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PRICE GAP PORTENDS GOLD PRICE BOOM
January 15, 2009
http://www.europac.net/externalframeset.asp?from=home&id=15180
Most consider the New York market ‘spot’ price for an accurate indication of the true price. However, investors now buying buy physical or ‘fabricated’ gold, are paying a premium of between $20 and $30 per ounce. When these gaps existed in the past, major increases in the price of gold were imminent.
For much of the 20th Century, gold continuously defied global government efforts to restrain its price. The premium currently in place may be evidence of the latest round of such policies.
In 1934, President Roosevelt devalued the U.S. dollar by some 75 percent by raising the official price of gold from $20 to $35 an ounce. This opened the door to the first great wave of inflation of the 20th Century. Following World War II, national governments, particularly the American Treasury, held the vast bulk of the free world’s gold. The official $35 price was maintained, almost by official dictate.
However, in the 1960’s, a ‘free’ market gradually developed that traded gold at a premium to the official $35 price. In response, the London Gold Pool, a central bankers’ gentlemen’s agreement led by the Bank of England and the New York Fed, was established to hold the so-called ‘free’ market price of gold “to more appropriate levels” … to “avoid unnecessary and disturbing fluctuations in price” which could erode “public confidence in the existing international monetary structure.” The agreement lasted until 1968. Thereafter, the price of gold was set solely by the free market.
As the inflationary financing of the Vietnam War began to filter into the international economy, private investors and nations with trade surpluses began to buy gold to protect their wealth. The ‘free’ market price began to soar above $35 an ounce. Far from reducing the demand for gold, as many esteemed Keynesian economists had predicted, this free market price increased the demand for gold.
Surplus nations demanded gold from the American Treasury at the official price. Experiencing a serious run on the national official gold reserves, President Nixon broke the U.S. dollar gold exchange link in August 1971. It unleashed a wave of competitive international currency devaluations and the second great inflation of the 20th Century. Subsequently, the U.S. dollar was devalued further, by some 20 percent, as gold officially was revalued to $42 an ounce.
However, led by America, the central banks then made a determined attempt, through the IMF, to “demonetize” gold. Central banks agreed not to fix their exchange rates against gold and agreed ‘voluntarily’ to the removal of their obligation to conduct transactions between themselves at the official price.
In addition, the IMF was persuaded to ‘distribute’ some 153 million ounces of gold into the market and to minor nations. This had the perverse effect of greatly increasing the interest in owning gold.
An even stronger ‘free’ market began to operate alongside the official price. As inflation continued to clime, so did gold. In the early 1980’s the free market price reached $850 an ounce, while the official price remained at $42 an ounce.
In 1999, the Central Bank Gold Agreement (CBGA), also known as the Washington Gold Agreement, led to the coordinated sales of central bank gold via the IMF. Clearly designed to depress the free market price, it is widely believed that the IMF sales were timed to magnify volatility in the free market price in order to destroy gold’s perceived worth as a ‘store of value’. The CBGA was renewed on September 27, 2004, for a further five years.
More recently, market dealers have become increasingly aware of a covert official ‘blessing’ for large naked short positions opened by major ‘bullion’ banks. These bets are designed to force down the free market price of gold.
In the mainstream investment community, gold has been consistently scorned as an investment. Many respected analysts have even suggested that gold’s allure is wholly based on perception and that the metal lacks intrinsic value. And yet, in terms of U.S. dollars, gold returned about 5.8 percent in 2008, following a 31.4 percent return in 2007. Thus far in the 21st Century, gold has delivered an average annual return of some 16.3 percent.
Despite the powerful attempts of governments to eradicate gold’s role in monetary affairs, the free market price has risen continuously. Today, although the possibility of global depression act as a head wind, the existence of an “above market” premium for fabricated gold, may foretell a major threat to the credibility of paper currencies, a major U.S. dollar devaluation and a consequent strong rise in the price of gold in the months ahead.
Roubini and oil...
at end of this report just released his group says oil stays between $30-$40 in 2009:
Navigating the First Global Economic Recession
With the industrial world already in outright recession and the emerging world navigating towards a hard landing (growth well below potential) we expect global growth to be flat (around -0.5%) in 2009. This will be the worst global recession in decades as the fallout of the most severe financial crisis since the Great Depression took a toll first on the U.S. and then – via a variety of channels of recoupling – on the rest of the global economy.
We forecast that the United States economy is only half way through a recession that started in December 2007 and will be the longest and most severe in the post war period. U.S. GDP will continue to contract throughout all of 2009 for a cumulative output loss of 5%.
One last look at 2008 will reveal a very weak fourth quarter with GDP growth contracting about -6%, in the wake of a sharp fall in personal consumption and private domestic investment. We see the real GDP growth contraction playing out through the year as follows: Q1 2009 -5%; Q2 2009 -4%; Q3 2009. -2.5%; Q4 2009 -1%, adding up to a yearly real GDP growth of -3.4% for the U.S. in 2009; our forecast is much worse than the current consensus forecast seeing a growth recovery in the second half of 2009; we also predict significantly weak growth recovery – well below potential - in 2010. Canada entered recession at the end of 2008, and the outlook for 2009 is likely to be worse, with the economy contracting by an estimated 1.5-2% for the year.
In 2009, Latin American countries will face a significant slowdown in economic growth. A combination of negative external shocks will slow down regional GDP growth to 0.8% in 2009. Under our scenario, all countries in the region will experience significant deceleration of economic activity in 2009. We expect Argentina and Mexico to shift into negative growth territory on a year-over-year basis. For the region as a whole, recovery will likely begin between the first and second quarters of 2010.
The latest cyclical upswing in the Eurozone (incl. large four Germany, France, Italy, Spain) was largely driven by a temporary but powerful boost to domestic investment from disappearing risk premia in the aftermath of the adoption of the single currency, and by external demand from a buoyant world economy. Both demand sources fizzled out by the second half of 2008, leaving the Eurozone as a whole and its largest members exposed to diverging deleveraging patterns in the face of suboptimal EMU-wide automatic fiscal stabilizer mechanisms. The latest record low readings of leading and sentiment indicators point to a severe recession ahead in 2009 that shapes up to be worse than the 1992/93 crisis. For the Eurozone we expect a below consensus y/y contraction in real GDP of around –2.5%, with negative growth in each of the four quarters of the year.
The United Kingdom economy is poised to shrink in 2009. Our forecast of a -2.3% growth in real GDP is below consensus as we do not expect a recovery in the second half of the year. Despite the relative resilience of consumer spending, investment should continue to collapse and the housing sector is yet to reach a bottom.
The Nordics, whose growth has outpaced other developed economies in recent years, are poised for much slower growth in 2009 and most likely an outright recession in most of the countries in this region. After growing faster than the world for the past decade as convergence occurs, Eastern Europe is set to slow abruptly in 2009. Countries with the largest current-account deficits—notably Estonia, Latvia, Lithuania, Romania, Bulgaria — are the most exposed to sharp corrections. Estonia and Latvia are already in the midst of sharp recessions, and Latvia turned to the IMF for help in December to avert crisis. The risk of an outright financial crisis is high in a number of countries in this region.
The combination of global credit headwinds and lower oil prices have dampened growth prospects in the Commonwealth of Independent States (CIS) (ex-Russia) with growth expected to slow to about 2% in 2009, with Ukraine and Kazakhstan being hardest hit by the crisis. With oil prices remaining well below half of the 2008 level, we expect Russian output to contract by 2.5-3% in 2009 as manufacturing contracts and Russia’s inflow-fueled consumption slows sharply.
Given its reliance on exports and capital flows to fuel growth Asia faces a gloomy 2009 amidst a G-7 recession. We expect Asia ex-Japan’s growth to slow down sharply to 3.8% in 2009. Hong Kong, Singapore and Taiwan will remain in recession through H1 2009, which might extend into Q3 2009 while the ASEAN economies will slow significantly from the 2004-07 growth trends. We believe China will experience a hard landing in 2009, with growth unlikely to exceed 5%, a sharp slowdown from the 10% average of the last 5 years. The reversal of capital flows and high credit cost will pull down India’s growth significantly to around 5% in 2009 from an estimated 6% in 2008.
Japan’s domestic demand continues to be an unreliable growth driver, and its export machine - the growth engine of recent years - is stalling given the global contraction and a stronger yen. Consequently, we foresee real GDP growth contracting 2.5% in 2009 after almost flat growth for 2008 as a whole.
Australia's recession will likely end in 2009 after starting in Q4 2008. Average annual GDP growth in 2009 will be flat to sluggish (0-1%) after registering an estimated 1.6% in 2008. New Zealand may have a tougher time than Australia during the global recession, with GDP expected to contract 1% in 2009 after growing around 1% in 2008.
Given that the global recession will reduce demand for Middle East and North Africa’s resource and non-resource exports, and the global liquidity crunch will reduce capital inflows, growth is expected to slow to an average of 3% in 2009 from almost 6% in 2008.
GCC countries will witness a significant dip in their hydrocarbon receipts, terms of trade, and current account surplus positions in 2009. Average real GDP growth in the GCC may slow to 2.5% in 2009. Israel’s growth is expected to slow significantly in 2009 to around 1% and we would not rule out a contraction.
Sub-Saharan Africa’s growth will slow to around 3.5% in 2009 from an average pace of 5% over the last decade as the reduction in global demand will reduce exports and capital inflows, including development assistance. Growth in South Africa in 2009 is set to slow to around 1% with several quarters of negative growth as mining output contracts.
Commodity prices, which already fell sharply in the second half of 2008, will face further price pressure in 2009. We estimate an average WTI oil price of $30-40 a barrel in 2009, as the fall in demand continues to outstrip supply cuts and production delays.
agree, oil is a good bet...
here. Most commodities are. The charts are execellent and very informative.
Schiff - January 9, 2009
The Fed’s Bubble Trouble
A few weeks ago when the Fed announced a strategy designed to bring down long-term interest and home mortgage rates through unlimited Treasury bond purchases, government debt staged a spectacular rally. To the unschooled market observer, the spike may be difficult to understand. After all, why would the value of Treasury bonds rise while their underlying credit quality is deteriorating faster than Bernie Madoff’s social schedule? The move is actually a perfect illustration of the tried and true Wall Street strategy of “buy the rumor and sell the fact”.
If it is well known that Fed will be a big purchaser of Treasuries, those buying now will be positioned to unload their holdings when the buying spree begins. If the Fed pays higher prices in the future, traders can earn riskless speculative profits. If the traders lever up their positions, as many are likely doing, even small profits can turn unto huge windfalls.
The downside of course, is that all of the demand for Treasuries is artificial. Treasuries are now in the hands of speculators looking to sell, not investors looking to hold. These players are analogous to the mid-decade condo-flippers who flocked to new developments for quick profits. They did not intend to occupy their properties, but rather flip them to future buyers. Once these properties came back on the market, condo prices collapsed, as developers were forced to compete for new sales with their former customers.
This is precisely what will happen with Treasuries. Just as the U.S. government issues mountains of new debt to finance the multi-trillion annual deficits planned by the Obama Administration, speculative holders of existing debt will be offering their bonds for sale as well. In order to prevent a complete collapse in the bond prices the Fed will be forced to significantly increase its buying.
However, since the only way the Fed can buy bonds is by printing money, the more bonds they buy the more inflation they will create. As inflation diminishes the investment value of low-yielding Treasuries, such a scenario will kick off a downward spiral. But the more active the Fed becomes in their quest to prop up bond prices, the bigger the incentive to hit the Fed’s bid. The result will be that all Treasuries sold will be purchased by the Fed. But with the resulting frenzy in the Treasury market, and with inflation kicking into high gear, we can expect that demand for other debt classes that the Fed is not backstopping, such as corporate, municipal and agency debt, to fall through the floor, pushing up interest rates across the board.
In order to “save” the economy from these high rates the Fed will then have to expand its purchases to include all forms of debt. If that happens, run-away inflation will quickly turn into hyper-inflation, and our currency will be worthless and our economy left in ruins.
To avoid this nightmare scenario, the Fed should pull out of the bond market before it’s too late and let prices fall to where real buyers, those willing to hold to maturity, re-enter the market. Given how high inflation will likely be by the time this happens, my guess is that long-term Treasury yields will have to rise well into the double digits to clear the market.
But we should know that the bursting of the bond market bubble will have even more dire consequences than the bursting of prior bubbles in stocks and real estate. Significantly higher interest rates and inflation that will result will severely compound the current problems. Imagine how much worse our economy would be if we faced double digit interest rates? In addition, not only will homeowners be confronted with record high mortgage rates, but the Government will be staring at trillion dollar annual interest payments on the national debt, making interest by far the single largest line item in the Federal budget. Just like homeowners who relied on teaser rates, the Government will face a similar problem when all its low-yielding short-term debt matures.
The grim reality of course is that when the real estate bubble burst the Government was able to “bail-out” private parties. However, when the bond market bubble bursts, it will be the U.S. Government itself that will be in need of the mother of all bailouts. If U.S. taxpayers or foreign creditors are unwilling or unable to pony up, and if the nightmare hyper-inflation scenario is to be avoided, default will be the only option. If misery really does love company, Bernie Madoff’s clients might finally find some comfort.
Mr. Schiff is president of Euro Pacific Capital and author of "The Little Book of Bull Moves in Bear Markets"
Austrian economists predicted the crisis...
and are much better at explaining the root causes and how their proposed fix attacks the root cause and can get us back on track.
But Keynesian economics rule and Obama is clearly following Keynesian theories - they are good at explaining what they intend to do - but not so good at explaining how it will help attack the root cause - and they seem to say the root causes are too complicated for common folk to understand - in sharp contrast to Austrians who say it's all very simple.
Just some observations after listening to Obama's speech on the stimulus plan. Speech = http://www.breitbart.tv/?p=255153
Ron Paul video...
http://news.goldseek.com/RonPaul/1231449691.php
Schiff on 1/7/09...
latest Faber video:
http://www.bloomberg.com/avp/avp.htm?N=av&T=Faber Says He'd Favor Industrial Commodities Over Gold&clipSRC=mms://media2.bloomberg.com/cache/vFxGybnAJsiA.asf
ETFs for infrastructure...
[note: messy post - too lazy to clean it up but this will record the related ETFs]
http://www.marketwatch.com/news/story/infrastructure-etfs-may-benefit-obamas/story.aspx?guid={DD48356E-D1AC-40AE-8BC2-1117358DFFBD}&print=true&dist=printMidSection
Obama's plan for U.S. spending could help construction stocks, other sectors
By John Spence, MarketWatch
Last update: 6:59 p.m. EST Jan. 5, 2009
BOSTON (MarketWatch) -- The promise of the incoming Obama administration has thrown a new light on certain sectors of the stock market, and on the exchange-traded funds that track them.
Building and materials stocks were crushed in 2008 by the global economic slowdown. But some investment professionals see new long-term opportunities in construction-related industries as the U.S. prepares to invest heavily in infrastructure improvement.
Investor interest has grown since President-elect Barack Obama in a Dec. 6 radio address outlined a plan to create millions of jobs in the U.S. by "making the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s." Obama, who takes office on Jan. 20, pledged to invest in roads and bridges, make public buildings more energy-efficient, modernize schools and improve Internet-based communication and its availability.
And that's just part of an expected global surge in infrastructure spending. "Governments around the world are making plans to jump-start their economies by throwing hundreds of billions of dollars at infrastructure projects," notes Robert Markman, portfolio manager of the Markman Global Build-Out Fund (MGBOX
markman multifund tr gbl build out
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Sponsored by:
MGBOX) , a conventional mutual fund that opened for business in September.
That spending could boost infrastructure-related ETFs launched in recent years in anticipation of a long-term global infrastructure boom driven by emerging-markets countries. Those ETFs -- which invest in industries including construction, engineering, utilities, building materials, industrial equipment and metals -- have been battered by worries about a near-term slump in private-sector construction spending.
"There are buying opportunities in many infrastructure ETFs," says Matt McCall, president of investment adviser Penn Financial Group LLC in Ridgewood, N.J.
Obama also has promised to focus on the development of alternative energy sources, another global trend, so investors may want to keep an eye out for further developments on that front. But his infrastructure plans appear far more advanced and so are likely to have a more immediate impact on stocks.
'Megatrend' seen in place
To be sure, infrastructure-related ETFs, like other narrowly focused funds, are unsuitable as core portfolio holdings. The S&P Global Infrastructure Index lost 41% in 2008, close to the 42% loss for the S&P Global 1200 Index, according to Standard & Poor's.
Losses among ETFs included a 32% decline by the SPDR FTSE/Macquarie Global Infrastructure 100 ETF (GII
SPDR FTSE/Macquarie Global Infrastructure 100 ETF
GII) and a drop of 39% by the iShares S&P Global Infrastructure Index Fund (IGF
ishares tr s&p glo infras
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IGF) . Another fund, PowerShares Emerging Infrastructure Portfolio (PXR
PowerShares Emerging Markets Infrastructure Portfolio
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PXR) , opened for business in October.
Chart of GII
But McCall says he still believes in the infrastructure "megatrend" toward higher global spending. And engineering and construction stocks got a boost late last year after Obama outlined his infrastructure plans.
Choosing an infrastructure ETF presents its own challenges, though. For one, McCall and others say some infrastructure funds are too heavily invested in utility stocks, which many analysts believe aren't poised to gain as much from infrastructure spending as other sectors, like construction and engineering.
For example, the SPDR FTSE/Macquarie Global Infrastructure 100 ETF had more than 90% of its holdings in the utilities sector as of mid-December, according to State Street Global Advisors. Jim Ross, senior managing director at State Street Global Advisors, says he expects growth in the sector as countries add utilities to areas that don't have them.
The iShares S&P Global Infrastructure Index Fund had more than 40% of its assets in utilities. A spokeswoman for Barclays Global Investors, which manages the ETF, notes that its holdings reflect the composition of the index it tracks.
ETFs that are more focused on other infrastructure-related sectors include the First Trust ISE Global Engineering & Construction Index Fund (FLM
first tr ise global engr & c com
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FLM) , PowerShares Dynamic Building & Construction Portfolio (PKB
PowerShares Dynamic Building & Construction Portfolio
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PKB) , Market Vectors Steel ETF (SLX
market vectors etf tr mv steel index
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SLX) and Materials Select Sector SPDR Fund (XLB
Select Sector SPDR: Materials Select Sector SPDR Fund
News , chart , profile , more
XLB) .
Tough to focus on U.S.
Profiting From Bernanke's Super-Fed and Obama's Newer Deal
http://seekingalpha.com/article/113169-profiting-from-bernanke-s-super-fed-and-obama-s-newer-deal
The historic wealth destruction of 2008 was obviously deflationary. Defaults strip away wealth. Institutions respond by selling assets to raise capital. Widespread deleveraging leads to supply expansion in assets and contraction in money and credit (i.e. deflation).
Nevertheless, the response has been unprecedented in its own merit. Government debt held by the public was $5.51 trillion when September began; by the end of 2008, it had risen to $6.37 trillion. The more than $1 trillion expansion in Treasury borrowing surely partially serves to offset the $438 billion budget deficit. But what about the additional half a trillion dollars?
On September 17, the Treasury announced the creation of the the “Supplementary Financing Account” in the Federal Reserve. This is a capital reserve in Fed financed by the Treasury selling new debt and it greatly expands the Federal Reserve's balance sheet, albeit stealthily. The excess capital is trapped in this Fed account and does not reach currency in circulation. As of January 2, $259 billion is in this Treasury-financed cash pool and counting the Treasury's “General Account” with the Fed, there is a total of $365 billion sitting at the Fed. The capital itself is money borrowed by the public, so its immediate net effect is deflationary.
On top of that, the Fed in an unprecedented gesture has started incentivizing excess bank reserve deposits by issuing interest on these holdings. Rather than being lent out, liquidity provided to banks by the Fed is thus trapped as it earns interest deposited at the Fed. The Fed is essentially issuing debt, and banks are engaging in what amounts to be a dollar-based Fed vs. interbank carry trade. Banks borrow money from the Fed, deposit them back into the Fed (use borrowed dollars to purchase Fed debt), and profit from the differential between the fed funds and overnight rates (profit off of the difference between the interest rates offered by Federal Reserve and other banks).
Less than $40 billion a year ago, the excess reserve deposits held by the Federal Reserve has ballooned to $860 billion. The banks can also deposit printed money into a Fed category called “Deposits with Federal Reserve Banks, other than reserve balances,” which is what the Supplementary Financing and General Accounts also fall under.
The “Other” subsection of these deposit accounts, which can be construed to represent bank deposits, has increased from $281 million in September to $15 billion today. Both the reserve and non-reserve deposits comprise another huge pool of excess liquidity on the Fed's balance sheet that doesn't immediately affect circulated currency.
Another Fed-induced cash trap has been in the form of increased reverse repurchase agreements, which are up to $88 billion. Reverse repurchase agreements are the offering of collateral in exchange for a cash loan. The Fed has utilized reverse repurchase agreements in its liquification of banks. It buys off toxic defaulting assets in exchange for cash and immediately reclaims the cash by selling the banks T-bills. The Fed printed money to pay for these T-bills, so there is excess liquidity that is trapped in time-sensitive debt. But why would the Fed be taking liquidity away from the system?
The Fed's balance sheet suggests it has been cranking the printing presses like mad. Fed liabilities have expanded to $2.26 trillion, up over 140% since September. However, currency in circulation is up only 7% in that same time period. Where is this “trapped” $1.37 trillion? The answer is the Fed has confined it into temporary cash pools, whether in the Supplementary Financing Account or excess reserve deposits or in time-sensitive T-bills. The Federal Reserve seems to be sequestering all of this cash to buy time for the Treasury to finish its funding activities. What is scary is this wave of future bailout funding is probably not even close to what will be needed for Obama's infrastructure and stimulus spending, which will be comparable only to FDR's and will be liquidity injected directly into the economy.
But who is going to keep funding this expansion Treasury debt issuance? The American public is broke and cannot offer its capital in return for terrible yields. Foreign nations don't have the means or will to continue financing our debt. Commodity prices have collapsed, cutting deeply into foreigners' export revenues. Oil is down from highs around $150/barrel this past summer to around $40/barrel now.
According to the CIA World Factbook, China has a $6 billion budget surplus. However, it announced a $585 billion economic stimulus package in early November to be invested by the end of 2010. The Chinese government agreed to provide only $170 billion of the the funds, in an effort to prevent an unreconcilable deficit. How will China raise the other $415 billion for continuous use until the end of 2010? Surely, local governments and private banks and businesses can't finance such a large package in the midst of a historic recession.
The only reserve China can tap into to finance its stimulus package is its $1.9 trillion foreign exchange reserves, $585 billion of which is in US Treasury securities. Also, according to the Guangzhou Daily, in mid November, the People's Bank of China began an effort to increase its gold reserves from 600 tons to 4500 tons to diversify risk held by its huge dollar debt reserves. Financing its stimulus package and gold purchases would require selling Treasury securities, but becoming a net seller of US debt could have disastrous economic, political, and even militaristic consequences for China, so it will be interesting to see how events unfold. What seems for certain, however, is that China can no longer purchase more American debt to finance the US Treasury (and consequently the Fed).
This is a problem echoed by the rest of the big creditor nations. After China, the biggest holders of American debt securities are Japan, the UK, Caribbean banking centers, and OPEC nations. Japan is facing enormous headwinds as its quality-focused exports are suffering massive demand destruction as its consumers abroad lose wealth at epic proportions in the economic crisis. Japan was a net seller of US Treasuries in 2008 and with the current wealth destruction, it is highly unlikely it will switch to a net buyer of American debt. The British demand for American debt represented Middle Eastern oil-financed investment, but with oil prices collapsing, it will be next to impossible for this proxy demand from the UK to rise and finance additional debt.
The demand for US debt by Caribbean banking centers is because of their tax laws and because of the dollar's status as the international reserve currency. As the credit crunch leads to liquidity destruction in Caribbean banks and the dollar slowly loses its reserve status, these tax haven banking centers will no longer be able to buy additional US debt. OPEC nations' US debt demand, similar to the UK's, is tied to Middle Eastern oil revenues financing American consumption (of their oil exports). As oil prices tank, as will OPEC nations' economies and they too will have no wealth to buy up more American debt.
Bernie Madoff is well-recognized as the biggest Ponzi scheme in history, at $50 billion. I beg to differ with that claim. The United States has financed debt with debt since the late 80s, when its external debt/GDP broke the 0 mark. Since then, it has risen to over 100% of its GDP (which in itself is quite artificially inflated because of manipulated hedonics-adjusted inflation figures), and now stands at $13 trillion. That is what's called a debt bubble. Bernie who?
But the debt bubble appears ready to collapse. The literal pyramid scheme is finally running out of investors, and many Treasury ETFs (like SHY, TLT, IEF, and IEI) are showing classic parabolic topping patterns and the next few weeks should confirm or deny my suspicions. Interest rates are at an obvious floor at zero, so there is nowhere to go but up. That means bond prices have nowhere to go but down, and the way bubbles burst, the falling prices will cascade into more selling until the debt bubble deflates and all the spending is financed by quantitative easing. The minute the Treasury finishes its current funding activity, the debt bubble will begin its collapse. Judging by gold backwardation (discussed later) and the bearish charts on the bubbly debt ETFs, I think the debt monetization and dollar devaluation will begin within the next six weeks.
With an insolvent public and no foreign demand for Treasuries, the Federal Reserve will monetize debt to finance its continued bailouts and economic stimulus. This is purely created capital pumped right into the system. This is not anything new for the Fed-- for the past two decades, it has kept interest rates artificially low and created massive artificial wealth in the form of malinvestment and debt-financing. In the past, the Fed has been able to funnel the inflationary effects of its expansionary monetary policy into equity values with its low rates, which discourage saving, causing bubble after bubble, in the form of techs, real estate, and commodities. The excess liquidity (the artificial capital lent and spent because of low interest rates and debt financing) was soaked up by the stock market, which gave the appearance of economic growth and production. With inflation being funneled into equity and real estate over the last two decades, illusionary wealth was created and the public remained oblivious to the inflationary risk and the much lower real returns than nominal.
Now that the “artificial wealth bubble” being inflated for the past two decades is finally collapsing, one of two scenarios can occur: capital destruction or purchasing power destruction. Capital destruction occurs when the monetary supply decreases as individuals and institutions sell assets to pay off debts and defaults and savings starts growing at the expense of consumption. This is deflation and the public immediately sees and feels its effect, as checking accounts, equity funds, and wages start declining. Deflation serves no benefit to the Federal Reserve, as declining prices spur positive-feedback panic selling and bank runs, and debt repayments in nominal terms under deflation cause real losses.
Purchasing power destruction is much more desirable by the Fed. Its effects are “hidden” to a certain extent, as the public doesn't see any nominal losses and only feels wealth destruction in unmanageable price inflation. It breeds perceptions of illusionary strength rather than deflation's exaggerated weakness. The typical taxpayer will panic when his or her mutual fund goes down 20% but will probably not react to an expansion of monetary supply unless it reaches 1970s price inflationary levels. In addition, the government can pay back its public debt with devalued nominal dollars, which transfers wealth from the taxpayers to the government to pay its debt. Inflation is essentially a regressive consumption tax, which the government wants and the Fed attempts to “hide”. Not only is the Treasury's debt burden reduced, but the government's tax revenues inherently increase.
The Fed, in an effort to minimize inflationary perception, has for the last two decades supported naked COMEX gold shorts to keep gold prices artificially low. The Fed, as well as European central banks, unconditionally supported these naked shorts to deflate prices and stave off inflationary perception, as gold prices stay artificially low. This caused gold shorts to be “guaranteed” eventual profit, by Western central banks offering huge artificial supply whenever necessary, causing long positions in gold to be wiped out by margin calls and losses.
Now that the economy is contracting, the Fed won't be able to funnel the excess liquidity into equities or other similar assets. It also can't allow the excess liquidity of today, which is different in both its size (already $1.37 trillion) and nature (it is printed “counterfeit” money and not malinvested leveraged and debt-financed capital), to be directly injected into the economy. That would prove to be immediately very inflationary, as more than three times the money is chasing the same amount of goods, technically leading to 300% price inflation. These figures are strictly based on monetization of the Fed's current liabilities, not including any future deficit spending (which is sure to dramatically increase, especially with Barack Obama's policies), the American external debt, or unfunded social programs that need payment as Baby Boomers retire.
In order to funnel the excess liquidity into a less harmful asset, the Fed appears to be abandoning its support for gold naked shorts, causing shorts to suffer their own margin calls and cause rapid price expansion in gold. On December 2, for the first time in history, gold reached backwardation. Gold is not an asset that is consumed but rather it is stored, so it is traditionally in what is called a contango market. Contango means the price for future delivery is higher than the spot price (which is for immediate settlement). This is sensible because gold has a carrying cost, in the form of storage, insurance, and financing, which is reflected in the time premium for its futures. Backwardation is the opposite of contango, representing a situation in which the spot price is higher than the price for future delivery.
On December 2, COMEX spot prices for gold were 1.99% higher than December gold futures, which are for December 31 delivery. This is highly unusual and it provides strong evidence to the theory that the Fed is abandoning its support for gold shorts. Backwardation represents a perceived lack of supply (in this case, the artificial supply the Fed would always issue at strategic times no longer existed), causing investors to pay a premium for guaranteed delivery. On May 21, when crude oil futures reached contango, I started waiting patiently for the charts to offer a short sell trigger because the contango represented a supply glut relative to perception and current pricing. Oil was priced at $133/barrel at that time and six weeks later, on July 11, oil topped at $147, and six days later crude broke its 50DMA on volume and triggered a large bearish position against commodities that resulted in some of my most profitable trades last year.
I consider gold's backwardation as a similar leading indicator to the opposite effect—a dramatic increase in prices. Crude began its most recent backwardation in August 2007 at around $75/barrel and increased dramatically over the next nine months to $133/barrel at contango levels. Backwardation, especially in the case of gold prices, reflects a lack of supply at current prices and is very bullish.
But why would the Fed abandon its support for naked COMEX shorts? What makes gold such a desirable asset to attempt to direct excess liquidity into? The unique nature of gold and precious metals provides its desirability in this Fed operation. Gold has little utility outside of store of value, unlike most commodities (like oil, which is consumed as quickly as it's extracted and refined), so its supply/demand schedule has unusual traits. Most commodities and assets go down in price as the public loses capital, because the public has less to consume with and that is reflected in demand destruction that leads to price deflation. Gold is not directly consumed and its industrial use and consumer demand (jewelry) is at a lower ratio to its financial/investment demand than almost any other asset in the world.
As a result, gold is relatively “recession-proof,” as evidenced by its relative strength in 2008. Gold prices rose 1.7% last year, which is quite spectacular considering equity values went down 39.3%, real estate values went down 21.8%, and commodity prices went down 45.0% in the same period (as determined by the S&P 500, Case-Shiller Composite, and S&P Goldman Sachs Commodity Indices, respectively). Because gold is not easily influenced by consumer spending, highly inflationary gold prices don't do any direct damage to the public and are a good way to funnel excess liquidity without economic destruction.
Federal Reserve Chairman Ben Bernanke is a staunch proponent of dollar devaluation against gold and is very supportive of President Franklin D. Roosevelt's decision to do so in 1934. In the past, manipulating gold prices to artificially low levels was beneficial because it prevented capital flight into a non-productive asset like gold and kept production, investment, and consumption high (even if it were malinvestment and unfunded consumption).
Bernanke's continued active support of gold price suppression would lead to widespread deflation that would collapse equity values and cause pervasive insolvencies and bankruptcies. Insolvency in insurers removes all emergency “backups” to irresponsible lending and spending, which would surely ruin the economy. Bernanke's plan seems to be to devalue the dollar against gold with huge monetary expansion, causing equity values to rise and economic stabilization. I've heard estimates of 7500 and 8000 in the Dow Jones Industrial Average as being minimum support levels that would cause insurers and banks to realize massive losses, causing widespread insolvencies in them and other weak sectors like commercial real estate that would irreversibly collapse the economy.
This gold price expansion, set off by the massive short squeeze, will continue until gold prices reflect gold supply and Federal Reserve liabilities in circulation. The “intrinsic” value of gold today (called the Shadow Gold Price), calculated dividing total Fed liabilities by official gold holdings, is about $9600/oz, compared to around $865/oz today. This gold price calculation essentially assumes dollar-gold convertibility, as is mandated by the US Constitution and was utilized at various periods of American history. The near-term price expansion in gold, mainly led by abandonment of gold shorts and the first traces of inflationary risk, should show $2000/oz by the end of this year. As the leveraged deals from the pre-crash credit craze mature, with the majority of them maturing in 2011-2014, there will be more monetary expansion for debt repayment, which will structurally weaken the US Dollar (which is inherently bullish for gold) and will also provide new excess liquidity to be funneled into precious metals. This leads me to believe gold will be worth $10,000/oz by 2012.
The US Dollar's strength as the equity and commodity markets collapsed was due to deleveraging and an effect of the Fed's temporary sequestration of dollars, taking dollars out of supply. That is over. Oil seems to be putting in a bottom on strong volume, no one is left to buy any more negative real yield securities the Treasury is issuing, and gold has started looking very bullish.
But a good speculator always considers all situations. Even if deflation is to occur, which I see as next to impossible, gold prices should still rise to $1500/oz levels next year, because it has shown relative strength as one of the most viable assets left to invest in. In addition, the short squeeze occurring in gold will provide substantial technical price expansion, even in the absence of dollar devaluation. Because of this, I suggest gold as an investment cornerstone for the foreseeable future.
I see the market breaking down from these levels to about the November lows, starting on Monday. Commercial real estate stocks like Simon Property Group (SPG), Vornado Realty Trust (VNO), and Boston Property Group (BXP) should lead the down move, as well as insurers like Allstate (ALL), Prudential (PRU), and Hartford (HIG), banks like Goldman Sachs (GS) and Morgan Stanley (MS), and retailers like Sears Holdings (SHLD). I recommend short positions (including leveraged bearish ETFs like SRS and FAZ) and buying puts against these stocks for the very near term. If the market indeed breaks down but shows bouncing/strength around 7500-8000 in the Dow Jones, that would confirm to me that the Fed is able and willing to inflate its way out of this crisis and I will sell my bearish positions and buy into bullish gold positions.
Because in inflation the dollar is devalued, I am a proponent of owning bullion and avoiding gold ETFs, but I do believe gold and gold miner stocks will provide great returns over the next few years. Royal Gold (RGLD), Iamgold (IAG), Jaguar Mining (JAG), Anglogold Ashanti (AU), Newmont Mining (NEM), Randgold (GOLD), Goldcorp (GG), and Barricks (ABX) are among my favorite gold equities at this early stage in the process. Their charts are all quite bullish and look to see much more upside. I believe gold will pullback for a few weeks as the market continues lower and deleveraging occurs, but like I said, I don't believe the Fed will allow the markets to breach its November lows. If indeed deflation wins out and the Fed can't prevent equity value collapse, I will just hold on to my aforementioned bearish positions and trade in particularly those securities for the foreseeable future, and I suggest you to do the same.
Literally the only thing that I find suspicious in all of this is the fact that I see so many inflationists out there and I even see commercials on TV about precious metals. I usually like to stay contrarian to the public, which I consider irrational and wholly incompetent. But this enormous debt and monetary expansion is a structural problem that common sense may provide better insight for than the most complex of models and theories.
I leave you with this, a quote from Fed Chairman Ben Bernanke about President Franklin D. Roosevelt's 1934 Gold Reserve Act, which was the greatest theft of wealth I've aware of in American history:
“The finding that leaving the gold standard was the key to recovery from the Great Depression was certainly confirmed by the U.S. experience. One of the first actions of President Roosevelt was to eliminate the constraint on U.S. monetary policy created by the gold standard, first by allowing the dollar to float and then by resetting its value at a significantly lower level … With the gold standard constraint removed and the banking system stabilized, the money supply and the price level began to rise. Between Roosevelt's coming to power in 1933 and the recession of 1937-38, the economy grew strongly.”
My predictions: gold at $2000/oz by the end of the year and $10,000/oz by 2012 and silver at $30/oz by the end of the year and $130/oz by 2012.
Disclosure: Long SRS, SRS calls, TBT, TBT calls, gold bullion.
al44 - link to board on junior miners...
http://investorshub.advfn.com/boards/board.aspx?board_id=5834
great board IMO.
Lebaneseproud - great to see you here...
good luck with gold and silver picks. Have several that are doing well - and a few not so good. Truly believe 2009 will be a good year for both silver and gold and plan to hold svrcf for the forseeable future.
great board here and lots of knowledgeable posters on the junior miners - I'm fairly new but have been studying hard and am getting some confidence in making picks.
as recession deepens - so does milk surplus...
http://www.nytimes.com/2009/01/02/business/02dairy.html?_r=3&ref=business
As Recession Deepens, So Does Milk Surplus
Peter DaSilva for The New York Times
Arthur Machado, a dairy farmer in Fresno, Calif., has to keep feeding his herd of more than 300 cows. He plans to sell them and take up a more stable commodity.
By ANDREW MARTIN
Published: January 1, 2009
FOWLER, Calif. — The long economic boom, fueled by easy credit that allowed people to spend money they did not have, led to a huge oversupply of cars, houses and shopping malls, as recent months have made clear. Now, add one more item to the list: an oversupply of cows.
Millions of pounds of government-owned milk powder stored in a warehouse in Fowler, Calif.
And it turns out that shutting down the milk supply is not as easy as closing an automobile assembly line.
As a breakneck expansion in the global dairy industry turns to bust, Roger Van Groningen must deal with the consequences. In a warehouse that his company runs here, 8 to 20 trucks pull up every day to unload milk powder. Bags of the stuff — surplus that nobody will buy, at least not at a price the dairy industry regards as acceptable — are unloaded and stacked into towering rows that nearly fill the warehouse.
Mr. Van Groningen’s company does not own the surplus milk powder, but merely stores it for the new owners: the taxpayers of the United States. To date, the government has agreed to buy about $91 million worth of milk powder.
“The thing is, they are going to produce it because they have to milk the cows,” Mr. Van Groningen said. “It’s like a river. It keeps coming.” In addition, dairy farmers are all too aware that, unlike industrial machinery, cows cannot be turned off and stored until economic conditions improve; they must be fed and cared for, at continuing expense.
The bags of milk powder represent a startling reversal of fortune for the dairy industry, which flourished in recent years in part because of a growing appetite for milk, cheese, ice cream and pizza in places like Mexico, Egypt and Indonesia. Many of those countries were benefiting from a global economic boom led by free-spending consumers in the United States.
As American dairy farmers increased their shipments of powdered milk, cheese and other dairy ingredients to foreign markets, their incomes rose. And the demand surge helped drive up the price of milk for American families. The national average for whole milk peaked at $3.89 a gallon in July, up from an average of $3.20 a gallon in 2006.
But now, demand for dairy products is stalling amid a global economic slowdown and credit crisis, even as supplies have increased. The result is a glut of milk — and its assorted byproducts, like milk powder, butter and whey proteins — that has led to a precipitous drop in prices.
The price of powdered skim milk, used in infant formula, dairy products and processed foods, has fallen to roughly 80 cents a pound today from about $2.20 in mid-2007. Other dairy products have declined as well. Whole milk at grocers has not declined as rapidly as wholesale powdered milk, but it has dropped to $3.67 a gallon, down nearly 6 percent from the peak.
While consumers are undoubtedly pleased by the lower prices, dairy farmers are struggling.
“Everything was going great,” said Joaquin Contente, a farmer in Hanford, Calif. “The product was moving. Then this financial crisis came along and shoot, the whole thing came to a halt.”
Logic might suggest that dairy farmers would simply sell some of their cows to a hamburger plant to cut the milk supply and raise prices. Indeed, the dairy industry has a cooperative effort under way to cull the herd.
But farmers are reluctant to do that if they expect a demand recovery, since rebuilding a herd can take years. The culling program is relatively small, and at least so far, most farmers are holding onto their cows.
“People don’t want to panic,” said Brian W. Gould, an agricultural economist at the University of Wisconsin, adding that farmers were receiving $20 for 100 pounds of raw milk just a few months ago. The price is expected to drop to about $14 for 100 pounds of raw milk in coming months. “It is unclear as to whether this will be a short-term or long-term market correction. It all depends on how long it takes the U.S. economy to recover,” he said.
Other agricultural sectors are also struggling with a slowdown in demand from foreign buyers because of the global recession and an increase in the value of the dollar, which has made American exports more expensive abroad. The Agriculture Department is expecting steep declines in exports of corn, wheat, soybeans and pork.
But while the government has price-support programs for about two dozen agricultural products, so far milk powder is the only commodity that has sunk low enough to start the flow of government dollars. Some expect that taxpayers will soon be buying blocks of cheese, too, given the plunging price.
Government price supports provide a price floor for agricultural products as a way of keeping farmers afloat during hard times and ensuring an adequate food supply.
The Agriculture Department has committed to buying 111.6 million pounds of milk powder at 80 cents a pound, for roughly $91 million, which includes some handling fees. Before October, the last time the government bought milk powder was in June 2006, and it was eventually used in government nutrition programs, given away as animal feed or sold on the open market, said Steve Gill, director of commodity operations for the department.
He said the agency has not decided what to do with the cache of milk powder in California.
Some critics of farm subsidies argue that price support programs are antiquated and allow farmers to continue producing even when the economics make no sense, as taxpayers will always buy up the excess production.
“They don’t want to downsize or respond to the market signal. They want to keep producing,” said Kenneth Cook, president of the Environmental Working Group, a Washington research organization that has long been critical of the government’s farm policy. “Once you get in a jam like this, it becomes our collective problem.”
The government purchases come after what the department calls a “euphoric period of record prices and booming exports” for the American dairy industry. Since 2003, dairy exports have increased from $1 billion a year to about $4 billion this year, with exports of powdered milk increasing sixfold during that period. Milk powder is an attractive product to export because it does not require refrigeration, has a long shelf life and can be used to make numerous beverages and foods.
Much of the increase was caused by increased demand in developing countries, where a growing middle class replaced starch in their diets with protein sources like meat and dairy products. Some Asian countries had little history of eating dairy products but were introduced to milk and mild cheeses by government nutrition programs or by restaurant chains like McDonald’s and Pizza Hut.
In China, for instance, per-person dairy consumption nearly doubled in just five years, to 63 pounds in 2007 from 33 pounds in 2002 (though it remains far below the per-capita consumption in the United States of about 580 pounds), according to the U.S. Dairy Export Council. The growth translates into the need for nearly 40 billion pounds more milk each year, roughly equal to California’s annual milk production.
In addition to the increased demand, exports from the American dairy industry benefited from a relatively weak dollar and tight global supplies. For instance, droughts reduced milk production in New Zealand and Australia, two major dairy exporters, allowing American suppliers to fill the gaps.
American dairy shipments soared to places like Algeria, Bangladesh, Indonesia and the Philippines. The biggest market, however, was Mexico, where imports from America increased to $853 million in 2007 from $258 million in 2003, according to the Agriculture Department.
But now, global demand has stagnated amid high prices and economic uncertainty just as the dollar has strengthened and milk production in New Zealand and, to a lesser extent, Australia, has bounced back. The continuing scandal involving melamine contamination of dairy products in China is expected to further diminish demand.
“In some of these countries where dairy hasn’t been a big part of their diet, this is where we are seeing people pull back,” said Deborah Perkins, managing director of the food and agribusiness research group at Rabobank International.
Several dairy exporters say they remain bullish on their long-term prospects, given the barely tapped markets in the developing world. Until then, dairy farmers say, they are braced for a period of low milk prices even as feed and other costs remain relatively high.
Arthur Machado, who milks cows on the outskirts of Fresno, said he sold more than half his herd in 2006, the last time prices collapsed. Now, with prices plummeting again, he said he is trying to sell the remainder of his herd to another dairy farmer.
“The business isn’t what it was in the ’70s, when I started,” he said. “There are not enough peaks to offset the valleys anymore.”
Once the herd is sold, Mr. Machado said, he plans to focus on less volatile commodities, like almonds and grapes. But it is not so easy to get out of the dairy business. Just as with automobiles and homes, there is simply too much inventory on the dairy cow market.
“Right now, there are no buyers,” he said. “When it’s on the upswing, we’ll sell. Until then, we’ll struggle through.”
Closet Keynesians Emerge
By: Gary North, Mises on Money
One of the best tests for determining whether a financial columnist or a professional economist is a Keynesian is to examine his views on personal spending. If he favors an increase of personal spending as a means to stimulate the economy, he is a Keynesian. He may not call himself a Keynesian, but he is a Keynesian.
John Maynard Keynes believed that an economy could become a self-reinforcing economic depression because the general public saved too much money. He believed that the key to economic growth is not productivity, but rather spending. He did not believe that the price system is a reliable system of resource allocation. For example, he did not believe that the interest rate is a price that allocates investments and savings. He believed that it is possible that many people in the economy can save money by hoarding currency – not depositing it in a bank, where it is immediately lent. This, he said, undermined the interest rate's role in equating savings and investments.
First, this observation is irrelevant in a world in which almost all currency is either deposited in a bank account or sent abroad, where it functions as a currency for black markets.
Second, hoarding currency pressures sellers to reduce prices. This acts as an incentive for people to buy more goods and services with their currency. The supposed excess of supply then disappears. Holding currency is a means of thrift. This thrift produces a positive result: lower prices and therefore greater purchasing power for the currency. This process was disparaged by Keynes as a liquidity trap. It was no trap. It was a benefit for holders of currency.
Keynes and his disciples had a solution to the liquidity trap: increased government spending and monetary inflation. This debases the currency, forcing hoarders to spend. The process by which this was accomplished, worldwide, was World War II. In the name of the war effort, every nation authorized its central bank to inflate.
This is what they are all doing again, in our Keynesian world, in which hardly anyone in the West hoards currency. Central banks are inflating. Governments are running huge deficits.
GOVERNMENT SPENDING
The Keynesian assumes that in a recession, the world is no longer suffering from scarcity. He believes that there are no remaining opportunities for profit in serving future consumers. The Keynesian believes that the central government must intervene and spend money in order to stimulate the economy. Expected private demand for future goods is insufficient to persuade entrepreneurs to invest money to meet this demand. The expected return on capital is zero. The Keynesian economist believes that the government gets money from lenders, and that by spending this money, the government can increase demand by consumers. This increased demand stimulates the economy. There will be economic growth, and therefore the government will reap a positive rate of return on its investments. This is what politicians are promising. "The government will be repaid." It is a fantasy, but even if it comes true, this will benefit the government, not taxpayers.
Keynes was quite clear on one point: it does not matter what the government invests in. It does not matter if the government spends every dime on building pyramids. Or the government can bury paper money in jars, and hide these jars around the community. This way, individuals will have an incentive to go out and dig up jars of money, and therefore this will stimulate the economy. You might think I am exaggerating here, but this is specifically what Keynes taught in his supposedly magnum opus, The General Theory of Employment, Interest, and Money (1936).
If someone believes anything as silly as the Keynesian economic system, he is likely to believe that consumer spending, in and of itself, will create such demand that the economy will be reversed from its recessionary condition. He believes that if he can just persuade enough people to go out and spend money, no matter what they spend it on, the economy will revive.
The problem is, the only way that people can go out and spend money is to spend money that would have been used for saving and investment in producer goods. Or else the individual can borrow money to buy consumer goods, therefore redirecting save the money from an investment to consumption. One of the reasons consumers are so successful in reallocating money from investment to consumption is that they are willing to pay preposterously high rates of interest in order to continue spending. An entrepreneur is not likely to pay 18% or 24% per annum in order to invest in some project. A consumer is quite likely to do this, and millions of consumers do this every week. They pay outrageous rates of interest in order to buy goods that are worth half of what they paid retail if they try to sell these goods in the used goods market a month later. They are so present-oriented that they do not care much about the future. They want immediate consumption.
You might think that relying on consumers to bail out the economy is to place one's hope in people with extremely poor economic judgment. These people are present-oriented. They are burdened with what Ludwig von Mises called high time preference.
The Keynesian believes that the key to long-term economic prosperity is spending, and if this requires deficit spending, so be it. It does not matter to the Keynesian whether a consumer with poor economic judgment goes out and spends his money, or whether a government bureaucrat with even worse economic judgment goes out and spends the government's money on poorly conceived economic projects. The Keynesian is convinced that both of these individuals, despite their poor economic judgment, are capable of producing economic prosperity simply by spending money on what ever they find amusing.
Former Senator Fred Thompson has produced a low-budget guerrilla video parodying Keynesian economics.
Someone without an extensive understanding of the actual writings of Keynesian economists might find Thompson's performance absurd. He would conclude that no one in his right mind would believe such nonsense. This conclusion is incorrect. Academic economists believe it, and so do the majority of people elected to Congress. They are going to prove just how much they believe in this theory over the next year. They have done so since September 7, and they are going to accelerate the amount of deficit spending in order to get the economy rolling again. This is straight Keynesian theory.
Keynes did not believe that individuals would respond favorably to encouragement that they spend more money during a recession or a depression. This is why he believed that the national government must intervene and run a deficit in order to stimulate the economy. He believed, correctly, that politicians and bureaucrats have much less restraint on spending other people's money than individuals have with respect to their own money. This is why Keynes appealed to politicians to increase deficits in order to increase spending.
RECOVERING KEYNESIANS FALL OFF THE WAGON
All around us, there are individuals who once proclaimed something remotely resembling economic sanity who are now proclaiming modified Keynesian doctrine. They are "spend now" Keynesians – not the real thing. One of the most flagrant examples of a turnaround in this regard is a video editorial by Ben Stein on the CBS news program, Sunday Morning. He said:
We are in a recession. People are being laid off right and left. Homes are being foreclosed in huge numbers. Detroit is teetering on the brink of disaster. There is a wild, palpable fear running amok in the nation. . . .
People are planning not to spend. They're not spending. This is not a good idea.
For those of us who still have our jobs, who still have a few nickels to rub together, we should be buying like mad.
Stein then cited the source of his seemingly revolutionary idea: John Maynard Keynes.
Look, we're faced with John Maynard Keynes called "the paradox of thrift." If everyone is cheap and thrifty and doesn't spend, the economy slumps and everyone is poorer, not richer.
This really isn't rocket science. It's part of what caused the Great Depression.
No, this was not what caused the Great Depression. Federal Reserve expansionary monetary policy in the 1924–29 period caused it. This was intensified by nations' passing tariffs in 1930 that reduced world trade and shrank the division of labor. On this point, see Ben Stein's high school teacher in Ferris Bueller's Day Off. The script writer had it right. Stein does not.
So, for those of us who can still pay our mortgages, let's tip the doorman double, get cashmere sweaters and flat screen TV's for our kids, and trips to Palm Springs for our wives.
If we as a group (those of us who are still employed and have some money put aside) buy a lot this season, we could just kick-start this economy into a higher gear.
Stein distinguishes himself from the common-variety Keynesians, who in fact are the real thing.
That would be a lot faster than the public works projects that Mr. Obama is talking about. We, our own little selves, could keep big retail chains in business and provide a lot of employment for sales clerks, just for starters. . . .
If we can afford it, now is not the time to zip up the wallet. Now is the time to get out there and buy something and keep our fellow Americans employed and our beloved animals fed. If we wait for the bureaucrats to do it, it will take too darned long. If we do it ourselves, it will get done.
There was a time when Stein was a great defender of personal thrift. I clearly remember an article he wrote, probably 20 years ago, about how much he saved every month. He was forced to do this, he said, because he derived his income from selling articles and appearing as a character actor in movies. He had no way of predicting what his income would be in the future, so he said he was almost maniacal about saving money each month, just in case his income would fall in subsequent months. He published this personal testimony as an article in the tabloid, The American Spectator.
Stein was also a great proponent of investing in no-load stock mutual funds. For years, he insisted that the best thing that a person could do to save for the future was to buy a no-load mutual stock funds in a stock market indexes. He continued to recommend this through the year 2007. In another recent video editorial, he admitted that this advice had been wrong, and that anyone who followed it had lost a great deal of money. His only consolation was that professional investors had also lost a lot of money, and they had been paid far more money that he ever was.
His most recent editorial, on going out and spending money, is a consistent extension of his errors in the past. He never understood that the United States stock market is a gigantic Ponzi scheme. He did not understand that the increase in stock prices from 1982 to the year 2000 was based on a false premise, namely, that increased American productivity was sufficient to enable companies to repay investors handsomely in the future.
He ignored the obvious: dividends were generally low for the entire period. An individual could barely pay the supposedly low fees of their no-load mutual funds with the dividends he received. Profits were low for the entire period, leading to a very high price/earnings ratio of 40 in 2000 – 200 for the Nasdaq. It should have been obvious from this that the system was a Ponzi scheme. It relied on a greater fool buying your stocks at a higher price in the future. Those who got in early would profit; those who got in late would lose their shirts.
From March of 2000, this Ponzi scheme began to self-destruct. The stock indexes peaked in 2000, and if you discount for price inflation, all of the indexes are lower today than they were in March of 2000. That was the month in which I told my subscribers to get out of the stock market and stay out. It was obvious to me that the peak had taken place. It was clear to me that a 200 to 1 price earnings ratio for the NASDAQ could not be sustained. It was going to crash. It did: by 80%.
But the perma-bulls would not change their song and dance. They kept telling the lemmings to buy and hold an index fund of the United States stocks. This was suicidal advice in 2000, and it was even more suicidal advice in 2007. But the lemmings liked the story, so Keynesians kept preaching it, along with the Supply-Siders and Chicago School economists. Ponzi schemes eventually break down. This is why the stock market is down today.
Every system of investing that does not rely on the actual increase in productivity of the businesses being invested in to pay off all debts, whether bonds, certificates of deposit, or retirement dreams of long-term holders of the company's stock, is a Ponzi scheme. It can be a government Ponzi scheme, such as Social Security or Medicare. It can be a Ponzi scheme by a state or local government, which promises enormous retirement benefits to state employees. It can also be a no-load mutual stock index fund. Ponzi schemes all have the same thing in common: future productivity will not repay the investors with sufficient money of constant or increasing purchasing power for the investors to achieve their goals. The investors have retirement goals which will be impossible to achieve by means of the investment strategies recommended by the experts. Investors believe the nonsense, and apparently their advisers believe it, too. Politicians get elected in terms of this nonsense. But it is nonetheless nonsense.
WEALTH THROUGH THRIFT
To tell American consumers that they can improve the productivity of the economy merely by going out and spending money is Keynesianism. It is utter nonsense. The only way to increase the productivity of the economy is through thrift. The money generated by this thrift must then be invested wisely, in terms of future conditions, so that the company or fund making the investment can reap a profit. If economy cannot do this through increased productivity, it will eventually find itself incapable of raising additional capital. Without additional capital, there can be no increase in productivity.
Economists are supposed to know this, but ever since the Great Depression and the publication of Keynes's magnum opus, most economists have not believed this. They believe that we really can spend ourselves into prosperity, either through personal spending or through government spending. The Keynesian system is opposed to investing during recessions.
I can remember the slogan that was promoted by the government in 1958: "you auto buy now." It was preposterous then, and it is preposterous now. The government today is lending money to Chrysler and General Motors because American consumers are not buying the output of those two companies. The government understands that it cannot afford to give every citizen enough money to go out and buy a new General Motors or Chrysler car, so it uses tax dollars to offer below-market loans to companies that would otherwise go bankrupt. This is the government's alternative to relying on the general public to go out and spend money in a way approved by politicians.
The fact that professional economists have returned to Keynesianism, in the words of the Bible, like a dog to its vomit, should not surprise anyone. Professional economists cannot shake their faith in big government. They cannot shake their faith in deficit spending. They also cannot shake their faith in the power of government to increase productivity merely by spending money on boondoggles. They believe in government, and in government boondoggles, with the same kind of commitment that theologians in the Middle Ages believed in scholastic theology. They cannot think outside the box. The box is labeled: "Spend!"
The government is determined to thwart all attempts of individuals to save more money and therefore increase productivity. It is committed to the idea that the individual is unreliable in his commitment to deficit spending. There was even a slight uptick in the second quarter of 2008 in household savings. It rose by a little under 3% per annum. This was a reversal of recent years, when most American households did not increase savings at all. In fact, they actually borrowed a in order to maintain their spending habits.
Politicians and government economists look at this slight uptick in the rate of savings, and they are horrified. They want the government to intervene immediately, so as to counteract these economically rational decisions of American consumers to reduce their consumption and increase the rate of savings. No matter how little this increased rate of savings is, Keynesian economists and politicians are determined to offset this rate of savings by increasing government spending.
Where will the government get the money? Through taxes, through investors in government bonds, and through debt sold to the Federal Reserve system, which will create the money out of nothing. Despite the fact that Treasury bill rates actually reached zero this month, government economists and academic economists generally say that the government should run massive deficits in order to spend this money into circulation. Despite the fact that investors are getting nothing for their money, this is not enough to persuade government economists and politicians to let the economy alone. They want the government to spend even more.
Supposedly, thrift destroys wealth. "What we need is more spending." The government is going to give us more spending. It is going to undermine investments in the private sector. It is going to move primary spending away from investing in into increased personal spending.
The result is going to be accelerating price inflation. While professional economists are wringing their hands in fear over price deflation, the Federal Reserve System has been increasing the monetary base. The government is waiting for banks to start winning the money to the general public instead of depositing the money with the Federal Reserve System. With the Federal funds rate target at zero, banks will soon start lending again.
The money supply will increase, prices will increase, and we will be back in the clutches of price inflation by the end of 2009. From that point on, price inflation is going to be the major problem in American economic life. The Keynesians will get their wish: spending without investing. There will be more money chasing a restricted supply of goods and services. The supply of goods and services will be restricted precisely because the government has intervened in the credit markets in order to stimulate consumption.
This is why the recession is going to last much longer than normal. It is going to be an inflationary recession. It is going to result in what was once called stagflation. This is what Keynesianism always produces. It is hostile to thrift; it is hostile to investing; and it is favorable to government deficits. The productivity that is needed to get us out of this recession will be restricted by policies of government spending.
The lemmings will not be convinced to spend more money until they see the prices are rising so fast that if they do not get rid of the money, they will be losers. That day is coming. It is not here today. This is why you can still buy bargains. It is still a buyer's market.
CONCLUSION
Save now. Buy later. Buy assets that will rise in price because of increased monetary inflation.
December 31, 2008
Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.
Roubini on 2009....
“Will Banks and Financial Markets Recover in 2009?”
12/30/08
NEW YORK - Global financial markets in 2008 experienced their worst crisis since the Great Depression of the 1930's. Major financial institutions went bust; others were bought up on the cheap or survived only after major bailouts. Global stock markets fell by more than 50%; interest-rate spreads skyrocketed; a severe liquidity and credit crunch appeared; and many emerging-market economies staggered to the International Monetary Fund for help.
So what lies ahead in 2009? Is the worst behind us or ahead of us? To answer these questions, we must understand that a vicious circle of economic contraction and worsening financial conditions is underway.
The United States will certainly experience its worst recession in decades, a deep and protracted contraction lasting about 24 months through the end of 2009. Moreover, the entire global economy will contract. There will be recession in the euro zone, the United Kingdom, Continental Europe, Canada, Japan, and the other advanced economies. There is also a risk of a hard landing for emerging-market economies, as trade, financial, and currency links transmit real and financial shocks to them.
In the advanced economies, recession had brought back earlier in 2008 fears of 1970's-style stagflation (a combination of economic stagnation and inflation). But, with aggregate demand falling below growing aggregate supply, slack goods markets will lead to lower inflation as firms' pricing power is restrained. Likewise, rising unemployment will control labor costs and wage growth. These factors, combined with sharply falling commodity prices, will cause inflation in advanced economies to ease toward the 1% level, raising concerns about deflation, not stagflation.
Deflation is dangerous as it leads to a liquidity trap: nominal policy rates cannot fall below zero, so monetary policy becomes ineffective. Falling prices mean that the real cost of capital is high and the real value of nominal debts rise, leading to further declines in consumption and investment - and thus setting in motion a vicious circle in which incomes and jobs are squeezed further, aggravating the fall in demand and prices.
As traditional monetary policy becomes ineffective, other unorthodox policies will continue to be used: policies to bail out investors, financial institutions, and borrowers; massive provision of liquidity to banks in order to ease the credit crunch; and even more radical actions to reduce long-term interest rates on government bonds and narrow the spread between market rates and government bonds.
Today's global crisis was triggered by the collapse of the US housing bubble, but it was not caused by it. America's credit excesses were in residential mortgages, commercial mortgages, credit cards, auto loans, and student loans. There was also excess in the securitized products that converted these debts into toxic financial derivatives; in borrowing by local governments; in financing for leveraged buyouts that should never have occurred; in corporate bonds that will now suffer massive losses in a surge of defaults; in the dangerous and unregulated credit default swap market.
Moreover, these pathologies were not confined to the US. There were housing bubbles in many other countries, fueled by excessive cheap lending that did not reflect underlying risks. There was also a commodity bubble and a private equity and hedge funds bubble. Indeed, we now see the demise of the shadow banking system, the complex of non-bank financial institutions that looked like banks as they borrowed short term and in liquid ways, leveraged a lot, and invested in longer term and illiquid ways.
As a result, the biggest asset and credit bubble in human history is now going bust, with overall credit losses likely to be close to a staggering $2 trillion. Thus, unless governments rapidly recapitalize financial institutions, the credit crunch will become even more severe as losses mount faster than recapitalization and banks are forced to contract credit and lending.
Equity prices and other risky assets have fallen sharply from their peaks of late 2007, but there are still significant downside risks. An emerging consensus suggests that the prices of many risky assets - including equities - have fallen so much that we are at the bottom and a rapid recovery will occur.
But the worst is still ahead of us. In the next few months, the macroeconomic news and earnings/profits reports from around the world will be much worse than expected, putting further downward pressure on prices of risky assets, because equity analysts are still deluding themselves that the economic contraction will be mild and short.
While the risk of a total systemic financial meltdown has been reduced by the actions of the G-7 and other economies to backstop their financial systems, severe vulnerabilities remain. The credit crunch will get worse; deleveraging will continue, as hedge funds and other leveraged players are forced to sell assets into illiquid and distressed markets, thus causing more price falls and driving more insolvent financial institutions out of business. A few emerging-market economies will certainly enter a full-blown financial crisis.
So 2009 will be a painful year of global recession and further financial stresses, losses, and bankruptcies. Only aggressive, coordinated, and effective policy actions by advanced and emerging-market countries can ensure that the global economy recovers in 2010, rather than entering a more protracted period of economic stagnation.
latest Roubini video...
12/26/08
Roubini, O'Neill See `Severe' U.S., EU, Japan Recessions New York University Professor Nouriel Roubini and Goldman Sachs Group Inc. Chief Economist Jim O'Neill talk with Bloomberg's Mark Barton about the outlook for the global economy, interest rates and financial markets in 2009.
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vd4onF1NCaHE.asf
wouldn't mind seeing $900 before end...
of year - and silver above $11 and holding - would ease the pain of 2008 a little bit.
Gold May Rise for Fourth Week as Investors Seek Store of Value
By Pham-Duy Nguyen [last name pronounced - "nnnn..goy..nnnnnnneemmeennnnnn" - lol]
Dec. 29 (Bloomberg) -- Gold may rise for the fourth straight week on speculation the recession will deepen in 2009, boosting the appeal of the precious metal as a store of value.
Eighteen of 25 traders, investors and analysts surveyed from Mumbai to Chicago from Dec. 24 through Dec. 26 advised buying gold, which rose 4 percent last week to $871.20 an ounce in New York. Four said to sell, and three were neutral.
Gold has outperformed stocks and most commodities this year as simultaneous recessions in the U.S., Japan and Europe reduced demand for raw materials and triggered a decline in asset values. The metal reached a record $1,033.90 in March and is headed for an eighth-straight annual gain.
Most analysts surveyed on Dec. 18 and Dec. 19 anticipated gold’s gains last week. The survey has forecast prices accurately in 144 of 243 weeks, or 59 percent of the time.
looks like we go to $950...
to test resistance.
INFLATION IMITATES THE OPOSSUM
Posted On: Monday, December 01, 2008
Author: Monty Guild & Tony Danaher
http://www.guildinvestment.com/ARhome.asp?VAfg=1&RQ=EDL,1&AR_T=1&GID=&linkid=324&T_ARID=287
The Sunday, November 30th Los Angeles Times’ front page headline boldly reads “BAILOUT: PAY NOW, WORRY LATER”
Those five words say it all. As we have expected for years, the crisis has developed. As we have assured readers for years, no major bank will be allowed to fail. Instead, after $8.5 Trillion in commitments by the U.S. and other governments, we now find ourselves about one third of the way through the crisis. We anticipate that the final bill worldwide will be between $20 and $40 trillion. Wow!
THE CURRENT BIG MISTAKE…assuming that Deflation lies ahead
There is a mistake currently being made by many short term oriented economists and market strategists. In the current case, the mistake is extrapolating the short term decline in the rate of inflation (due in part to lower oil prices) into the future, as if all prices will continue to fall. Many analysts have concluded that the problem ahead of us is deflation.
For over four decades, we have analyzed economic models, and in that period we have made many economic models of our own projecting economic events. One thing has become very obvious in our analysis. The most common mistake in economic analysis and modeling future events, relates to the human tendency to extrapolate the current trend into the future. I will go further, and say this does not only apply to economic modeling, but to all human predictive activity. There exists a human tendency to extrapolate the current trends into the future.
In our opinion, this is a patently incorrect analysis. In it most rudimentary form, such analysis is simply assuming that the recent past will repeat itself…and then grabbing the select data points, to support this point of view. We do not mean to impugn the work of a few very competent economists and analysts, who hold this view due to economic trends that they foresee. In our opinion, the majority of those subscribing to this view are simply extrapolating the recent past into the future.
OUR VIEW…One should ignore the recent past.
1. Inflation is the big problem looming in the future. Deflation will not be the problem.
2. The recent past has witnessed a brutal decline in global stocks. Our outlook for the coming days (and possibly weeks) is a continuation of the rally off of the October/November lows in world stock markets. It would not surprise us to see a stock market rally of one third or more of the recent decline. While a big rally continues to be a possibility, market volatility is at all time highs…so expect a wild ride.
3. Gold and commodities have been under pressure. In our opinion, gold is a good long term purchase on any sizeable decline. We believe that most other metals commodities will start to rally by mid 2009. The rally in all of these areas will be large.
4. Oil prices are under pressure, and will likely fall below $50 per barrel, but oil will not fall in price for a prolonged period of time. In our opinion, oil prices will bottom, probably in the $40’s per barrel and begin to rise.
5. In our opinion, the big long term risk is being short commodities. The decline in some commodities prices may last longer, but we are much closer to the end of that decline, than to the beginning.
6. The U.S. dollar has continued to hold its recent rally, even after the announcement of astounding amounts of capital that will be invested in, guaranteed, or loaned to financial enterprises. Thus far, the amounts total about $8.5 trillion globally. We anticipate that the bailout is only about one third completed. We believe that before it is over, the U.S. will be forced to increase their share of the pledges to about $25 trillion. Longer term, this spells disaster for the value of the U.S. dollar.
7. The world economy continues to slip deeper into negative growth, and the economic news will continue to get worse for months. As our readers know, we have believed that the U.S. recession/depression began in late 2007 or early 2008. Today, our views were corroborated by the prestigious National Bureau of Economic Research. They state that the recession began in December 2007. Their data is completely contrary to the erroneous data which was presented by the U.S. Government before the presidential election.
8. We continue to hold the view that the economies of the U.S. and of the world, will be under pressure throughout 2009, and into 2010.
WHAT TO DO?
Most stock markets are base-building and searching for a bottom. Some markets have begun a rally. Enjoy the stock market rallies worldwide, but beware of volatility and keep an eye on the exit.
Remember that commodities and inflation are not dead; they are only feigning death, much like a marsupial known in North America as an opossum. As soon as you turn your back, the opossum jumps up and runs away. In our opinion, inflation itself may be playing dead, imitating the opossum.
Thanks for listening.
12.23.2008 - Rogers and Faber agree on Inflation
[whether we see inflation or deflatin is potentially critical to the price of gold - with high inflation ther is little doubt that gold will go up - with deflation the chances are not as high - that's why will continue to post again and again on the arguments for inflation or deflation -with skyrocketing inflation we will likely see skyrocketing gold prices]
http://jimrogers-investments.blogspot.com/
Marc Faber another veteran investor like Jim Rogers is also predicing inflation and is very critical of the FED.
"Inflation is the next danger, as once a recovery takes place prices will rise and the Fed will find it hard to push its near-zero rates above inflation", Marc Faber said.
Jim is predicting an "inflationary holocaust" because of the money printing all over the world and especially in the US.
Inflation Definition
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Inflation can also be described as a decline in the real value of money—a loss of purchasing power in the medium of exchange which is also the monetary unit of account. When the general price level rises, each unit of currency buys fewer goods and services. A chief measure of price inflation is the inflation rate, which is the percentage change in a price index over time. in Wikipedia
More 2009 predictions - They called it right...
They Called It Right
http://www.kiplinger.com/printstory.php?pid=15121
These eight experts tried to warn Wall Street about the storm. And they see more bad tidings in 2009.
By Elizabeth Ody
December 22, 2008
Who saw the financial meltdown of 2008 coming? Why the bears, of course. Kiplinger's Personal Finance went back to see which investors, analysts and academics made the right predictions about the market and economy in 2008 and asked each for their 2009 outlook. Although some, like Jeremy Grantham, see hope for 2009, these Cassandras remain a dour bunch. As for us, we expect that the recession will end in mid-2009 and that stocks could gain 5% to 8% for the year (see Outlook 2009).
NOURIEL ROUBINI, chairman of RGE Monitor and professor at New York University
WHAT HE SAID: There is going to be a recession next year ... The bursting of the housing bubble -- we have not seen it yet -- is going to lead to broader systemic banking problems. It is going to start with the subprime lenders ... and then it is going to be transmitted to other banks and financial institutions all over the country. -- September 7, 2006, speech to the International Monetary Fund
HIS PREDICTION FOR 2009: I expect that the recession will be very severe and that it won't be over before the end of 2009. And even though we might technically be out of recession in 2010, annual growth could be just 1.0% to 1.5% for several years if the credit crunch remains severe. I think there is a further 15% to 20% downside risk for global and U.S. stocks, and a further 15% to 20% downside risk for commodity prices. So 2009 will be a year of recession and deflation.
PETER SCHIFF, president of Euro Pacific Capital
WHAT HE SAID: This is going to be an enormous credit crunch. The party is over for the United States ... [Subprime] is not a tiny [problem], and it's not just subprime -- it's the entire mortgage market. -- August 18, 2007, Fox News
HIS PREDICTION FOR 2009: The dollar is going to resume its fall, leading to a resurgence in the bull market in commodities. That will pierce the bubble in the bond market, causing interest rates to go up. So we're going to be in a depressionary environment, but with rising prices and rising interest rates. Our economy will be a mess for years and years to come.
MEREDITH WHITNEY, analyst at Oppenheimer & Co.
WHAT SHE SAID: We believe that over the near term, Citigroup will need to raise over $30 billion in capital through either asset sales, a dividend cut, a capital raise or a combination thereof. We believe such a catalyst will pressure the stock significantly lower. -- October 31, 2007, research note [Citigroup announced a 41% dividend cut on January 15.]
HER PREDICTION FOR 2009: We believe we are now entering a new era in the financial landscape that will be characterized by expanded forced consumer deleveraging, with a pronounced downshift in consumer spending ... Specific to the credit-card industry, we believe that well over $2 trillion of lines [of credit] will be pulled over the next 18 months. -- November 30, 2008, research note
DAVID TICE, chief equity strategist for bear markets, Federated Investors, and former manager of what is now called Federated Prudent Bear fund
WHAT HE SAID: Corporate profits, household incomes, asset prices and economic performance have all evolved to the point of acute dependency on ongoing leveraged speculation and rampant credit inflation ... Mortgage finance is tightening, with negative portents for inflated housing prices, the overleveraged consumer, scores of exposed debt instruments and financial institutions, and the highly maladjusted U.S. bubble economy. -- March 2007, letter to shareholders
HIS PREDICTION FOR 2009: The dollar will decline, and it's very possible that inflation will pick up. The S&P 500 index could easily fall to 450 or so [it closed December 19 at 887.88]. This will be a longer-term decline -- you'll see fits and starts and significant rallies, which will be selling opportunities. But it's likely going to take four to five to ten years. Investors should be selling equities and conserving cash. I think gold represents a phenomenal opportunity right now.
JEREMY GRANTHAM, chairman of Grantham, Mayo, Van Otterloo & Co.
WHAT HE SAID: In five years, I expect that at least one major 'bank' (broadly defined) will have failed ... I have often been bearish about the U.S. equity markets in the last 12 years ... but I think it is fair to say that my language has almost never been this dire. The feeling I have today is that of watching a very slow-motion train wreck. -- July 2007, quarterly letter
HIS PREDICTION FOR 2009: I think there's a two-to-one chance that the market will go to new lows in 2009. A further 25% to 30% drop is probable. But that will be setting up the basis for a multiyear rally, in which the market could double, triple or quadruple. [If you invest in stocks today], you have a reasonable chance of making 7.25% [a year], plus inflation, over the next seven years.
ROBERT SHILLER, professor at Yale University
WHAT HE SAID: The home-price bubble feels like the stock-market mania in the fall of 1999, just before the stock bubble burst in early 2000, with all the hype, herd investing and absolute confidence in the inevitability of continuing price appreciation. -- June 20, 2005, Barron's
HIS PREDICTION FOR 2009: The present situation has many similarities to the Great Depression. The Great Depression was a self-fulfilling prophecy-there was no reason for it other than that people were getting worried, and right now everyone's worried about what bad times we're in. We do have better monetary policy and a government that's clearer on its fiscal policy, so I'm hopeful. [Fed Chairman] Ben Bernanke claims he can stop deflation. Bernanke will be tested.
BOB RODRIGUEZ & TOM ATTEBERRY, chief executive officer and partner, respectively, First Pacific Advisors
WHAT THEY SAID: Fear of a general contagion from the subprime fallout has worried the financial markets and especially the housing sector. So far, the general belief is that it will be contained ... We are not so sure ... [The financial-service sector's] profitability is at risk ... The common thread that is flowing through the housing market, private equity, hedge funds and other aggressive forms of investing is the absence of fear. They are all using elevated levels of financial leverage ... there will be a high price to be paid for excess. -- March 31, 2007, market commentary
THEIR PREDICTION FOR 2009: Projections of economic growth have been far too optimistic. This is a multiple-year problem. The problem lies in the fact that the primary driver of economic activity has been the consumer, and this person needs to rehabilitate his balance sheet. Corporate earnings in 2009 will be lower than people expect, and margins will decline. The upturn won't come until 2010, and when it does, it will look very sluggish and lethargic.
MARK KIESEL, portfolio manager at Pimco
WHAT HE SAID: I believe the U.S. housing market is set to cool given the current level of prices and fundamental trends. Recent price gains have likely come primarily from rising speculation and "creative financing" because affordability is declining and inventories are rising ... With a softening housing market, we should expect tighter lending standards, a moderation in the willingness to take risk, a slowdown in the pace of asset price appreciation, less-liquid markets, and rising volatility in financial markets. -- June 2006, market commentary [Home prices peaked in July 2006, according to the S&P/Case-Shiller 20-city home price index.]
HIS PREDICTION FOR 2009: The consumer went through a 20-year leveraging-up period. Now we're going through the Great Unwind, and that takes time. We'll probably stay in a recession until the second half of 2009, but even as we come out, it won't feel good. This will be an extended period of subpar growth. Credit is the blood that flows through the patient, and the patient has had a heart attack. It's too soon to buy stocks and too soon to buy a house. It won't be time to buy until the credit markets have healed.
2009 around the globe outlook...
from Roubini:
North America
U.S. Economy Slipped into Recession in December 2007. How Long Will It Last?
NBER: “U.S. economy entered a recession in Dec 2007 marking the end of the 73 months expansion that began in Nov 2001 (previous expansion of the 1990s lasted 120 months)”
Fed: GDP growth: 0.0-0.3% (2008) and -0.2 to -1.1% (2009). Unemployment rate: 6.3-6.5% (2008) and 7.1-7.6% (2009); OECD: Growth at +0.4% in 2008 and -1.2% in 2009; IMF: Growth at 1.4% in 2008, -0.7% in 2009;
Citi: U.S. economy to grow 1.3% in 2008 and to contract 1.5% in 2009; Morgan Stanley: GDP will contract 6% in Q4 and 3.25% in Q1; 2009: -1.3%; Deutsche Bank: U.S. to grow 1.2% in 2008 and contract 2% in 2009; consistent with an 18 month recession
Canada Has Recoupled: But Will It Fare Better Than the U.S.?
Canada faces a precarious political and economic situation in 2009 with the country set to face its first annual growth contraction and current account deficit in more than a decade. The government barely avoided a no-confidence vote in early December and the country faces a growth contraction in 2009, as faltering domestic demand adds to weak exports. Although Canada's internal finances have remained strong, Canada is unable to escape the severe downturn in the U.S. and the global economy
Canada’s housing market is now slowing, putting pressure on its banks, though both may avoid the collapse faced by the United States. With the US absorbing over 70% of Canada’s exports and the prices of Canada’s commodity exports slumping, Canadians have experienced a major decline in their terms of trade and net income and wealth
Latin America
2009 Economic Outlook for Latin America
Vikram Haksar and Robert Rennhack wrote about the Economic Outlook for Latin America in 2009, which is a summary of their IMF Latin American and the Caribbean Economic Outlook. Among other conclusions, the IMF argues that the region should grow around 3 percent next year
2009 Economic Slowdown in Argentina
The deteriorating external environment and increased economic uncertainty will continue to haunt Argentina. Indeed, while fairly in line with consensus, our 2.6% GDP growth forecast for next year (which already implies technical recession Q4 2008-Q1 2009) could still prove optimistic. Stress-testing our commodity and growth scenarios for next year (0.0% GDP growth and commodities back to 2006-07 average), the financing gap could widen by an additional USD2.5bn
2009 Economic Outlook for Brazil
As the final quarter of the year has important implications for next year’s statistical carryover (just 0.8% in our numbers), we also believe that 2009 growth expectations will continue to move lower. We have repeatedly argued, contracting domestic activity in Q4 2008-Q1 2009 likely will produce a widening negative output gap that should ease underlining inflationary pressures and help the anchoring of inflation expectations. The cited activity slowdown indications suggest that this may play out even to a stronger degree than we had expected
The US Spillover to Mexico's Economic Growth
The Mexican economy will grow at an average rate of 0.6% in real terms in 2009, compared to growth of 1.8% in 2008. Our 2009 forecast is below the government’s forecast of 1.8% and is in line with the latest market consensus. From a quarterly perspective, we are projecting zero sequential growth in the first half of the year, following an estimated 0.3% drop in output in the final quarter of 2008 (Credit Suisse)
Europe
Eurozone: How Large Will the Contraction Be in 2009?
The current recession is far worse than the 1992/93 recession. We see the Eurozone economy contracting by 2½% in 2009. The Eurozone's higher manufacturing share makes it more sensitive to cyclical swings and to falling import demand from abroad (emerging market, U.S.) (BNP)
ECB growth projections between -1.0% and 0.0% in 2009; HICP between 1.1% and 1.7% in 2009
The 0.2% quarter-on-quarter contraction in third-quarter Eurozone GDP means that the region is now in recession as it followed a 0.2% drop in the second quarter. Plunging business surveys paint a bleak picture going forward. Manufacturing is in free fall and services are hit by the credit crunch which will fuel internal divergences going forward as member countries' exposure to credit is very asymmetric. German Q3 GDP growth at -0.5% confirms the seriousness of this downturn, Italian Q3 GDP contracted by 0.5% q/q in Q3 with Q2 revised down to -0.4% q/q, while the Spanish economy contracted by 0.2% q/q in Q3. Franceavoids a technical recession as Q3 GDP rose 0.1% q/q in Q3 after contracting by 0.3% in Q2
The pace of recession should deepen in Q4 2008 and Q1 2009 – we have penciled in -0.4% for both quarters – and negative growth will probably continue in Q2 2009. Only in H2 2009 we should be able to see a resumption of marginally positive growth rates (Unicredit)
Will Germany Fare Worse Than The Eurozone In 2009?
BNP: We now expect the German economy to contract by 3.0% in 2009 which is worse than our forecast for the Eurozone of -2.5% due to Germany's a higher exposure to cyclical industrial export demand as compared to the rest of the Eurozone--> Support of German internal demand via fiscal stimulus is only possible solution in the medium term.
Bundesbank forecast: price-adjusted gross domestic product (GDP) will decline 0.8% in 2009 and go up by 1.2% in 2010. Average annual inflation rates of
0.8% and 1.4% are to be expected for 2009 and 2010 respectively.
Nov manufacturing PMI survey reported that economic activity is collapsing, while price pressures are easing. Index reading for Germany: 35.7, down from 50.9 in July.
UK Economy Heading For A Serious Recession?
3Q08 GDP declined by -0.5% q/q, the first official evidence that the economy is entering a recession and the first decline since 1992. Household spending fell 0.2% in the three months to the end of September after falling 0.1% in the previous quarter. Weaker service industries, construction and production output drove the deceleration. Manufacturing made the single largest contribution to the slowdown, falling -1.1% in the quarter. The sharp decline was much lower than the +0.2% consensus pushing the y/y growth from +1.0% to +0.3%
IMF revised down UK's 2008 GDP growth from +1.0% to +0.8% while for 2009 growth was revised from -0.1% to -1.3%
Russian Economic Outlook Worsening Rapidly Amid Global Credit Squeeze: Russia Already In Recession?
Given falling oil prices, capital outflows from Russia and faltering domestic demand, Russia's growth may contract in early 2009 if oil prices average $40-50 a barrel after growing about 7% in 2008
Manufacturing indicators and industrial production are now contracting. Lack of credit (despite liquidity injections and government support) is threatening construction, a major source of growth. Meanwhile oil production decline may shift Russia’s current account and fiscal balance into deficit in 2009 at current oil prices, especially once recent government fiscal stimulus is passed through.
Uncertainty about the destination of bailout funds and direct transfers as well as the faster pace of depreciation of the rouble are impairing the effectiveness of the governments response to the financial crisis
Nordic Economic Outlook: Good Times Are Gone, Global Financial Crisis Takes Toll
Nordics, whose growth has outpaced other developed economies in recent years, are expected to experience slower growth in 2009, with Sweden already officially in recession and Denmark close behind
Slowdown due to: impact of the global financial crisis (tighter credit, slowing export growth), cooling housing markets, weakening domestic demand, and in Norway’s case, sliding oil prices
Compared to other regions, downturn in the Nordics expected to be relatively mild, as they all have sound macroeconomic structures without prospects of dramatic increases in unemployment; strong public finances are providing some resilience
Fast Growth in Eastern Europe Is Coming To An End
CEE has grown faster than the world for the past nine years as convergence occurs, but regional growth is now set to slow sharply, as the global credit crisis has made access to external finance much more difficult and expensive - an issue in a region where current-account deficits are the norm
Worst performance in 2009 is expected in the Baltic states, with deep recessions already underway in Estonia and Latvia. Meanwhile, Slovakia is seen as a regional star, with forecasts of 7% GDP growth in 2008 and roughly half that in 2009
Besides the Baltics, the countries with the largest current-account deficits—notably Romania, Bulgaria and Serbia - are the most exposed to sharp corrections
Turkey Economic Outlook: Growth Forecasts For 2009 Slashed
Economy is slowing dramatically, with Q3 GDP growth coming in at just 0.5% yoy – a 6-year low, prompting many analysts to slash their 2009 growth forecasts to under 2.0%
Slowing growth trend is broad-based and is expected to continue due to weak consumer confidence, global credit crunch, continuing domestic political uncertainty, and slowing demand in export markets
Asia Pacific
Japan Officially In Recession: How Long And Deep Could It Be?
Japan's economy is now officially in recession - the first since 2001, but analysts' opinions are divided over the severity and length of the recession
There is a strong consensus that the Japanese economy is heading for deflation and at least two more quarters of negative growth (and possibly many more, given Japan’s limited maneuvering room in both fiscal and monetary policy)
Factors Contributing To Slowdown: domestic recession, wage sluggishness, yen appreciation, global market turmoil, slowing foreign demand, global manufacturing slump
Asian Economies To Face Headwinds In 2009: Decoupling Is A Myth
Hopes that Asia would decouple from a US-led slowdown, were overly optimistic, as Asia’s consumption remains relatively weak and is correlated with exports and global liquidity. Growth and industrial production have slowed sharply in many economies and may slow farther in 2009 with the Asian tigers (Korea, Singapore, Taiwan) most vulnerable to slowdown in global manufacturing activity and correction in commodity prices poses risk to commodity exporters like Indonesia, Malaysia, Vietnam.
Fiscal and monetary responses may cushion domestic economies. Political uncertainty and security concerns could exacerbate the economic situation, making it harder to attract capital inflows and social unrest is on the rise and export slowdown pares jobs.
Slowing growth in developed and emerging markets globally will further reduce demand for Asian exports. The blow to exports will in turn destabilize corporate balance sheets, reducing capex, a trend exacerbated by the rising cost of credit (MS) Inflation and credit growth is slowing and some economies are nearing deflation
Chinese Growth Slows Sharply: What Is the Risk of a Hard Landing in China?
Economic growth in China, which has already slowed over the past year, has downshifted further in the fourth quarter, further slowing is likely in 2009 until government fiscal stimulus (infrastructure spending and support of the property markets) kicks in. Estimates for 2009 growth are being rapidly revised down to an 6-8% range from the 9% expected for 2008.
Due in part to past monetary and credit tightening, investment growth declined in 2008, led by real estate and construction, feeding through to several “upstream” industries, but private investment is expected to weaken in 2009 as the external outlook and that of the property sector weaken even though private consumption may be supported by expansionary fiscal stimulus. Global growth weighted by chinese exports may be somewhat weaker than that in 1998, during the Asian crisis and in 2001 when the “dot.com bubble” burst. (WB)
Indian Economy to Slow Significantly in 2008/09
Growth forecasts revised down: Forecast for 2009: 6.3% (IMF), 7% (ADB); I-banks: 5.3-5.8% from 7% in 2008
Growth, capex and consumer spending in recent years were fueled by global growth and liquidity boom, capital inflows and asset bubbles. But global credit crunch and risk aversion has severely affected domestic liquidity for banks, causing large sell-off in the stock market, real estate correction will affect bank lending to finance consumer spending and capex
Australian Economy: On a Losing Streak in 2008, Recession in 2009?
2008: Q2 nominal GDP growth posted 3rd straight quarter of decline to 2.7% y/y, down from 3.3% y/y Q1
RBA: 2008 & 2009 GDP forecasts revised to well below 2% (1.5% in Dec 2008, 1.75% in Dec 2009). Despite slower growth, inflation won't be in 2-3% target zone until mid-2011
Growth drags from net exports and inventories mean downside risk for GDP, but soaring profits and tidy growth in wages will provide some offset. GDP growth to be flat at 3.9% in 2008 and 2009 (nabCapital)
Middle East, Central Asia and Africa
MENA Economic Outlook 2009: Slower Growth, But Outperforming Other Regions?
The Middle East and North Africa is expected to grow by a rate between 3.9% and 5.3% in 2009 after witnessing the fastest regional growth (almost 5.9%) in 2008. Non-oil sectors like construction, retail, transportation, and financial services will contribute significantly to growth. Inflation will continue to fall in coming months due to the steep decline in commodity prices including oil, the decline in global food prices and slowdown in real estate activities. (WB, IMF, and Global Investment House).
Average real GDP growth in the GCC will slow to 3.6% in 2009 from 5.7% in 2008 due to reduced oil production, tighter credit conditions, and substantially lower oil prices. Nonhydrocarbon real GDP growth may fall to around 4% in 2009 from 6% in 2008(IIF). Lower oil prices will contribute to much lower asset accumulation, but fiscal and current account outlook provides cushion for soft landing
The Maghreb countries be more insulated from the global crisis than other countries despite a potential slowdown of 1-1.5ppts due to domestic reforms, relatively shielded financial sectors, and heavy public expenditures. Lower FDI and remittances from a slowdown in the GCC should reduce growth in Levant countries, especially Lebanon and Jordan . Egypt's growth rates are expected to fall to 5.5%, while Israel's growth rate will be between 0% and 1% in 2009.
2009 Outlook: How Vulnerable Are The CIS Economies To The Global Slowdown?
Growth in CIS countries excluding Russia may slow sharply to a 1.6% in 2009 from 6.9% in 2008 and about 10% in 2006/7as the financial crisis and global recession worsens (IMF). Russian economic deterioration in 2009 will undermine trade, investment and remittance flows to CIS countries, passing on the brunt of the crisis. Meanwhile double digit inflation remains a risk.
Ukraine is in its first recession in a decade, as it faces simultaneous terms of trade and external financing shocks. Its recent unsustainable, consumption fuelled growth and pro-cyclical macroeconomic policy mix increases the size of the necessary adjustment. The currency may continue to plunge, contributing to defaults on corporate debts and policy uncertainty may exacerbate other risks.
Fuel exporters like Kazakhstan and Azerbaijan will suffer from reduced resource revenues from much lower oil prices and possibly production cuts. Meanwhile all countries will suffer from reduction in external financing, something that particularly hits countries like Kazakhstan and Ukraine, current account deficit countries whose banks borrowed heavily abroad
How Much Will African Growth Slow Amid Global Recession
Economic growth in sub-Saharan Africa is expected to moderate in the face of the financial turmoil, especially as terms of trade gains from the surge of commodity prices moderate. Overall, growth is projected to decline from 7% in '07 to 6% in 2008-09. South Africa , the region’s largest, most open economy, will suffer further slow down in growth as exports and consumption falter even as it needs to finance a wide current account deficit
In recent years, African economic activity was the best recorded in over three decades, supported by rising commodity production and exports, with higher foreign investments and official aid rather than credit growth. However the financial crisis may depress aid even as remittance flows also suffer.
Despite the credit crunch in the rich world's financial markets, in sub-Saharan Africa in particular there is little sign of any reduction in a growth rate that has averaged over 5% a year for the past decade (Economist)
Global Issues
Risk of Global Deflation
A severe global recession will lead to deflationary pressures. Slackening demand for goods/services, labor and commodities will lead to sharply lower inflation. Inflation in advanced economies will fall towards the 1% level that leads to concerns about deflation (Roubini)
Global policy reaction to the financial crisis has been so aggressive, determined and persistent, that it is highly likely we avoid deflation, and eventually end up with higher inflation. To paraphrase Minsky, "fears of deflation are inflationary" (Merrill Lynch)
Global Stocks: Where Is the Bottom?
Equity market performance fundamentally depends on the unfreezing of credit markets
Valuations are cheap but very poor guides to market timing. Fundamentals, like the economy, earnings and earnings revisions also matter, as do liquidity conditions and technicals
Oil Price Outlook: Will Demand Destruction Keep Up with Supply Destruction?
Oil prices may dip to as low as $25/b in 2009 on global recession
OPEC will vigorously defend an oil price ($40-50) that will allow most OPEC members to balance their national budgets. Falling oil prices are a big tax cut for oil consumers now, but the resulting supply cuts may mean they will have to pay for it in even higher oil prices later
Global Financial Writedowns Exceed $1 Trillion: Are We Half-Way Through?
Re-intermediation of $10 trillion impaired securitized assets requires an additional $700bn in equity capital (IMF GFSR Oct 2008; see also Geithner). IMF expects total writedowns to reach at least $1.4 trillion from current $1 trillion. At RGE, Nouriel Roubini expects a doubling to $2 trillion writedowns with according capital raising requirements as house prices have to fall another 15-20%--> we're only half-way through. [See also Calculating the economic impact of deleveraging]
Nov 20: Global writedowns by banks, insurers, GSEs reach $965bn, capital raised $827 [of which: global banking writedowns are $707bn [426 U.S., 253 EU], and fresh bank capital is $714bn [376 U.S., 292 EU]
Will the Global Carry Trade Revive in 2009?
Sharp deleverages historically imply a very prolonged period of underperformance. Hence, do not expect carry trades to return quickly
Carry trade funding currencies - such as Yen, Swiss franc, US dollar - will keep strengthening while high-yield currencies will suffer selloffs on global deleveraging
Will Risky Asset Markets See the Light of Day in 2009?
Only in 2009 is it likely that riskier asset classes start to perform again (Barclays). Because of the retreat of securitization, risk spreads will settle at permanently higher levels. Shares will remain on a rollercoaster ride until corporate bonds stabilize
A more challenging global outlook should lead to more divergent outcomes across emerging markets - asset returns will be most challenged where current account deficits are big issues
State of Global Imbalances: Will The Credit Crisis Finally Reduce Imbalances?
Enforced increase in US domestic savings, reduction in surpluses by oil exporting regions and capital inflows to other EMs may reduce current account imbalances. However, uncertain if credit crisis will continue to contribute to unwinding or will freeze imbalances. Unwinding could be disorderly
Wolf: Countries with large external surpluses import demand from the rest of the world while suppressing it at home, creating a contractionary beggar thy neighbor response in the face of a deep recession.
Structural surpluses in several EM exported led to unsustainable dynamic of overinflating demand in advanced economies. Since domestic absorption remains too low in several emerging economies the surpluses would remain unless domestic demand were stimulated hard -very hard (BNP)
EM Capital Flows and Markets Meltdown: Reversal of Fortunes
Emerging Markets are being hit by the credit drought seen all over the world. The outlook for capital flows in the form of FDI and portfolio are being revised down. Even foreign direct investments, known to be less volatile are expected to cool down especially in response to a much less dynamic M&A environment.
Redemptions of $41.2 billion out of EM funds since the beginning of the year have fully reversed the record $40.8 billion inflow of 2007, according to EPFR. About half of the EM fund purchases that have occurred since 2003 have now been withdrawn, yet fund flow data does not yet indicate capitulation/despair by investors. On a regional basis, CEEMEA looks less vulnerable to a new stage of pessimism than Asia or, to a lesser extent, Latin America (Citi)
Although Foreign Direct Investment (FDI) is considered by many to be a major (and more stable) source of financing for a number of developing countries, it can sometimes compound problems during times of financial crisis. Multinational enterprises can shift financial resources easily from one country to another, adding to macroeconomic instability in developing countries, thus not being a substitute better mobilisation of domestic resources (OECD)
All but Roubini say buy...
gold and gold miner stocks. hmmmm.
Marc Faber predicts 2009...
to be catastrophic for world economy - saying market will go up in short term. just adding to the list of forecasts:
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vh4CZyP0iSKg.asf
more forecast from those who predicted the crisis here:
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=34358940
2009 Forecasts from those who predicted...
the crisis:
Marc Faber:
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vh4CZyP0iSKg.asf
Roubini:
http://blogs.tnr.com/tnr/blogs/the_plank/archive/2008/12/14/tnrtv-roubini-predicts-deeper-recession.aspx
Rogers:
fairly good chance gold spikes to...
$880 these next few trading days. Big test will be whether it holds. Regardless, 2009 should be a good year for gold and silver IMO.
Gold May Rise for Third Straight Week as Dollar Rally Stalls
By Pham-Duy Nguyen
Dec. 22 (Bloomberg) -- Gold may rise for the third straight week on speculation the dollar’s rally will stall, boosting the appeal of the precious metal.
Thirteen of 25 traders, investors and analysts surveyed from Mumbai to Chicago on Dec. 18 and Dec. 19 advised buying gold, which rose 2.1 percent last week to $837.40 an ounce in New York. Seven said to sell, and five were neutral.
The Federal Reserve on Dec. 16 cut its benchmark interest rate to zero to 0.25 percent from 1 percent, driving the dollar lower. Gold reached a record $1,033.90 in March, partly because of a decline in borrowing costs.
Most analysts surveyed on Dec. 11 and Dec. 12 anticipated gold’s gains last week. The survey has forecast prices accurately in 143 of 242 weeks, or 59 percent of the time.
Last week’s survey results: Bullish: 13 Bearish: 7 Neutral: 5
Rogers says Oil Prices will go to 200, Maybe in 2013
12/19/08
Jim Rogers bought oil last week as crude prices collapsed to near four-year lows and that the world is running out of known oil reserves. The sharp sell-off in oil prices suggested a bottom.
In Jim words, "Oil collapsed last week. Whenever you've had that sort of selling climax throughout any period in history, you are usually well-rewarded to buy it. It may not be the final bottom, but a bottom, so I'm buying oil again," he said.
"We're going to see $200 oil at some point, it may be by 2013. It's a sad fact but the world is running out of known oil," he said.
Taiwanese ADR Stocks:
Taiwan Semiconductor TSM
United Microelectronics UMC
AU Optronics AUO
Chunghwa Telecom CHT
Siliconware Precision SPIL
Advanced Semiconductor ASX
Himax Technologies HIMX
Silicon Motion SIMO
I own HIMX
Taiwan ETF`S:
ISHARE MSCI TAIWAN EWT
Taiwan Greater China Fund TFC
Auto bailouts - Schiff wins this one...
as other loses his point in the emotion and lack of rationale in what appears to be his single point --- we need government to save us --- IMO.
2009 Predictions starting to come out...
from those who predicted the crisis - just a few below:
Roubini:
http://blogs.tnr.com/tnr/blogs/the_plank/archive/2008/12/14/tnrtv-roubini-predicts-deeper-recession.aspx
Rogers:
Second crash coming - 60 minutes in case...
you missed it - although some of this "crash" may have been averted with the fed going ZIRP - but that doesn't prevent foreclosures from those who lost their jobs or otherwise face financial issues:
Rogers talks about his funds...
check out RJI and HAP - which mimic his funds:
Schiff - today on Gold in 2009...
December 19, 2008
2009—LIKELY VINTAGE YEAR FOR GOLD
The Federal Reserve estimates that in the past year losses in real estate, stocks and mortgages have sucked out some $7.2 trillion of wealth from the U.S. economy. Some are now putting the figure at $20 trillion. A massive recession is starting and will likely spread throughout much of the world. These forces have exerted their classic strong downward pressure on the price of gold.
In addition, the $700 billion TARP fund to salvage the American financial system, and large amounts spent by other governments to protect their own banks, has greatly reduced the fear of a financial breakdown. As a result, the financial panic insurance value of gold was largely eroded, adding further downward price pressure.
2008 was a volatile year for gold. Prices have gyrated quite violently between the $700’s and $1,000, or by some 25 to 30 percent. This volatility alone acts as a depressing influence on gold prices as it discourages the belief that gold is a credible investment.
The world’s major governments long have sought to eradicate gold as a monetary measure in order to remove the last vestiges of monetary discipline and to clear the field for massive government over-spending and inflation.
In 1968, the London Gold Poll was abolished. In 1978, America forced a further move, via the IMF, to write gold out of the international money supply. In August 1971, President Nixon broke the U.S. dollar-gold exchange link.
In September 1999, the United States, while being careful to keep its own gold stocks intact, led other major nations, in the first of two so-called ‘Central Bank Gold Agreements’ to flood the gold market with sales of gold.
In 1999, the central banks held some 33,000 tonnes, or one quarter of all mined gold. The effect of government gold sales was potentially very bearish for gold.
Gold market observers, who have studied the pattern of IMF gold sales, allege that the sales are timed to cause the maximum volatility in the price of gold, to discourage investment.
More recently, there are allegations that the Government has allowed certain institutions to engage in massive naked short selling of gold and silver. This has caused distortions in the gold price that do not reflect genuine market pressures. In short, they amount to market manipulation.
A fair conclusion is that gold is cheap and that its present price does not truly reflect market conditions.
On December 16th, the Fed announced, as we have long forecast, a further cut in interest rates to between zero and 0.25 percent. It also announced ‘unlimited’ support to buy assets from beleaguered institutions.
The amount of debt and new money injected into the economy should progressively raise inflation alarm bells. The fire of future inflation is being stoked alarmingly, but the recessive forces of deleveraging are concealing it temporarily.
The Fed looks desperate. This could lead to feelings of panic and upward pressure on the gold price.
Investors should also especially be concerned as to who will repay these massive debts. The conventional answer of politicians is “taxpayers”. But this is a serious understatement. Any depreciation of the U.S. dollar means that every American citizen and every single holder of U.S. dollars throughout the world will suffer from monetary loss and a severely reduced standard of living.
In 1934, facing a depression President Roosevelt first confiscated gold from every American. Then, he unilaterally devalued the U.S. dollar by 75 percent against gold.
At a stroke, FDR wiped out 75 percent of the dollar denominated debt of the U.S. Treasury.
As both President-Elect Obama and Fed chairman Bernanke are students of FDR, we face the real possibility of a massive devaluation of the U.S. dollar against gold in 2009.
http://www.europac.net/externalframeset.asp?from=home&id=14965
Deflation or Inflation - another...
take:
Deflation
For years, we've been forecasting that chronic deflation of 1% to 2% per year would start with the next major global recession. Well, it's here! In October, the U.S. producer price index fell 2.8% from September and the CPI dropped 1.0%, the biggest decline since before World War II. Sure, the big driver was the decline in energy costs, but even excluding food and energy, consumer prices dropped 0.1%.
The Fed worries that in deflation, offsetting monetary policy is difficult since its target rate has to stop declining when it reaches zero. Of course, the Fed has other tools as witnessed by the quantitative easing discussed earlier. Nevertheless, all these measures amount to leading the horse to water, as discussed earlier, and he may not drink. The deflation in Japan in the 1999-2005 years worried the Fed when it appeared imminent in the U.S. early in this decade, and it still does. Japan again faces chronic deflation, and the Bank of Japan forecast zero change in the CPI (ex food but not energy) for the fiscal year ending March 2010. Fed Vice Chairman Kohn said the lesson from Japan was that "we should be very aggressive in combating deflation."
Deflation encourages saving since money is worth more later. It also spawns deflationary expectations. Buyers anticipate lower prices later by waiting to buy. That sires excess inventories and capacity, which forces prices down. Buyer suspicions are confirmed so they wait even further to buy, generating a self-feeding downward price spiral, as now seen in autos and houses. Deflation also elevates the cost of debts and debt service since both remain fixed in nominal terms but the revenues and incomes used to repay them tend to fall with overall prices.
Deflation fears and other forces have also reduced reducing 30-year Treasury bond yields to our long-held target of 3.0% and completed what we dubbed in 1981, when the yield was 14.7%, "the bond rally of a lifetime." The recent financial crisis has also helped as investors abandon everything else -- stocks and fixed income alike -- in favor of Treasurys.
Deflation results from overall supply exceeding general demand. We have been forecasting the good deflation of excess supply, as in the late 1800s and in the 1920s, due to today's confluence of semiconductors, the Internet, computers, biotech, telecom and other productivity-soaked technologies. But we have allowed for the bad deflation of deficient demand, as in the 1930s, if one of two adverse conditions develop -- widespread financial crises and worldwide protectionism. Sadly, both are real possibilities.
Inflation ?
Many, of course, worry not about deflation but inflation due to all the money being pumped out by central banks and governments globally. They no doubt are biased since most have lived only in an era of inflation and don't agree with us that inflation is the result of excess government spending in wars, both hot and cold. In peacetime, deflation reigns. Starting with rearmament in the late 1930s, then World War II and the Cold War with its hot phases, Korea and Vietnam, wartime and inflation persisted for 60 years.
For now at least, all that money from central banks and governments isn't getting outside financial institutions. We're in a liquidity trap. The horse isn't drinking, thank you very much. And if lenders do start to lend, central bankers, with their congenital fear of inflation, will no doubt reel in all that extra credit.
Even if the bank reserves stimulate the money supply with the usual multiplier effect, the credit created will pale in comparison to the destruction of derivatives and other privately-created liquidity due to persistent deleveraging and writedowns.
Finally, the consumer saving spree we're forecasting will probably increase the saving rate by one percentage point per year on average for the next decade. That would generate a cumulative $5.5 trillion and go a long way to offsetting the intervening fiscal stimuli, and then some.
http://www.safehaven.com/article-12092.htm
Schiff - "this is it"...
he says. He is getting more emphatic that the end in the dollar is very near. He's almost emotional about it - which doesn't help him with the message IMO. Still - he makes sense and predicted the cause of the collapse and the sequence of events better than anyone I can find - although he did make some key mistakes on the strength of the dollar and weakness abroad.
HAP - HAP seeks to replicate...
as closely as possible, before fees and expenses, the price and yield performance of The RogersTM—Van Eck Hard Assets Producers Index, which was developed in concert with international investor Jim Rogers and is viewed by many as the definitive global benchmark for commodity equities. HAP provides “one-stop shopping” for the global hard assets industry because its underlying index is comprehensive in construction, covering the world’s largest and most prominent publicly owned companies engaged in the production and distribution of hard assets and related products and services. The index includes water and renewable energy (solar, wind)—a first among commodity equity indexes—and utilizes consumption-based weights that afford balanced sector exposure. HAP is subject to the risks of investing in the hard assets sector.
http://www.vaneck.com/index.cfm?cat=3192&cGroup=ETF&tkr=HAP&LN=3-02
Schiff radio broadcast yesterday...
The Battle of the Flations...
http://news.goldseek.com/BudConrad/1229623562.php
Posted Thursday, 18 December 2008
The Casey Report
One of the most hotly debated topics among financial talking heads these days is, “Deflation or inflation, what is it going to be?”
There is no question that we are currently experiencing asset price deflation and economic slowing. But we, the editors of The Casey Report, see this as a transitional phase. In our analysis, the truly extraordinary and historic levels of government spending and bailouts being deployed to keep the economy afloat are certain to lead to inflation in the not-too-distant future.
While our long-term view remains solidly in the inflation camp, over the past four months, the U.S.’s financial problems have caused deflation in many important asset classes. Put another way, a reduction in asset prices amounting to about $14 trillion (in housing, equities, etc.) is bigger than the government’s countervailing actions of around $3 trillion -- the total, so far, arrived at by combining the measures taken by the Fed with the federal government bailouts.
But there are important differences between a sharp collapse in asset prices and the potentially leveraged stimulus packages.
The Fed’s actions, if taken in normal times, would be multiplied throughout the banking system as banks used the new money to increase their lending and, in so doing, leveraged the funds throughout the entire economy. This time around, however, while the Fed has been extremely accommodating to the banks, even going so far as to make direct loans to them, the effect is moderated. That’s because of tighter lending standards, the need to replenish capital, and the demise of many complex structures, which were previously available for securitizing and selling loans on to others.
As a result, the banking system as a whole is not responding to the stimulus. It can be thought of as pushing on a string. Simply, as large as the stimulus has been to date, it has not yet been enough to offset the effects of the economic collapse. The resulting deflationary pressure increases concern over a downward spiral in the economy.
Another way to view this is that consumers and businesses alike are now anticipating deflation, which makes saving and survival the primary goal (in an inflation, spending becomes the primary goal, unloading the money before it can lose value). Of course, a cutback in spending and demand drives down the price of things, at least temporarily.
But the longer-term expectation is that Bernanke’s assertion – an assertion now backed up by action – that the government can and will print new money to any extent needed is the more important force.
As long as there is evidence of serious economic collapse, it can be expected that the bailout programs will be ratcheted up. And, to the extent that the public expects deflation – and so businesses reduce prices to raise cash and reduce inventories – the wave of price inflation experienced in the spring of 2008 will be moderated. But within the seeds of that positive are the very big negatives that the government, seeing that its extraordinary money creation is not being evidenced in rising prices, will be emboldened to go even further.
This is of great importance because, unlike in the 1930s, there is no limitation on what the government can do, because there is no gold standard to enforce monetary discipline. Instead, the world is afloat on a sea of massive new government spending and credit facilities. After a lag, the stimulus will perform the expected actions of reinstating credit and debasing the currency. But never lose sight of the fact that the government is creating money out of thin air. Some call it bailouts, we would call it legal counterfeiting on an epic scale.
In the New Deal, FDR created the FDIC and guaranteed bank deposits, set minimum bank deposit rates, and brought the discount rate to almost 0%. He cut the dollar/gold exchange rate from $20.67 to $35 and confiscated gold; i.e., devalued the dollar by 40%.
While the beginning of the collapse from too much credit was parallel to the previous experience of the depression, the response today is different. The size of the monetary stimulus and the risk to the dollar from foreign holders -- who can also see the implications of the out-of-control deficits -- strongly argue for a return to inflation much sooner.
How much sooner? Impossible to say, but remember: deflationary or inflationary fears are not the independent agent that will determine whether or not we will see inflation (though, in the intervening phase, they will certainly be an important economic driver). The Federal Reserve is throwing everything it can at the financial markets to fight deflation. As you can see in the chart below, the Fed has doubled the size of its balance sheet since September.
On December 16, the Fed cut interest rates to a range of between a quarter of a point and zero. That is lower than ever in the 94 years of their existence. And they promised in the accompanying announcement to provide additional funds to “stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level… the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets.”
At this time individuals and companies alike are sensing deflation and, as a result, are raising cash… in the process deleveraging the extreme debt loads. That is causing downward pressure on asset prices and, soon, a serious contraction in the economy as more and more companies lay off workers and cancel spending. This will not be a happy holiday season. And it will be a long-term recession and maybe even a protracted depression.
But the fact of the extraordinary deficit spending is there for all to see and, over time, more and more will see it. And, more to the point, understand it. In fact, thanks to the Internet and always-there financial media, the shift in sentiment can happen almost on a dime. Slowly at first, and then faster, fears over inflation will return, but this time they will be well founded.
The economic downturn could be protracted, but that does not mean that the deflation will be protracted. Instead, once we are through this phase, we expect to see poor economic conditions, but against a backdrop of rising inflation. Stagflation is a word that remains in our vocabulary.
Inflation or deflation – whatever the current market trend, there is a way to play it. Every crisis contains opportunity as well as danger… and many of those who manage to mitigate the risk and grab the opportunity have made a fortune in times like these.