar and Emerging as the New Flight to Safety Trade

Nakheel Seeks Suspension $5.25 Billion in Bonds

According to the latest CNBC report:
Dubai's Nakheel, said on Monday it had asked for three of its listed Islamic bonds worth $5.25 billion to be suspended from trade until it can inform the market more fully about its restructuring plans. Nakheel, along with Dubai World, announced last week that they would seek debt standstill agreements from creditors until May 2010, briefly sparking fears of another global financial market crisis.
The three instruments listed on the exchange are its $3.5 billion sukuk due on Dec. 14, its 3.6 billion dirham sukuk ($980.1 million) due on May 13 and a $750 million sukuk due on Jan. 16 2011. Nakheel's first bond, the $3.5 billion sukuk, was widely expected by the market to be repaid on time.
Must be real hard to see your bonds nose dive to zero and your investors reach for the oxygen mask. We feel your pain Nakheel.

The Taxman Cometh, Singing the "Share the Sacrifice Song"

Despite the colossal debt load facing America, Congress and Obama are hell-bent on driving the dollar train off the cliff. A few Congressmen however, have dared to hop off this train, by proposing a tax-hike to pay for the Afghanistan war. Congressman Dave Obey (D-WI) and John Murtha (D-PA) have introduced legislation that would imposing a war surtax beginning in 2011, to pay for Afghanistan. A press release issued by Obey's office explained their rationale:
“For the last year, as we’ve struggled to pass healthcare reform, we’ve been told that we have to pay for the bill – and the cost over the next decade will be about a trillion dollars. Now the President is being asked to consider an enlarged counterinsurgency effort in Afghanistan, which proponents tell us will take at least a decade and would also cost about a trillion dollars. But unlike the healthcare bill, that would not be paid for. We believe that’s wrong,” said Obey. “Regardless of whether one favors the war or not, if it is to be fought, it ought to be paid for.”
“The only people who’ve paid any price for our military involvement in Iraq and Afghanistan are our military families,” Obey added. “We believe that if this war is to be fought, it’s only fair that everyone share the burden. That’s why we are offering legislation to impose a graduated surtax so that the cost of the war is not borrowed.”
Working on the principal that if the President and the nation decide that the war is important enough to fight, then it ought to be important enough to pay for, the Share the Sacrifice Act of 2010 requires the President to set the surtax so that it fully pays for the previous year’s war cost. However, the bill allows for a one year delay in the implementation of the tax if the President determines that the economy is too weak to sustain that kind of tax change, and it exempts members of our military who have served in combat since September 11, 2001 along with their families, and the families of the fallen.
“As presidential historian Robert Dallek reminds us, ‘war kills off great reform movements’,” Obey said, noting that World War I ended the Progressive Era, Korea ended Harry Truman’s Fair Deal and Vietnam ended Lyndon Johnson’s Great Society. “If we don’t address the cost of this war, we will continue shoving billions of dollars in taxes off on future generations and will devour money that could be used to rebuild our economy by fixing our broken health care system, expanding educational opportunities and job training possibilities, attacking our long term energy problems and building stronger communities. We cannot allow the war to derail that potential”.
Now the probability that this bill will pass is exactly zero. Instead, team Obama will choose the "easy" way out and send Santa Claus Bernanke, to shower dollar bills down the chimney to pay for the war.

Saturday, November 28, 2009

Bernake Takes a Page from AIG CEO's Book and Throws a Hissy Fit Over Auditing the Fed

Ben Bernanke must be a pretty confident guy these days. Why else would he throw a mini-fit just before his confirmation hearing on December 3, and risk offending his interviewers? So confident is Bernanke of landing another term that he recently penned an article in the Washington Post where he throws a hissy fit and trashes all the plans in the Senate and the House that would require an audit of the Fed. Bernanke has taken a page from Hank Paulson's scare tactics book and painted a dire picture of economic collapse if the Fed's dealings are exposed.
Now we actually AGREE with Bernanke's economic collapse theory but not for the reasons he is citing. Once the Fed's books are open, scary skeletons are sure to pop out of its closet, and it will certainly push us back over the cliff as the world realizes:
1) The true extent to which Bernanke has raided the taxpayer kitty and put the taxpayer's hard earned cash at risk, by making secret loans to banks and other entities: A brief trailer of this scenario has already been provided by Bernanke's cousin across the pond - Bank of England's governor Mervyn King. It was recently revealed that last year the Bank of England hid a $102 bn loan it had made to RBS and HBOS from the British Government and the public. As Edmund Conway of The Telegraph writes:
For it transpires that last autumn, to the almost complete ignorance of most of the City (and, I admit, most of the journalists who, like myself, keep a pretty close eye on the UK economy), the Bank of England lent a staggering amount of cash [$102 billion] to Royal Bank of Scotland and HBOS. I was dumbfounded when I found out. For a period of time in late ‘08 and early ‘09, British taxpayers’ cash was at a significant risk (although the money lent out by the Bank was not backed up by its own debt so this was rather more like quantitative easing than Government debt).
The first thing to remember that in the wake of the Northern Rock fiasco the Government enacted a number of laws which allowed the Bank to withhold certain information about the constituent parts of its balance sheet if it judged that this would help it improve financial stability. This meant that it could legally be rather more discrete about where in the balance sheet these sums would show up.
How many such secret loans has the Fed made? An audit would surely reveal several.
2) The true extent of Bernanke's money printing operations, and the degree to which these have trashed the dollar.
3) The Fed's secret currency swap deals with other nations that allow it to claim "successful U.S. Treasury auctions", when all the while it has been lending dollars to foreign central banks to buy U.S. Treasuries.
4) The true extent to which banks have been able to raid the taxpayer's kitty and indulge in heavy speculation in financial markets
5) The extent to which the Fed has worked to suppress gold prices.
So much as a "peep" about any of these secret Fed dealings and the U.S. economy is toast. No wonder Bernanke is running around town scared.

Memo to Credit Investors: Please Stop Jumping Aboard the "Assumption" Bandwagon

Sigh. When will bondholders ever learn their lesson - that they should not invest in shaky bonds on the mere "assumption" that a rich benefactor will be around to bail'em out? Well it seems Abu Dhabi has taken up the cause to teach these gullible folks a lesson. Reuters is reporting that Abu Dhabi has just mailed out a neatly typed "thanks but no thanks" memo to Dubai World bondholders, in which they clearly outlined their noble intentions - Abu Dhabi will cherry pick the best assets for cheap and stick the rest of the clunkers to bondholders.
Abu Dhabi, wealthy capital of the United Arab Emirates, will "pick and choose" how to assist debt-laden neighbor Dubai, a senior official said on Saturday, after fears of a Dubai default sent global markets reeling.
"We will look at Dubai's commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts," the official in the government of the emirate of Abu Dhabi told Reuters by phone. Selective assistance for companies in "Dubai Inc.," a network of quasi-sovereign industries, instead of blanket assistance, would serve a rude awakening to investors who for years assumed that the conservative Abu Dhabi provided a safety net for its racier neighbor.

For the investing world that has once again gone bananas in their excitement to chase the "emerging market" riches, a decent dose of "rude-awakening" is probably a well-deserved medicine at this point.

A Poor Economy Not an Excuse for Lay-offs

In these tough times, when the singular focus on "creating shareholder value" at the expense of other stake holders in a company such as employees, customers, the nation and the enviornment, is destroying livelihoods and communities, some very pertinent words of wisdom from the founder of India's largest technology company, Infosys.
Layoffs are an inevitable aspect of the corporate world, especially in recession. But a poor economy should not be an excuse to cut jobs, Murthy said. "In today's economic downturn, the challenge lies in having the courage to set an example that responsible profitability is a realistic achievement, and by using data to demonstrate that it is possible to preserve jobs in an economic downturn while innovating to increase profits, productivity and efficiency," Infosys' Chief Mentor, N R Narayana Murthy, told reporters on the sidelines of an industry meet here today.
While we realize that not all jobs can be saved, in a dire situation where unemployment is touch 18%, and families are struggling to make ends meet, is it not the responsibility of our largest corporations to step up and lend a helping hand to their nation and fellow citizens? Is their responsibilty solely to their shareholders alone?

Is the Dubai Government Completely Broke?

As the Dubai saga flows into the weekend and with no new information forthcoming, some perplexing questions come to mind. According to official figures (which at this point are highly suspect), Dubai World a state-sponsored entity and parent company of Nakheel (the real estate developer) has a total debt outstanding of $59 billion of which $9.2 billion is coming due in the next 4 months ($4.3 billion in December and $4.9 billion in 1Q 2010). In addition, according to Bloomberg, in 2008 Dubai World had assets of $99.6 billion and revenue of $14.2 billion.
Now the first question that comes to mind is how broke is the Dubai government that it could not come up with a mere $4.3 billion to tide Dubai World over? A not too large a sum for Dubai, when you consider that just last November, the government revealed that Dubai had well over a $1 trillion in assets to support its ~$100 billion of debt load. Unless of course, they were flat out lying, which looks to be the case right now.
Additionally the government asked for a 6 month moratorium, so this is not a short-term cash flow mismatch. The problem is much larger. And it is unlikely that Dubai choose the default route without having first explored all options with Abu Dhabi. After all Abu Dhabi is probably their biggest creditor. Which brings us to our last question: Is Abu Dhabi's financial position as strong as the media portrays? If it is then why would they choose to let Dubai go under? Such an action is surely not in their best interest.

Doug Kass Explains the Program Trading Bubble that Keeps Markets Going Up, Up and Up

Doug Kass,
"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."
-- Chuck Prince, former chairman and CEO of Citigroup (told to the Financial Times on July 10, 2007).
These words resonate to me in the current investment setting as many investors and traders are assuming the most benign of economic outcomes and have begun to dance and party like it's 1999. The media's talking heads are doing their best to fuel the celebration, just as they were at DJIA 14,000 before the market crashed last year. It is also the same group of cheerleaders that was mired in depression eight short months ago.
Some, like myself, have been cautionary (and wrong) over the past few months, expressing concerns over emerging short- and intermediate-term headwinds that threaten a self-sustaining economic cycle, including the effect of the withdrawal of monetary and fiscal stimulus. Countering those concerns has been one overriding factor -- namely, the Fed's zero rate policy and curse on cash, which has already produced its desired effect of causing investors to "look over the valley" and to buy longer-dated assets (equities, bonds, commodities).
Read the entire article here

Shipping Set to be the Next Industry to Make Banks Take a Bath

As if the Dubai saga was not enough to cast a pall on the bonus jackpots of the banking sector. It now emerges that a number of loans banks made to shipping companies have been going sour. In the past, shipping companies took out loans to either build new ships or purchase second-hand ships from other companies. Banks, especially those in Europe, underwrote huge loans to finance these purchases. Now with ship prices dropping due to contracting global trade and an oversupplied ship market, shipping companies are deeply underwater on their loans (same as the housing crisis). A Bloomberg news piece titled Shipping Has ‘Trouble" Building Behind the Dam, points out:
Ship prices may keep dropping for at least another year because banks have not yet dealt with the weaker loans they made to the industry, according to Michael Drayton, a former chairman of the Baltic Exchange.
The cost of a second-hand capesize used to haul iron ore plunged 66 percent to $53 million since July 2008. The cost of a second-hand supertanker slumped 52 percent to $77 million, according to data from the London-based bourse.
“There’s trouble building up behind the dam, and the dam is going to be breached,” Drayton, now an independent shipping consultant in London, said in an interview. “The market is blocking the natural flow to where it should be.” Drayton said he has been approached by private-equity funds and institutional investors seeking advice on when to buy distressed loans and the ships tied to them.
Yeah better grab those fat bonuses and scurry on to a safe corporate job, before the dam bursts.

Friday, November 27, 2009

Dubai Default Examined: Sheikh Gave Fake Pep Talk As Recently As Nov 10

Serious Implications for the Global Risk Trade, Especially in Emerging Markets
This year's Thanksgiving turkey has arrived as a dud. While the U.S. markets were closed over the holiday, Dubai managed to pull the rug from under the global risk trade by announcing a 6 month moratorium on the debt of Dubai World. The state-sponsored Dubai World is an umbrella company that houses a portfolio of businesses, including Nakheel - the famous real estate developer of the Palm Islands.

Dubai Default Examined

Wednesday, November 25, 2009

A Very Happy Thanksgiving to All Our Readers

U.S. Dollar Index Heads Decisively Lower - Could this Turn Ugly?

Today the U.S. Dollar Index (DXY) hit its lowest point in the year of 74.269. For some days the DXY was holding around the 75 level and most of the market was expecting a counter trend rally upwards with a break above the 50-day moving average of 75.90. Instead the DXY collapsed much further (see chart 1).
Looking at Chart 2 we can see that the Index bottomed out in the middle of last year, trading in the 71 -72 range from March'08 -July'08. Once the financial crisis hit the dollar index started rallying because of the flight-to-safety trade. Ever since March'09 when the Fed announced its quantitative easing. the index has been reversing course. Today having broken its short term trading support of 75, there is little in the way of resistance until 72. Beyond 72 its just free-fall with no technical support whatsoever.

Chart 1: Short-Term U.S. Dollar Index Snapshot

Chart 2: Longer-Term U.S. Dollar Index Snapshot

David Rosenberg of Gluskin Sheff had some pertinent thoughts on how quickly this downward move in the DXY could turn ugly:
Considering how crowded the bear-dollar-trade has been, it is remarkable and a testament to its headwinds that we never got much of a counter-trend bounce [in the DXY]. The question going forward is the extent to which the U.S. dollar’s descent can remain orderly, especially when half the country’s marketable bonds are held abroad; deficits are set to exceed $1 trillion annually as far as the eye can see; and central banks are looking for diversification into either hard assets or hard asset proxies.
It will be interesting to see how this plays out because it is always calmest before the storm and quite often serious hiccups in financial markets stem from instability in the FX market (the failed Louvre Accord in 1987 and the Asian FX crisis in 1998 come to mind right away). So far, there has been no leakage from the dollar’s decline into the Treasury market, where bidding at the auctions have been healthy and the 10-year yield sitting just above 3.3%. But as Peter Gibson told us in a presentation on Monday, the Treasury market holds the key (as it did back in 1987 if you recall – and the summer of 2007 too!).
But by hinting in the FOMC minutes that it could take “five or six years” for the U.S. economy to recover, and the economy will remain gripped with excess capacity in the labour market, and at least one Fed official sees deflation risk out to 2012, FX investors have clearly treated the document as a green light for the dollar-carry-trade to persist to perpetuity. The fact that the ranges in the Fed forecasts remain so wide, whether it be for real GDP growth, unemployment or inflation shows just how uncertain the macroeconomic outlook is. For investors who do not like to be characterized as gunslingers, this is not an environment to be adding substantially more risk to the portfolio at this time.
We concur.

HSBC's Gives Retail Customers the Boot to Make Room for Institutional Gold

Author: Carolyn Cui of the Wall Street Journal
Fleets of armored trucks piled with gold bars and coins have been streaming out of midtown Manhattan in one unexpected consequence of the gold craze. Amid gold's rise -- it has gained 32% this year and reached a record on Monday -- investors have been loading up on bullion and coins. One big problem now is where to store it. The solution from HSBC, owner of one of the biggest vaults in the U.S.: somewhere else.
HSBC has told retail clients to remove their small holdings from its fortress beneath its tower on New York City's Fifth Avenue. The bank has decided retail customers aren't profitable enough and is demanding those clients remove their gold to make room for more lucrative institutional customers.
An HSBC spokeswoman said the firm doesn't comment on its vault due to "security concerns. "HSBC's decision has created a logistical nightmare for both the investors and the security teams in charge of relocating the gold, silver and platinum to new vaults across the country. Many of those vaults are also feeling pressure from the surge in demand for space from clients that have stocked up on metal.
Read the entire article here

US Mint Runs Out of Gold Coins - Again!

Ever wonder why the U.S. Mint is always running out of inventory? It seems really strange especially when other mints, the Canadian for example, don't seem to have such what gives? We don't have the answer but would sure like to hear from our readers. Send us your thoughts at
The U.S. Mint said Wednesday it will suspend sales of the popular American Eagle 1-ounce bullion coins as rising demand depleted its inventory. "The United States Mint has depleted its current inventory of 2009 American Eagle 1-ounce gold bullion coins due to the continued strong demand for this product," the Mint told its authorized dealers in a memorandum on Wednesday. November sales to date were at 124,000 ounces, higher than the 115,500 ounces sold in each month of September and October, the Mint said.

Read the entire article here

The Tremendously Funny Robin Williams on Sarah Palin & More

The Fed has Gone Rogue, But Mishkin is Still in Deep Denial

More fear mongering drama from former Federal Reserve Board Governor Fredrick (Ric) Mishkin on the Ron Paul led "audit the Fed" bill moving through Congress. Mishkin describes the bill as a serious "attack" on the Fed and calling it really "dangerous" stuff (see video below).
Is this fear mongering justified? Not at all. As the Firecracker Report has highlighted earlier, auditing the Fed will not impede its independence in setting interest rates - which Mishkin cites as his biggest fear. To claim it will, is akin to saying that Walmart's accountants can influence its pricing strategy and business decisions. As Ron Paul explains in a letter published today:
I was pleased last week when we won a vote in the Financial Services Committee to include language from the Audit the Fed bill HR1207 in the upcoming financial regulatory reform bill. As it stands now, if HR 3996 passes, because of this action, the Federal Reserve’s entire balance sheet will be opened up to a GAO audit. We will at last have a chance to find out what happened to the trillions of dollars the Fed has been giving out.
Finally, the blanket restrictions on GAO audits of the Fed that have existed since 1978 will be removed. All items on the Fed’s balance sheet will be auditable, including all credit facilities, all securities purchase programs, and all agreements with foreign central banks. To calm fears that we might be trying to substitute congressional action for Fed mischief in tinkering with monetary policy, we agreed to a 180 day lag time before details of the Fed’s market actions are released and included language to state explicitly that nothing in the amendment should be construed as interference in or dictation of monetary policy by Congress or the GAO.
David Rosenberg of Gluskin Sheff chimes in on this fear mongering: "Memo to Mr. Mishkin, the Fed has never been truly independent and once you have sacrificed the sanctity of the balance sheet by adding housing loans and channeling credit in general through the economy you have basically become a de facto political institution in any event"
Perhaps the single biggest reason we should demand an audit is to examine whether giving the Fed full independence in printing money (without any congressional approval) is really justified. While the $700 billion TARP bailout that Congress approved caused immense public outrage, there was not a whimper to be heard when the Fed decided to print $1.75 trillion dollars to buyback MBS and Treasuries. Even more stunning is the fact that this decision to print trillions did not require any congressional approval. The American democractic system failed miserably when it came the Fed. How can an institution that has the power to single handedly destory our currency not subject itself to an audit?
In conclusion, all of Mishkin's Fed independence talk is purely a diversion tactic. His main reason for not wanting an audit is because he is fearful of what skeletons we many uncover in the Fed's closet. So with all due respect Mr. Mishkin, an unaudited Fed coupled with your untruthful independence talk, is the "real" dangerous stuff.

While the West Foolishly Debates Gold's "Intrinsic" Value, Indian Citizens are Laughing all the Way to The Bank

Even after the financial crisis nearly wiped off the world's fiat currency based banking system, western commentators still find themselves vigorously debating whether gold has "any intrinsic" value. One would have thought that the financial crisis would have put this issue to bed permanently. Not so. So entrenched is the faith in fiat currency that folks in the west would rather own paper dollars (backed by nothing but the Fed's determination to print even more money), than buy gold, a commodity that has been held throughout history as a store of value.
Of course this western apathy for gold is not shared by the ~1 billion people of India who have been investing in gold for centuries. So great is gold's appeal to ordinary Indians, that The Times of India has taken to labeling India as "Gold's Own Country". In a recent article they point out that:
The glitter of gold has attracted Indians for centuries for a variety of reasons - ranging from a medium of transaction to protecting wealth, securing the future and as jewellery. Gold is valued in India as a savings and investment vehicle and is the second most preferred investment behind bank deposits.
It is estimated that about 15,000 tonnes of gold is privately held in India [by its citizens], more than twenty-five times as large as the official hoard of 558 tonnes after the RBI's [Indian Central Bank] recent purchase of 200 tonnes from the International Monetary Fund (IMF).
In one year, gold has appreciated by 53%, from $742 to $1,134 an ounce in international markets. Considering this jump, the value of the country's privately held gold reserve, the highest in the world, has jumped from $357 bn to $547 bn, posting a rise of $190 bn. "Over a period of ten years, privately held gold reserves have increased significantly in the country as consumers have bought more gold to preserve their wealth," says Dharmesh Sodha, director, World Gold Council- India.
"As gold offers safety and better liquidity, people prefer to park their savings in the yellow metal," said GR Ananthapadmanaban of GRT Thanga Maligai, a Chennai-based jewellery firm. Whether it's for security, returns or other purposes, what's clear is that India's hunger for gold remains insatiable.
So folks, given Gold's ringing endorsement by ~1 billion now much wealthier Indians, it is time to put the "intrinsic value" debate firmly to bed.

Bernake Got Punk'd Again! India Pursuing a Bid for Remainder of IMF Gold

Author: Tyler Durden at Zero Hedge
$1,200 here we come. Bernanke just got punk'd. Again. From the Financial Chronicle of India:
India is open to buying more gold from the International Monetary Fund (IMF). It bought 200 tonnes for $6.7 billion on November 3. The Reserve Bank of India (RBI) may well buy IMF’s remaining hoard of 201.3 tonnes on acceptable terms, which are now under negotiation.
A government official said that the additional purchase would depend on the “successful pitching by RBI”. “RBI is an independent body, and the government does not interfere in its affairs. It will get the gold if its bid is successful and at the price it has offered,” said the official.

Sarah Palin: Fooling None Of The People All Of The Time

Deepak Chopra in The Huffington Post 
Last fall it seemed as if Sarah Palin would light a fuse and cause a social explosion. Behind her beauty-pageant smile lurked the shadow, the dark side of human nature. Her tactic of appealing to the worst impulses of the electorate had a long history in the Republican Party. Indeed, Palin inherited the selfish, mean-spirited values of another politician with a gleaming smile, Ronald Reagan.
When it first dawned in American politics, the shadow was shocking. Values were turned upside down. The AIDS crisis? Ignore it. They deserve what they got. The deficit? Doesn't matter as long as the rich get what they want. Huge unemployment and falling incomes among the working class? Feed them crank social issues so they have someone to hate. Palin breathes this noxious atmosphere like the clear air of Alaska and thrives on it.
Read the entire article here

Tuesday, November 24, 2009

The Quickest Way to End the War & Save America from Fiscal Collapse: Tax the Rich

Over the weekend CBS News carried a rather interesting report that caught our attention:

Michigan Sen. Carl Levin, a Democrat and the chair of the Senate Armed Services Committee, is arguing that wealthy taxpayers should perhaps shoulder the cost of sending additional troops in Afghanistan. In an interview for Bloomberg Television's "Political Capital with Al Hunt," the senator suggests funding additional troops with an "additional income tax to the upper brackets, folks earning more than $200,000 or $250,000."
White House Budget Director Peter Orszag has put the cost of each additional troop at $1 million. The top commander in Afghanistan, General Stanley McChrystal, has reportedly requested 40,000 new troops to be added to the roughly 70,000 U.S. troops (and 40,000 troops from other countries) there now.
First of all we would like to point out that folks earning ~$200,000 are not exactly rich, given the enormous cost of funding one's children’s education, personal retirement and healthcare. Having said that we would like to state that we wholeheartedly support the tax for the following reasons:
  1. For most Americans the war has become a surreal movie that we watch comfortably seated on our couches, while our brave soldiers fight on foreign soil. Because the battle ground is thousands of miles away, our daily lives have been unaffected by the "theater of war" and the stark reality of resultant human suffering has never really hit home. We are no closer to solving the problem of terrorism but our soldiers are exhausted from having served 4-5 active duty missions. Despite their weariness we still want to push them back into the battle field, because many of us think that, that is the only way to support our troops. It is not. Patriotism is not the blind support of endless wars.
  2. As the highly regarded ex-army Colonel Andrew Bacevich (who lost his son in the Iraq war) has pointed out, America's response to the problem of terrorism has been disproportionate. Rather than engaging in endless and costly wars, we should have addressed the problem by beefing up border security and immigration. To target terrorists on foreign soil, we should have set up elite global counter-terrorism and intelligence task forces (in conjunction with our allies) that would smoke-out the terrorists wherever they were hiding.
  3. However, instead of focusing on terrorism, the goal of the war has morphed into impossible and indefinite projects such as bringing democracy to the Middle East. This was never our goal, and we definitely cannot afford such a lofty mission. Throughout history the Middle East has been beset by warring factions of tribes that rule based on regional and religious boundaries. Democracy is a concept that is alien to the region and nearly impossible to implement. And since when did imposing democracy become the goal of America? China is not democratic and our government is fine with that set up.
Bill Moyer's in a recent documentary drawing parallels between Lyndon Johnson’s deliberations on Vietnam with Obama’s on Afghanistan poignantly concludes:
"Once again we're fighting in remote provinces against an enemy who can bleed us slowly and wait us out, because he will still be there when we are gone.
Once again, we are caught between warring factions in a country where other foreign powers fail before us. Once again, every setback brings a call for more troops, although no one can say how long they will be there or what it means to win. Once again, the [Afghan] government we are trying to help is hopelessly corrupt and incompetent.
And once again, a President pushing for critical change at home is being pressured to stop dithering, be tough, show he's got the guts, by sending young people seven thousand miles from home to fight and die, while their own country is coming apart.
And once again, the loudest case for enlarging the war is being made by those who will not have to fight it, who will be safely in their beds while the war grinds on. And once again, a small circle of advisers debates the course of action, but one man will make the decision. We will never know what would have happened if Lyndon Johnson had said no to more war. We know what happened because he said yes".
In the face of a $12 trillion national debt soon going to $14 trillion, 10.2% official unemployment and 17.5% unofficial employment, a rapidly declining dollar and rapidly worsening housing and economic crisis, can we really afford to spend hundreds of billions of dollar fighting these wars? Wouldn’t all this money be better spent trying to stop domestic problems from unraveling our country?
Which is why we support levying a war tax. Although such a tax would be vigorously opposed, it will serve an important purpose - by bringing the reality of war into our wallets it will finally force us to answer the tough question - Can we really afford it?

Gerald Celente and Bill Fleckenstein on King World News

Two exceptional interviews of Gerald Celente and Bill Fleckenstein on King World News. Both Gerald and Bill offer excellent insights on what the future holds. These are a must hear if you would like to learn more about where the world economy and gold are headed.

Gerald Celente

Bill Fleckenstein

High Frequency Trading Valuation of Worthless Fannie Mae: At Least a $1!

Joe Saluzzi, Themis Trading
What is it about FNM and the $1 handle? It has traded in the $1.01-$1.02 range on 16mm shares since last Thursday. And since November 2nd, FNM has traded between $1.00 and $1.07 on over 400 million shares. What is it about the $1 mark? Why doesn’t FNM go below $1 when most analysis that we have seen conclude that the company is worthless. Sure it is true that bankrupt companies like LEHMQ and MTLQQ still trade as some investors use them as lottery tickets, but these stocks trade way below $1. There are a few possibilities here:
1) A buyer (or more than a few buyers) are desperate to own this ward of the state and refuse to pay anything less than $1 for it . This is not a likely scenario.
2) Someone is buying the stock and simultaneously trading options against it (possible but not likely).
3) High frequency traders are buying and selling the stock with each other as they collect liquidity rebates from the exchanges and ecn’s. They collect as much as $0.0032 per share per side. If you trade the stock flat and collect a rebate on both sides, then your return is 0.6% each time. Do that 1000 times a day and it starts to add up. Sure beats collecting 0.26% for a 1 year t-bill.
So, even if you agree with us about this, you may ask what is so special about the $1 price? Well, any stock that trades less than $1 does not qualify for a liquidity rebate. So, what we have here is trading for rebates.

Monday, November 23, 2009

Folks Get Ready to Shred Your Dollar Bills

Folks it is time to put your office shredder to good use - shred any remaining dollar bills you may still have tucked in your wallet because even MORE money printing is on its way. Why you may ask - didn't Bernanke promise (just a couple of months back) that he will stop the money printing machines in March 2010, when he terminates the $1.25 trillion mortgage backed securities (MBS) buyback program? Yeah he did, but you did not make the mistake of believing him, did you? Well tough luck, because now he and his Fed cronies have changed their mind.
CNBC is reporting that St. Louis Federal Reserve bank's James Bullard is proposing that the Fed extend its Mortgage Backed Securities buyback program beyond its expiry in March 2010. According to Bullard:
The central bank should keep alive its mortgage-related assets purchase program beyond a planned end-date [of March 2010]. Bullard, who will be a voter on the Fed's policy-setting panel in 2010, said with rates near zero, keeping the purchase program alive would enable the Fed to react should the economy take another turn for the worse. "I'd hate to get the feeling that the Fed is saying our work is done," after the programs' end date, Bullard said.
So the Fed is expecting a double dip recession but is wilfully misleading the public with economic green shoots recovery talk.
Diving into a contentious debate among members of U.S. Congress over the role of the Federal Reserve, Bullard said that the independence of the Federal Reserve is essential for credible monetary policy and doubts about the U.S. central bank's ability to do its job without political interference could hurt the nascent economic recovery.Talk of eroding the Fed's independence can be counterproductive for economic recovery," the St. Louis Fed chief said in a presentation to a panel in New York.
With all due respect Mr. Bullard the Fed's monetary policy has zero credibility. Just take a look at the plunging dollar if you still have some doubts.
Bullard said that non-independent central banks have historically been forced to finance large government budget deficits. "This can be very inflationary," he added.
Mr. Bullard are you high? You can't be serious? Forcing a non-independent Fed to financing budget deficits is inflationary, but when an independent Fed wilfully print gobs of money to bail out their banking buddies...that is NOT inflationary? And pray, please explain how conducting a simple accounting audit of the Fed will open the Fed up to political influence on its monetary policy? That is akin to saying that Walmart's accountants are capable of influencing their pricing strategy.
Bullard batted back criticism that the Fed missed the brewing crisis, saying the central bank provided "important warnings" before the crisis began. He noted that his predecessor at the St. Louis Fed, William Poole, argued in the early 2000s that Fannie Mae and Freddie Mac were "ticking time bombs," while former Federal Reserve Bank of Minneapolis President Gary Stern published a book entitled "Too Big To Fail," warning some financial firms were growing too large for proper supervision. "These types of warnings show that the Fed is well aware of systemic risk concerns in real time," Bullard said in his slides.
Mr. Bullard we only have one question for you - if the Fed was 'aware' of the systemic risk why did they not do something about it? Thanks to the Fed's failure to do its job banana republic town is not too far away.

Like a Good Squirrel the U.S. Should Have Stashed Away for the Winter

The looming fiscal crisis facing the U.S. is aptly captured in a quote from Bill Gross "“What a good country or a good squirrel should be doing is stashing away nuts for the winter. The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”
The New York Times reports that a Wave of Debt Payments is facing the U.S. Government, with a staggering $1.6 trillion of short term debt maturing by March 2010 alone. The U.S. Treasury is desperately trying to roll over this debt into longer term paper without raising the cost of borrowing. However they will find the going tough, as on top of this the U.S. government has to borrow an additional $2 trillion to bridge the annual budget deficit. The Times reports that:
Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.
Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.
With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.
Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.
“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”
This month, the Treasury Department’s private-sector advisory committee on debt management warned of the risks ahead. “Inflation, higher interest rate and rollover risk should be the primary concerns,”
“Clever debt management strategy,” the group said, “can’t completely substitute for prudent fiscal policy.”
We agree.

China Questions Costs of U.S. Healthcare Reform

Author: James Pethokoukis, Reuters
Guess what? It turns out the Chinese are kind of curious about how President Barack Obama’s healthcare reform plans would impact America’s huge fiscal deficit. Government officials are using his Asian trip as an opportunity to ask the White House questions. Detailed questions.
Boilerplate assurances that America won’t default on its debt or inflate the shortfall away are apparently not cutting it. Nor should they, when one owns nearly $2 trillion in assets denominated in the currency of a country about to double its national debt over the next decade.
Nothing happening in Washington today should give Beijing any comfort or confidence about what may happen tomorrow. Healthcare reform was originally promoted as a way to “bend the curve” on escalating entitlement costs, the major part of which is financing Medicare and Medicaid. That is looking more and more like an overpromised deliverable.
Read the entire article here

Nation Building in Afghanistan But Not at Home

Huffington Post: The U.S. setting aside $1.3 billion for Afghanistan's anti-Taliban militias.
The United States will make $1.3 billion available for a program that rewards Afghanistan's anti-Taliban militias with development money, according to unnamed officials quoted in The Guardian. The $1.3 billion in development funds for militias and warlords adds to US spending in Afghanistan, which totals $3.6 billion per month. That cost could rise even more, if President Obama decides to escalate the war and send more US troops as predicted.
Read the entire article here

Sunday, November 22, 2009

American Democracy - A Silent Spectator to the Pillage Underway

Press reports out over the weekend are strongly hinting that President Obama will choose the politically safe middle ground and give the green light to a troop escalation in Afghanistan. In doing so he will aim to appease both his critics and his supporters by sending in ~20,000 troops, which is less than the 40,000 troops requested by McCrystal. Some of the troop shortfall is to be made up by requesting about 7,000 additional troops from NATO allies. The announcement is conveniently planned for the Wednesday before Thanksgiving, when much of the nation will be too busy to devote any serious attention to the issue. And all this at a time when the American fiscal train is careening off a cliff.
For Obama supporters, many of whom jumped the gun and put a tremendous degree of faith in him, this will prove to be the final wake-up call. His plan to escalate the war is in stark contrast to his pre-election promise of bringing troops home, having a timeline for withdrawal and a defined exit strategy. Obama is rapidly proving to be nothing more than a 'movie-star' president who talks a great talk but lacks the leadership skills and sheer guts to make the tough choices necessary to put the nation on a path of recovery.
Just like his predecessor George Bush, he has reduced himself to being a puppet at the hands of the vast military, financial, energy and healthcare corporate complex that control this nation. So entrenched are these corporate interests that regardless of which party is in the White House the nation's policies remain the same - favoring corporate interests and sacrificing ordinary American lives. One only has to look at the financial crisis and realize that even though more than a year has passed, no has been held responsible or brought to justice and no laws have been passed to stop the vast fraud perpetuated by the financial giants against the American people.
It saddens us greatly to say that America is no longer the land of equality, freedom and justice for all. What we have become is a nation of serfs at the hands of the corporate lords who control: our access to healthcare, our right to a strong and stable currency, our right to information (usurped by the mainstream media who is hell-bent on dumbing down the population), our access to a healthy and local food supply (food that has not been genetically modified to fit the goals of corporatized farming) and most importantly our right to have our elected representatives in Congress follow the will of the people who elected them. Instead, the American democracy has been reduced to being a silent spectator to the pillage of all the ideals this great country was founded on. What we need is for the American people to wake up, get educated on the real issues and demand real change.

Saturday, November 21, 2009

Gold Market Under Heavy Manipulation Especially Before Option Expiry

Over the last several months we at the Firecracker Report have been noticing a sudden and sharp drop in physical gold prices on the days of large U.S. Treasury auctions. Further more these drops are particularly pronounced on the days when the Treasury auction week coincides with gold options/futures expiration (towards the end of each month). John Embry of Sprott Asset Management recently published a fascinating report, that encapsulates this trend that we have been observing all along:
In Mid-October gold surged to new all time highs approaching US$1070 an ounce despite a massive buildup in short positions by the commercials (bullion banks, etc.) on the Comex and widespread mainstream commentary that it was overpriced and in a bubble phase. Nothing could be further from the truth but the failing currency markets require the dissemination of considerable disinformation on gold to keep the public in line.
In the face of another option expiry, gold was then subjected to its usual vertiginous drop with the price being driven down nearly $30 an ounce in less than 24 hours early in the last week of October. Ostensibly this was caused by dollar strength, but the true explanation was another bear raid related to option expiry and the approach of yet another massive U.S. Treasury auction.
I believe that it is absolutely essential that investors realize that the U.S. government is becoming even more panic stricken as its financial condition deteriorates. Its fear of a failed auction is now so ingrained that it feels the need to aggressively groom markets to create the impression that all is well in the debt world. Ergo the U.S. dollar is forcibly propped up, and stocks and commodities and precious metals are taken down with the express purpose of getting a solid bid in the bond market on the eve of auctions. As preposterous as this sounds unfortunately it is reality.
What I find particularly objectionable is the blatant manipulation of gold prices prior to option expiry. Legitimate call option holders are essentially being defrauded by big banks as gold prices are intentionally driven down [via leveraged futures] to ensure that the options expire out of the money.
Now all this could be disregarded as pure fiction had we not witnessed a similar manipulation saga in another commodity - oil. Last year oil prices rallied to historic highs of ~$150/barrel and the whole time the CFTC denied the presence of any market manipulation. It is only 1 year later, after oil prices collapsed and the public as a result lost interest in the crisis, that the CFTC has begun to admit to futures markets being used to manipulate oil prices. In fact the CFTC has now done a complete 180 on their earlier position of (no market manipulation via oil futures) and are now talking about placing substantial restrictions on futures market trading in oil.
In conclusion, we would like to highlight to our readers that although market manipulation in gold prices is a big risk that gold investors are exposed to, in the long run, no amount of manipulation will be able to suppress the true upward trend. So we recommend using these "corrections" to your advantage and add to ones physical gold position.

The Commercial Real Estate Disaster

Friday, November 20, 2009

Contrarian Indicators: Equity and Oil Trade Getting Crowded

New report out by David Rosenberg at Gluskin Sheff, where he maps out the fall 2009 Big Money Manager survey in conjunction with Barron's. The result - most fund managers are hugely optimistic on a continued run in equities and oil, somewhat ambivalent on the direction of gold, and hugely bearish on treasuries. These are some very interesting contrarian indicators. In order for an equity market correction to ensue, all it would take is a short rally in the dollar, to smoke the bulls out of their positions and send them scurrying into the safety of Treasuries. We saw some of this today when the equity markets fell and 3-month treasury yields went negative for the first time since September 2008, when the financial crisis first hit.


Thursday, November 19, 2009

Glen Beck Explains the Dollar Carry Trade and Impending Currency Crash - Yeah, Much to Our Shock he Actually Gets it Right

We never thought we would say this, but this is an ultra rare occasion when even Glen Beck is beginning to make sense. In the following videos he actually does an excellent job of explaining the impending dollar crisis and the world wide asset bubble that the Fed has now inflated. In true journalistic honesty we would like to point out that these videos were first posted by Karl Denninger in his blog The Market Ticker.
Video 1

Video 2

Video 3

And here are our musings on Glen Beck and some other points that he left out in these videos:
The Allure That is Glen Beck: We have often wondered, what exactly is the allure of people like Glen Beck and Sarah Palin, that seemingly rational people are drawn to them? Are people not turned off by the sheer hatred and hypocrisy these people propagate?
Perhaps the answer lies in the deft skill with which Glen Beck (and to some extent Palin), manages to cloak often vile and irrational thoughts under disarmingly rational ones (such as those in the videos above). When you say 6 sensible things and 4 outrageous lies, most people are gullible enough to give you the benefit of the doubt on the 4 lies you told, because they find it hard to discern truth from fiction.
So while Glen Beck manages to make perfect sense on the impending currency crisis and has Ron Paul on his show talking about End the Fed, he is completely illogical when it comes to inciting tea party folks (hatefully in our opinion) against Obama - calling him a racist, supporting the U.S. wars around the world, and inciting people against the public option on Healthcare.
The Path of Least Resistance: The American people have no stomach for frugality or lower standard of living. So while the right way to solve our massive government debt problem would be to reduce deficits by raising taxes, cutting benefits and social handouts and most importantly ending the endless and costly wars that we can no longer afford - none of these events will happen. Instead the Democrats faced with elections next year along with a complicit Bernanke will take the easy way out and degrade the dollar. This is the path of least resistance but highest risk, inviting trade wars, capital controls and eventually a global currency crisis. So the hypocrisy of Glen Beck is really exposed when he exhorts people to live a tough lifestyle in the second video and says he will do so he really ready to pay higher taxes on his $50 million pay check? Judging by his past rants - of course not. Talk is not necessarily followed by action.

Wednesday, November 18, 2009

When It Comes to Getting a Fat Bonus Goldman is Ready to Sell its Mean Apologize

So desperate are the super rich folks at Goldman when it comes to amassing even more wealth, that they have now stooped to apologizing! The Financial Times is reporting that Goldman is apologizing for their role in this crisis. And don't worry they are not getting away scott free. They are throwing us a little bone of a promise to loan $500 million to small businesses, if we keep quiet and let them keep their $20 billion bonus hoard. Talk about negotiating skills and deal terms. We do have the best and the brightest bulbs at Goldman. Mama America is proud of its gold-diggers.
And while they could not bring themselves to apologize for an entire 12 months since the crisis unfolded, one whiff of their precious bonus pot disappearing, is enough to get these folks groveling. Who needs enemies when we have our very own "patriotic" Goldmanites. So Mr. Blankfein thank you for letting us impoverished Americans, share some morsels from your Cake. Marie Antoinette would be proud.

Let Us Bow Before China & Japan - If That is What it Will Take to Keep the Grinch at Bay

The United States is barreling down the hillside, fast approaching the currency crisis checkpoint. Barack Obama being at the head of the barrel is desperately trying to slow the tumble by personally pleading with our two largest creditors China & Japan - a fact largely missed by the folks at Fox News who continue to be fixated on how far Obama bowed before the Japanese emperor.
For God's sake get with the program folks! We as a country are BANKRUPT. At this point no degree of bowing would be too LOW, we are at THEIR mercy. So the sooner the good folks at Fox News throw off the false sense of machismo and bravado, the faster they and the rest of this country can come to terms with the new reality.
Our endless drive to consume, our desire to stay blissfully ignorant of the real issues surrounding us and instead fixate on the President's cat/dog, our blind allegiance to crony capitalism even if it came at the cost of lower wages and shipping our jobs overseas, our blind faith in aligning ourselves with one or the other political party, when BOTH carry on the same retarded policies, our blind worship of money as a measure of human achievement (look at the number of folks clicking photos outside Trump Plaza in New York), our insane wars that have caused millions of people to die but we never view their suffering as ours...all this will ultimately be the cause of our undoing. The United States days as a superpower are not numbered...they are GONE. Our greed has ruined this great country.
Warren Buffet talks about innovation as the great strength of the American people, we do not disagree with American ingenuity, but how can you innovate when you don't have any money? Innovation require one to take risks. Will a poor person or country take the same levels or risk as a rich one? We think not. When you are worried about putting food on the table and feeding your family, when capital available to start a business is scarce, when the end market (consumers) does not have the cash flow to buy your product, when universities don't have funding to carry on scientific discoveries, innovation will most definitely take a backseat.
We end with some very pertinent thoughts from an article titled Paper Promises, Golden Hordes in The Economist. The article highlights the instability in the current global currency system and how the United States is staring down the barrel of an eventual currency crisis. Ofcourse this crisis will not just affect the U.S. but the entire world, and most definitely China.
TWO hundred metric tonnes of gold would occupy a cube of a little more than two metres on a side; it would fit into a small bedroom. But India’s purchase of that volume of gold from the IMF last month has had an outsize impact on the markets, helping push the price well above $1,100 a troy ounce.
For bullion bulls, the implication is clear: central banks no longer trust the creditworthiness of other governments. And if they have lost confidence, private investors should do the same. The next step in this chain of reasoning is to assume a stampede (or at least a quick trot) by other central banks into holding the yellow metal. Gluskin Sheff, a Canadian asset-management firm, suggests that if China followed India’s lead, bullion could hit $1,400 an ounce.
Developed-country governments have attempted to control bond yields through quantitative easing and to support stockmarkets through ultra-low interest rates. But they cannot support their currencies as well without risking problems in the bond and equity markets. Gold’s surge may indicate that investors fear the next stage of the crisis will occur in the foreign-exchange markets.

You'll Know the Gold Trade is Crowded When...

Some excellent and funny pointers from Bill Fleckenstein to discern when the gold trade is getting too crowded and when you should consider bailing out of your position.
  1. When Goldman Sachs has a "bus tour" to a bunch of mines (like the ones that it and other  firms arrange for different industries, particularly the technology industry).
  2. We see ads on Bubblevision (CNBC) encouraging people to buy gold, as opposed to prodding them to sell their jewelry, as is the case today.
  3. The banks find a way to put money into gold -- because no modern mania has ever ended without the banks finding a way to lose money in it.
  4. We see a frenzy of mergers and acquisitions, and an LBO or two.
  5. Lastly, BusinessWeek puts gold on the cover, telling us how it's the wave of the future, or some variation of that theme.
Until then sit tight and buy some more bullion on corrections.

Warren Buffett Put the Pom Poms Down

Author: Ariana Huffington of The Huffington Post
Difficult times need wise men to tell difficult truths. And, for many years, Warren Buffett, the "Sage of Omaha," has done just that. For example, he was one of the first to sound the alarm about the danger of derivatives, warning in 2003 that they were "financial weapons of mass destruction" that could lead to a "corporate meltdown." So it was deeply distressing to watch his recent CNBC town hall meeting with a group of Columbia business students, followed the next night by an hour spent talking about the economy with Charlie Rose, and see Buffett joining in the economic victory lap the Obama administration -- and much of the media -- are taking.
Read the entire post here

Monday, November 16, 2009

Talk is Cheap - Obama Promises to Put America in Rehab

On his Asian tour Barack Obama has been doing what he does best - hand out more ludicrous and empty promises. This time he has tried to assure Asia that U.S. borrowings will not spiral out of control. The Telegraph reports:
"As the economy recovers, I intend to take serious steps to reduce America's long-term deficit," he [Obama] told the APEC forum in Singapore. "Debt-driven growth cannot fuel America's long-term prosperity." The assurance comes amid growing doubts across the world over the wisdom of White House spending plans. The US Congressional Budget Office expects the deficit to remain around $1.8 trillion as far ahead as 2019 under current plans.
First of all, the economy is not recovering - unemployment has officially crossed 10% and is unofficially touching 18%. Consumer confidence is falling and factories are operating below break even.
Secondly all the talk of deficit reduction defies Obama's own budget projections of running a $1 trillion+ deficit in each year until 2019.

Lastly the President should at least get his facts right before speaking: "Debt driven growth cannot fuel America's prosperity"...except that it IS!
That is precisely the plan currently put in place by Obama anointed geniuses Ben Bernanke and Tim Geithner. Thanks to their 0% interest rate** policy a highly leveraged (debt-driven) dollar carry trade is underway. Large financial institutions are borrowing massive amounts of dollars on the cheap and buying up stocks, commodities and real estate around the world. That is why the Dow has crossed 10,000 defying all fundamental logic, and real estate and stock prices across Asia have soared.

And the newly rich wall street class is once again pushing up sales of luxury goods as they get ready to gather rich pickings from their debt fueled asset bubbles - huge bonuses.

So it seems that a gifted President Obama can offer only one thing to the world - Cheap Talk. That is all that a bankrupt America can afford these days.
Note: ** While we understand Bernanke's motives for keeping interest rates at 0% so as to not choke of any weak recovery, we however do NOT agree with his belief that the only tool he has at his disposal is monetary policy. One tool cannot solve ALL problems. To contain asset bubbles which are a byproduct of an easy monetary policy, Bernanke should focus on parallel regulatory enforcement e.g.: imposing greater margin requirements and curbs on the amount of leverage a financial institution could employ in buying stock futures, currencies and commodities. A simple rule such as implementing a 20% down payment before you buy a second home or higher taxes if you flip quickly, would have gone a long way in curbing the real estate bubble in America. (More on this to come soon).

Is China the next "Subprime Bomb" For the World?

Author: Ambrose Evans-Pritchard of The Telegraph
Far from taking over as the engine of growth from an exhausted West, China is making matters worse. Its "beggar-thy-neighbour" policies continue to play havoc with global trade and risk tipping the world into a second leg of the Great Recession.
"The inherent problems of the international economic system have not been fully addressed," said China's president Hu Jintao. Indeed not. China is still exporting overcapacity to the rest of us on a grand scale, with deflationary consequences.
While some fret about liquidity-driven inflation, Justin Lin, World Bank chief economist, said the greater danger is that record levels of idle plant almost everywhere will feed a downward spiral of job cuts and corporate busts. "I'm more worried about deflation," he said.
By holding the yuan to 6.83 to the dollar to boost exports, Beijing is dumping its unemployment abroad – "stealing American jobs", says Nobel laureate Paul Krugman. As long as China does it, other tigers must do it too.
To read the entire article click here

Sunday, November 15, 2009

Weekend Musings

Some interesting weekend snippets that we compiled:
China Confirms Dollar Carry Trade is Very Much Alive and is Inflating Asset prices Worldwide

China's chief banking regulator said Sunday that persistently low US interest rates and a declining U.S. dollar are leading to new global economic risks. The U.S. government's promise to keep interest rates low for an extended period is encouraging a U.S. dollar carry trade and leading to massive speculation, Liu Mingkang, Chairman of the China Banking Regulatory Commission, said at a financial forum. Such conditions "are seriously impacting global asset prices and encouraging speculation in stock and property markets," he said.
William Buckler reports in the The Privateer that, the State of The States is Worsening by the Day and only the Stimulus money is keeping them From Leaping off the Cliff

On November 10, the Center on Budget and Policy Priorities announced that all US states are facing the absolute necessity of making steep cuts in their fiscal 2011 budgets. For most of the states, fiscal 2011 will start on July 1, 2010. The major reason for these budget cuts is that federal stimulus payments will run out by late in 2010. Mr Obama’s stimulus has merely postponed the fiscal crisis in the states for a year or so. The stimulus package made up for 30-40 percent of the budget gaps the states face in the current fiscal year. Barring another and even bigger stimulus, the states face HUGE budget cuts in 2010.
For a visual take on the rapidly worsening unemployment situation across the country see Jim Sinclair's interactive map here. What you see will shock you.
Unlike Obama, the British Sure Have the (Masculine Parts) to Take on the Banks

[Under a new legislation to be unveiled this week by the Queen], bankers who are paid “unjustifiable” multi-million-pound bonuses face having their contracts ripped up and their banks fined. In an interview with The Sunday Telegraph, Alistair Darling, the Chancellor, said that the culture of banking had to change and that bankers had to see themselves as “fellow citizens” who had been bailed out by the taxpayer. He admitted that some of the huge bonuses paid to bankers around the world were viewed by the public as “ludicrous”.“Bonuses have been a symptom of the excessive behaviour of some banks over the last few years and even over the last few months,” said Mr Darling.
According to John Embry of Sprott Asset Management The Con Job in Financial Markets Continues

The objective is to keep markets elevated so that the average citizen will ignore the rot eating away at the foundations. Jim Sinclair the brilliant gold trader and a man who very early recognized the true destructive nature of OTC derivatives has coined an expression for the whole sordid procedure. He calls it Management of Perception Economics or MOPE. It is patently designed to mislead the public by producing phony economic statistics to promote the idea that a sustainable economic recovery is underway. [This explains] why gold and silver continue to remain off the radar screens of so many investors [and they would never realize this by listening to the mainstream press and established commentators like CNBC].

Saturday, November 14, 2009

Bullish Signal: Interesting Step Pattern Developing in Gold

An interesting bullish staircase pattern is visible in gold prices. Jim Sinclair calls this pattern the swiss staircase and he views the pattern as an indicator that prices are headed much higher. We enclose a graph of this step pattern posted by Trader Dan Norcini on Jim Sinclair's website below (second chart). Since the price of gold on the right axis is not visible in Dan's chart we have posted the first chart as a reference for our readers.
Money Morning explains the technical rationale behind this step pattern formation:
As asset prices rise, they often initially overshoot. Then they correct – fall back a bit. Then they consolidate, or trade sideways, usually for a period of six to 18 months, but sometimes for even longer. It’s this period of sideways trading that creates the horizontal step – a technical-analysis tool that lets us see the foundation for the next step up in the long-term uptrend.

We find these patterns extremely interesting as we are long term bulls on gold. However we would like to caution our readers that in the short term gold prices could correct and this pattern could get broken. The main reason we are cautious over the next few months is that although the Fed would like to see the dollar depreciate much further, the same is not true for the europeans (as we highlighted in our post yesterday), or the asians. Given that the U.S. dollar index (USDX) (currently at ~75) is not too far from its all time low of ~72, and the fact that the Euro (currently at $1.50) is rapidly approaching its all time high of ~$1.60 versus the U.S. dollar, we expect a short term rally to occur in the US Dollar Index which will take the dollar higher (euro lower) before it falls back and breaks the 72 level. The europeans and asians will not let the dollar break 72 without a fight. This fight will ofcourse prove futile in the long term, but it could cause gold prices to correct in the short term.