Over the last couple of weeks we have witnessed a series of conflicting reports from all over the media complex as to why equity markets are under pressure. Predictably, as soon as the markets recover a bit these same pundits come up with all sorts of reasons to cheer.  Needless to say these hysterical reports, bullish or bearish, are entirely worthless.  CNBC, with its ridiculous “fat finger” report, has proved its irrelevance as a financial news source. In fact, this embarrassing story (released with less than an 1/2 hour to go in the trading session) stinks of manipulation and seems to implicate CNBC as a pawn in a propaganda ring.

But I digress, my purpose today is to offer a little clarity to the situation. So without any further ado, let’s map the market developments and see what, if any, conclusions may be reached.

Support:

Government support is the primary reason equity markets have traded higher over the last year. That support has taken the form of, to name a few, ‘cash for clunkers’, foreclosure prevention, home buyer credits and a myriad of Fed liquidity programs.

The result of this support has been the release of government supplied economic numbers that appear promising and suggest GDP expansion (Did you pick up the sarcasm in that sentence? Sorry!).

To sum up, large quantities of Fed-provided quantitative easing and rosy economic numbers are the fuel driving markets higher.

Now Europe and the European Central Bank (ECB) have joined the fray. Supposedly close to $1trillion of liquidity will be thrown into the gaping mouth of the debt monster.

Pressure:

Abysmal – as in the size of an abyss – amounts of world debt are swallowing up prodigious amounts of liquidity.

China - China’s equity markets have for some time been a leading indicator for US markets and risk assets in general.  Recently, the Shanghai Index reached into bear market territory with a 20% decline from the highs of the year.  This is not a good omen.  Moreover, China’s economic expansion could be labeled the lynchpin of world economic growth and the recent measures by China’s central bank to tighten liquidity is, to say the least, problematic for a world drowning in debt. The recent increase in consumer prices of 2.8% in China only exacerbate the problem as it would appear inflation is accelerating.

GS – Common knowledge suggests the markets swooned because of violence in Greece. This is absolutely not the case.  We can draw a direct line to the beginning of this most recent market drop and the day Goldman Sachs faced the Senate tribunal.  Government crucifying of the financial space is heating up and will only get worse as senators fight for re election this November.  GS is the undisputed heavyweight champ of the financial space and if they fall the financials as a whole will experience painful P.E. multiple contraction.  In the last few weeks GS’s credit curve has inverted. Credit protection on GS cost more for 1 year than 5 years. If this trend persists a debt downgrade for GS could be in the offing which would in turn send financial shares tumbling.

This Just In: As I write this the “Senate Finance Committee votes on amendment to create a new ratings agency; yay’s have it 64-35, amendment agreed to…” Can you hear that? That’s the sound of a GS debt downgrade being written. The congressionally approved ratings body will likely remove the conflict of interest inherent in the current private rating agencies business model. Hence, we would not be surprised to see Moody/Fitch/S&P make a preemptive downgrade.

Financial Group (FINs) – FINs have always been a leading indicator for overall market direction. If GS drags the FINs down the rest of the market will suffer. Make no mistake, as the volume of negative news and behavior towards the FINs grows louder the equity markets will suffer.

Andrew Cuomo Investigating Whether Banks Duped Rating Agencies – Huffington Post

Senators Seek Proprietary Trading Ban for Big Banks – WSJ

Greece – I would be remiss if I didn’t include this component as part of the pressure on the markets. The proposed Trillion $ bailout seems dubious at best.  Lest we forget weeks were required to raise just $30 billion and now somehow the finance ministers got together over the weekend and $700 billion was pledged?! Now these ministers must go back to their respective countries and try to get funding. This funding request should be a tough sell. After all, the German people recently voted the ruling party out of one house after the first 40 bil Euro bailout.  In fact, rumor has it a reintroduction of the German Mark may be in the offing. How about England? They have yet to participate in any bailout and now elections have created a coalition (read: do nothing) government.

The simple fact remains that all this talk of bailouts is actually missing the real point: Greece has a solvency issue not a liquidity issue.

Conclusions/Questions:

Q: Will liquidity expansion trump debt implosion?

Q: Will excess liquidity continue to find its way into the equity markets?

Q: Will Chinese tightening and supposed European austerity plans actually drain marginal liquidity?

C: As my mom would say, “we must live the questions and the answers will reveal themselves.” So, remain vigilant, defend principal and let the markets be your guide. Don’t force your will on the market and avoid complacency at all costs.

C: No matter which is the victor, the Tidal Wave of Liquidity or the Trench of Debt, one asset class will not only survive but flourish.  The precious metals, Gold and Silver, are now advancing to new highs against all fiat currencies. I have written repeatedly over the last few years that the true inflection point for Gold and Silver will arrive when their values increase even in the face of a rising US$.  The time is now.  Please hold on to the Bar!

Tags: China, Credit, ECB, euro, Fed, financial, gold, Goldman Sachs, Greece, GS, Inflation, precious metals, silver, US$

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Yesterday, the equity markets sold off over 2% while the US$ and GOLD moved sharply higher. That’s right, you read correctly, Gold and the US$ moved up together. This action comes as no surprise to the partners of RCM. Over the last year or so, I have explained to anyone willing to listen that the real move higher in Gold prices will occur in spite of or along with an initial move higher in the US$.

One reason the US$ initially moves higher with Gold can be accredited to the carry trade unwind which artificially drives funds back into US$ investments. As an example simply look at the strength of US Treasuries yesterday. As risk is unwound money moves into the relative safely of US Treasuries. I write ‘relative safety’ because as currencies around the world continue to devalue owning US Treasuries will not protect buying power. The only true safe haven in a world intent on currency debasement will be the precious metal Gold and Silver.

I will allow Briefing.com to supply the summary of yesterday’s trading. As you will see they have done an exemplary job…

WRAPX End of Day Summary: Stocks Drop Sharply in High Volume Trade

A high-volume selling effort in response to downgrades on the sovereign debt of Greece and Portugal sent stocks to their worst percentage loss in more than two months, but drove the dollar to its best gain in four months… Early trade was rather lackluster as widespread weakness among overseas markets weighed on mood of morning participants… Data didn’t do anything to improve the mood either. The S&P/CaseShiller 20-City Composite made its first increase since 2006 with a 0.6% year-over-year increase, but that was still weaker than the 1.3% annual increase that had been expected… Consumer confidence climbed in April as the Conference Board’s Consumer Confidence Index came in at 57.9, which was not only higher than the 53.5 that had been expected, but was the best reading since August 2008…

Weakness quickly worsened when it was learned that credit analysts at Standard & Poor’s downgraded Greece’s debt to junk and cut Portugal’s debt two notches to A-. Subsequent selling pressure sent the Dow down roughly 150 points in just 30 minutes. It even pushed through its 20-day moving average for the first time since February. It was never able to recover and, as a result, finished near its session low…

The wave of selling sent volatility sharply higher. In fact, the Volatility Index made its way up more than 30% to its highest level since February…

Many market participants fled to the dollar for safety. That gave the greenback a 1.3% gain against a basket of foreign currencies. The euro was especially weak as it fell to 1.3179 against the buck. That puts it on par with its one-year low against the dollar…

Tags: Bookmark and Share Tags: case-shiller, equity markets, gold, Greece, Portugal, precious metals, silver, sovereign debt, US Treasury, US$

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My Feb. 25th remarks  stressed the need for a solid defense based on the current market environment. Today, let’s have some fun and talk offense.

We at RCM have carried the precious metals torch for quite some time. We have explained on countless occasions via this blog, via radio interviews and through one on one conversations, that prodigious fiat currency creation around the world will lead to one unassailably predictable outcome: Higher Gold and Silver prices.   

We have not wavered from our stance despite, at times, an overwhelming din that spews forth from the chorus of naysayers and neophytes. However, we are not so arrogant as to avoid the necessary and important process of challenging our own beliefs. We continue to question our own conviction by analyzing the behavior of Gold and Silver vs. the US$, Euro, GBP and other currencies.

The results of this analysis from the past two weeks are in and the prognosis remains bullish with an increased likelihood of  ’wildly’. We have often stated that the true inflection point for Gold will come when it rises in price vs. all currencies at the same time. Well, in true Shakespearean fashion,  I say to the Caesars of today, beware the Ides of March….

Gold Surges With DXY Positive For The Day

No, you are not reading that chart wrong. Gold just surged to near two month highs, hitting $1130/oz, or $12 higher, even as the dollar is green for the day. The fiat currency inferno is picking up, as traders refuse to keep their money in anything but gold or dollars – proof of tungsten gold counterfeiting is not helping the gold shorts. From the 2010 lows, the currency devaluation “safety trade” has been Gold and the USD, in a ratio of 5-1!

Read More…

Meet The New Regime: Gold And Dollar Coincident  

For all those who expect to see a strong dollar result in lower gold prices: our condolences. Gold is now as much a flight-to-safety target, as the the ra(p/b)idly devaluable dollar (and all other fiat currencies), as has been repeatedly observed on Zero Hedge. The chart below demonstrates that over the past three weeks, not only has dollar strength resulted in gold strength, it has resulted in gold strength at a 6X multiple.

Read More…

Another Record For Euro-Denominated Gold  

As the euro is plunging (and dollar by implication surging) with gold yet again flat and looking like it may turn positive for the day, gold denominated in euros just hit another all time record of €827.

Read More…

In ancient Rome the government clipped coins to devalue the currency.  Nero, in 64 CE, was the first to come up with the idea to actually debase coins by reducing their content. Today, currency debasement has become an art form as evidenced by the story below. For our society, will the outcome of such debasement mirror that of Rome?….

US Dollar Money Supply Is Underreported

March 1, 2010 – As the financial crisis has unfolded over the last two years, the Federal Reserve has been responding in a variety of unprecedented ways.  Therefore, it is logical to assume that these never-before-used actions have altered long-established ways of viewing things.  One area that has been impacted is the US dollar money supply.

The quantity of dollars in circulation is being underreported by relying upon the traditional and now outdated definitions used to calculate M1 and M2.  These ‘Ms’ are calculated and reported by the Federal Reserve based on the following guidelines that identify the several different forms of dollar currency used in commerce:

Read More…

Tags: currencies, DXY, euro, Federal Reserve, GBP, gold, precious metals, silver, US$

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The equity markets dropped on average 1.5% Monday and this morning another 1.5% decline is underway.  I mentioned, in A Review of the RCM Investment Strategy, the defensive posture we at RCM have taken. I said, “We have deployed our assets in a manner we feel most appropriate for the environment we are experiencing.”

The following news items should help illustrate what was meant when I wrote, “…the environment we are experiencing.”….

Lending falls at epic pace – WSJ

WSJ reports U.S. banks posted last year their sharpest decline in lending since 1942, suggesting that the industry’s continued slide is making it harder for the economy to recover. While top-tier banks are recovering at a faster clip, the rest of the industry is still suffering, according to a quarterly report from the FDIC. Banks fighting for survival, especially those plagued by losses on commercial real estate, are less willing to extend loans, siphoning credit from businesses and consumers. Besides registering their biggest full-year decline in total loans outstanding in 67 years, U.S. banks set a number of grim milestones. According to the FDIC, the number of U.S. banks at risk of failing hit a 16-year high at 702. More than 5% of all loans were at least three months past due, the highest level recorded in the 26 years the data have been collected. And the problems are expected to last through 2010. FDIC Chairman Sheila Bair said banks are “bumping along the bottom of the credit cycle” and that the number of bank failures in 2010 will likely eclipse the 140 recorded last year.

If “Banks fighting for survival, especially those plagued by losses on commercial real estate, are less willing to extend loans” then what do you think will happen when the following development gains steam?….

SAN FRANCISCO (MarketWatch) — Just when they thought the worst of the mortgage crisis was behind them, billions of dollars in bad loans from the debacle may be rising from the dead and creeping back on the balance sheets of the largest U.S. banks.

Big lenders including Bank of America, J.P. Morgan Chase and Wells Fargo may be forced to repurchase troubled home loans from insurers and mortgage-finance giants like Freddie Mac that had agreed to take on risks associated with those assets during the real estate boom.

The banks are setting aside more reserves to cover the potential costs of such repurchases, cutting into earnings….

Read More…

Of course, we can spend all day debating the reasons for banks’ lack of desire to lend, but the real crux of the issue remains the employment picture. The American people, due in large part to the horrible jobs market, are reigning in spending hence needing less credit….

Mass Layoffs Surge In January, Highest Since July 2009

The BLS has reported Mass Layoff Statistics for January 2010 – the result is plain ugly, and kills any hope for sustained improvement in unemployment data. Not seasonally adjusted Mass Layoff Events (defined as at least 50 persons being laid off from a single employer) surged in January to 2,860, from 2,310 in January, from a 12 month low of 1,371 in September 2009. This is the biggest monthly surge since July when the Mass Layoff Events hit a 12 month high of 3,054. In terms of actual workers, January saw 278,679 initially laid off people. The deterioration was mirrored in the much less credible seasonally adjusted data. Obviously companies were waiting for the end of the year to dump as many people as they could.

ECONX Initial Claims Report Suggests a Much Weaker Labor Sector

The initial claims data weakened for the week ending Feb. 20 as the claims figure increased from 474,000 to 496,000. The consensus expected claims to decline to 460,000. Many analysts, including us, believed that inclement weather conditions across the U.S. would prevent many workers from filing new claims. If this scenario is true, then the actual initial claims figure would be much closer to 550,000… Continuing claims rose a modest 6,000 to 4.617 mln for the week ending Feb. 13. The figure for the week ending Feb. 6 was revised up from 4.570 mln, and the consensus expected claims to remain at that previous level… The job creation data looks to be minimal. The unadjusted claims data from Feb. 6 was down by 85,842 claims while the emergency benefits figure declined 317,933 claims. The decline in original claims is mostly due to workers running out of benefits and it seems the weather made it difficult to process extended benefit applications.

Meanwhile, the health of the credit markets remains the number one issue facing the equity markets today.  You may recall my Feb. 18th post ‘Credit Markets Warning Signal, Foreign Demand for US Treasury Falls ‘ in which I outlined the very real possibility that European credit constriction was migrating across the pond. Well, the following stories add credibility to that concern…

Greek Treasuries Pancake As Bond Vigilantes Chant Death Chorus

Ah, curve pancaking – better known in bond parlance as the death rattle. The Greek 4 Year GGB just traded wider of the 15 Year at a spread of -4bps (yup, negative). This, to continue the parlance lesson, means the bond vigilantes are now pretty sure how the Greek situation will play out. Oh, and Greece, all the best with that €5 billion10 year bond issuance. The 1 Year spot his exploded from just over 200 bps on January 1, to just under 5%, a rout for all short-term GGB holders. We are anxiously awaiting RBS’ rebuttal.

Read More…  

California postpones bond sale – WSJ

California One Step Closer To Insolvency After State Cancels $2 Billion General Obligation Bond Sale

Five days ago a great white hope appeared for the great bankrupt Golden State (Baa1/A-), in the form of $2 billion in GO bonds, which were supposed to be promptly syndicated via underwriters JPMorgan and Morgan Stanley. This would have been the first bond sale for California since November: a critical milestone as the state creeps ever closer to a full-on default. Unfortunately, the creeping just turned into a casual jog after Jane Wells (@janewells) just tweeted that California has cancelled its bond sale “after legislature fails to approve cash management flexibility bill [the] Treasurer said he needed to attract investors.”And seriously, did California think it would succeed where so many other high yield issuers have recently failed?

Read More…

I will rest my case today with a request to review my post titled ‘Looming Defaults and the Effect on Currencies, US$ vs. Euro’.  In this post I describe the competitive devaluation process unfolding and the similarities between Greece and California.

Tags: bad loans, California, commercial real estate, credit markets, euro, FDIC, Greece, initial jobless claims, Treasury, unemployment, US Treasury, US$

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A maelstrom of misinterpretation dominates the financial media outlets today in regards to last night’s Fed action.

Click here for my audio post on the recent decision by the Fed to increase the discount rate.

After listening to the above post, Gary Rosenthal had the following comments on the Fed move:

1) Federal Reserve banks currently have a record high of $1.14 Trillion of excess reserves on deposit with the Fed. Thus, an increase in the discount rate is meaningless because the banks have no need to borrow and will not be borrowing for a very long time.

2) Therefore, we believe raising the discount rate at this point was merely a ploy to strengthen the US$ in advance of a major Treasury auction next week.

3) Note the anomalous strong behavior of Gold during the last 72hrs in the face of overwhelmingly “bearish” news: IMF announces further Gold sales, Fed increases discount rate and Gold Feb. futures/option expiration next week.

Tags: Fed, gold, IMF, Treasury, US$

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The following story represents perhaps the largest obstacle facing equity market integrity today.  The previous statement is not hyperbole. The collapse of equity prices in 2008 was presaged by a python-like constriction of credit. If the private sector cannot access credit then business grinds to a halt and as we saw in 2008 economic cataclysm ensues… 

Credit markets flash hottest warning signal since crisis

European credit markets are flashing the most serious warnings signs in a year as the yields on risker bonds rise sharply and a string of companies cancel share flotations, raising fears that the recovery may falter in coming months.

The Markit iTraxx Crossover index measuring yields on lower-grade debt has jumped by almost 130 basis points since mid-January to 514, while the main index of investment grade bonds has jumped by a third to 93. “This is the biggest move since the financial crisis in early 2009, said Gavan Nolan, Markit’s credit analyst.

The rating agency Moody’s said market ructions have led to a “material” rise in borrowing costs over the last month, prompting the cancellation of debt issues by the Dutch energy group New World Resources, Italy’s Snai betting group, and the UK’s Travelport. Sixteen companies wordwide have pulled debt issues worth a $7.3bn (£4.66bn) since mid-January, including Canada’s Bombardier.

Read More…

…Will the Sovereign debt issues of Europe migrate across the pond?  The following story suggests the answer may be yes. The lack of foreign demand for US debt will have the effect of increasing rates. However, since an increase in rates would be the death knell of our supposed economic recovery we would expect the Fed to attempt to fill any gap foreigners create. These actions would be, of course, US$ bearish. So while the talk of an end to Q.E. intensifies reality of the situation suggests otherwise….  

Foreign demand falls for Treasuries – Financial Times 

Financial Times reports foreign demand for US Treasury securities fell by a record amount in December as China purged some of its holdings of government debt, the US Treasury department said on Tuesday. China sold $34.2 bln in US Treasury securities during the month, the US Treasury said on Tuesday, leaving Japan as the biggest holder of US government debt with $768.8 bln. China overtook Japan as the largest holder in September 2008. The shift in demand comes as countries retreat from the “flight to safety” strategy they embarked on upon during the worst of the global economic crisis and could mean the US will have to pay more to service its debt interest. For China, the shedding of US debt marks a reversal that it signalled last year when it said it would begin to reduce some of its holdings.

“Credit is a system whereby a person
who cannot pay gets another person
who cannot pay to guarantee that he can pay …”
Charles Dickens (1812-1870)

Tags: China, Credit, credit markets, equity markets, Q.E., sovereign debt, US Treasury, US$

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Euro zone gives Greece 30 days to show good on deficit – Reuters

The tsunami of Greek fear begins to ebb and like proverbial clockwork the US$ drops almost 1%, the equity markets rally over 1% and Gold runs back above the $1100 level up over 1.5%.

By now, as readers of this blog, the financial market behavior described above should come as no surprise.  I exposed the market’s playbook on Feb. 9th and directly addressed the perennial gold bears by saying, “They have not owned Gold during its nearly 300% increase over the last 10 years, but somehow, through a haze of delusional arrogance, they are sure prices have peaked.”

In the five days since that comment Gold has rallied 5%.  Coincidence? Maybe. I’ll concede, sometimes we’re simply lucky, but when understanding is acute luck becomes more pervasive and that, my friends, is called success.

For the last few months, the fear of  reduced stimulus and quantitative easing has gripped the markets. In an apparent effort to support the US$, government officials and Fed members have raised the expectations of economic growth and reduced expectations of Q.E.. I have, time and again, called this type of  jawboning nothing more than propaganda. I explained as much in my Jan. 20th post and highlighted the “need for a new round of stimulus” demand from the conference of mayors on Jan. 22nd as the beginning of a shift in the wind.

Well, today, I would like to say, the wind is a steady 10-15kts in the direction of stimulus and looks to be increasing over the coming weeks.  Evidence for this forecast below…

IMF tells bankers to rethink inflation – WSJ

WSJ reports the IMF’s top economist, Olivier Blanchard, says central bankers should consider aiming for a higher inflation rate than they do currently to lessen the chances of repeating the recent severe recession. Mr. Blanchard said the global economic downturn revealed flaws in macroeconomic policy, especially the reliance primarily on interest rates to manage economies. Although Japan had fallen into a decade-long funk despite low inflation and low interest rates, “most people convinced themselves that the Japanese didn’t know what they were doing,” Mr. Blanchard said in an interview. In a new paper with two other IMF economists, Giovanni Dell’Ariccia and Paolo Mauro, Mr. Blanchard says policy makers need to consider radically different approaches to deal with major banking crises, pandemics or terrorist attacks. In particular, the IMF paper suggests shooting for a higher-level inflation in “normal time in order to increase the room for monetary policy to react to such shocks.” Central banks may want to target 4% inflation, rather than the 2% target that most central banks now try to achieve, the IMF paper says.

Australian Finance Minister Says More Stimulus Needed

Feb. 7 (Bloomberg) — Australian Finance Minister Lindsay Tanner said the nation’s economy remains fragile and that it will require more stimulus this year.

Australia’s long-term debt, accumulated through the global financial crisis, is also a serious matter, Tanner said on Network Ten’s “Meet the Press” program.

Read More…

G-7 Vows to Keep Economic Stimulus Even as Budget Deficits Grow

Feb. 7 (Bloomberg) — Group of Seven finance ministers pledged to press ahead with economic stimulus measures even as investors intensify their focus on mounting budget deficits.

Read More…

In conclusion, I’d like to accentuate the following analysis of the Japanese experience with private sector de-leveraging. I feel these issues are at the very center of the problems facing our markets…

Richard Koo’s book about the lessons from Japan’s balance sheet recession: The crux of his analysis is that governments have no option but to stimulate aggressively all the while the private sector is de-leveraging. ANY attempt at fiscal cuts simply results in renewed recession and a further loss of confidence, thus making it even harder and more costly to sustain any subsequent recovery and hence the budget deficit ends up bigger than before.

Tags: equity markets, euro, gold, Greece, IMF, Inflation, QE, Quantitative Easing, Stimulus, US$

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Turn off the TV and forget about the newspaper. If you want to understand the equity market gyrations of the last couple of weeks simply log on to an internet service like Briefing.com and watch for updates to the sovereign debt crisis.   Today’s trading is a perfect example of this new paradigm.  The Greek tragedy has turned into a farce as constant rumors have succeeded in whipping the markets into a frenzy.

Markets opened today’s trading on a firmer note because…

Greek bailout speculation lifts euro – Reuters

Reuters reports euro rose on Tuesday on speculation that European Union nations could bail out errant member Greece, while global stocks were flat and emerging market shares climbed. Expectations about a rescue for Greece followed news that European Central Bank President Jean-Claude Trichet was leaving a meeting of central bankers in Sydney early to attend a European Union leaders’ summit. EU leaders will hold a special summit on the economy on Thursday in Brussels amid increasing worries that Greece and other so-called peripheral euro zone economies cannot handle their debts and deficits. Spreads between German 10-year bonds and Portuguese and Spanish equivalents tightened. The spread with Greek debt was steady, but wide at 365 basis points.

…Then things went into high gear when this story hit the wire:

Germany Preparing Aid Package To Greece, FTD Says — Bloomberg

…The above news hit at 11:48, but wait, at 12:41 the following news splashed the wire and markets swooned:

German govt spokesman says reports about decision on aid for Greece are “unfounded” – Reuters

…But cooler heads prevailed and by 2:43 the market regained its footing as…

Germany considering loan guarantees for Greece, other troubled Euro partners, source says – WSJ

My purpose for the play by play of today’s equity action is to illustrate the lunacy of attempting to build an investment strategy based on short-term market swings.

After a couple of weeks of a strong US$ brought on by the Greek situation, I am inundated with comments from would-be experts that the rally in Gold is over.  These same experts, who are convinced they can spot the top in Gold prices, have been unable to spot the best bull market of the last decade. They have not owned Gold during its nearly 300% increase over the last 10 years, but somehow, through a haze of delusional arrogance, they are sure prices have peaked.  

When will Gold prices peak? Don’t know for sure. Trying to pick a price is a fool’s errand.  But I will tell you this: When Gold is, say, $3000/oz and I’m inundated with comments that prices are headed for $6000/oz I’ll be selling.

The following comments exemplify the actual long term trends we believe require scrutiny during the building of an investment strategy.  Yes, sovereign debt woes are a problem, but so are the debt woes of US states.  Running from the Euro into the US$ appears short-sighted and, to us, resembles the hapless effort of running from the deck into the galley of the Titanic. The only real safety (in a world where governments are playing the dangerous game of competitive devaluation and stimulus leapfrog) is the safety of Gold. Please hold onto the bar….    

In a nutshell, toxic assets have basically been swept under the rug in the hopes that we will outgrow the problem. Leverage ratios across every level of society are still reaching unprecedented levels as the public sector sacrifices the sanctity of its balance sheet in its quest to stabilize the dubious financial position of the household and banking sectors in many parts of the world.

Whatever bad assets have been resolved have almost entirely been placed on the books of governments and central banks, which now have their own particular set of risks, as we have witnessed very recently in places like Dubai, Mexico, and Greece, not to mention at the state and local government level in the United States. We simply have not seen a reduction in the percentage of properties with mortgages that are “under water”, hence the FDIC has identified 7% of banking sector assets ($850 billion) that are in “trouble”, so how can it possibly be that the financial system is anywhere close to some stable equilibrium? – David Rosenberg

Tags: EU, euro, FDIC, gold, Greece, investment strategy, sovereign debt, US$

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Perspective: US$ vs. Gold

Tags: ben bernanke, debt-ceiling, economy, GDP, Geithner, gold, gold prices, obama, Q.E., Quantitative Easing, U. S. economy, US$

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G.O.P. takes Massachusetts Senate seat – NY Times

NY Times reports Scott Brown, a little-known Republican state senator, rode to an extraordinary upset Tuesday night when he was elected to fill the Senate seat that was long held by Edward M. Kennedy in the overwhelmingly Democratic state of Massachusetts. By a decisive margin, Mr. Brown defeated Martha Coakley, the state’s attorney general, who had been considered a prohibitive favorite to win just over a month ago after she easily won the Democratic primary. With all precincts counted, Mr. Brown had 52% of the vote to Ms. Coakley’s 47%. “Tonight the independent voice of Massachusetts has spoken,” Mr. Brown told his cheering supporters in a victory speech, standing in front of a backdrop that said “The People’s Seat.” The election left Democrats in Congress scrambling to salvage a bill overhauling the nation’s health care system, which the late Mr. Kennedy had called “the cause of my life.” Mr. Brown has vowed to oppose the bill, and once he takes office the Democrats will no longer control the 60 votes in the Senate needed to overcome filibusters. There were immediate signs that the bill had become imperiled. House members indicated they would not quickly pass the bill the Senate approved last month.

There is hope! Can the American people bring balance back to our capital as well as some much need accountability? Yes, we can! Yes, we can! Yes, we can!

I’m not suggesting Brown is the embodiment of all that is good, but I am saying this is a wakeup call for the political machine that has been grinding the American dream assunder.  A dream that was never built on handouts and entitlements but instead on entrepreneurial spirit, individual freedom and hard work.

Ok, enough of the patriotism. How will this news affect the investment world? I expect the immediate reaction will be a fiscal responsibility trade. The US$ will rally and Treasury bonds will catch a bid as yields go lower. Meanwhile, commodity prices will suffer as will equity prices. However, this trade will not last long. The economic situation is not improving despite all the financial media cheerleading of the last few months. The reaction to Q4 earnings has been disappointing, as we predicted. Companies have been unable to hide the fact that organic growth is nonexistent. Add to this disappointing earnings picture the Brown victory in Massachusetts and you get a recipe for another stimulus package before the November elections.  Hence, the idea of fiscal responsibility is a pipedream.    

If one would care to argue the economic picture is becoming brighter I offer Exhibit A:

Housing Starts Plummet

Housing starts continued their up one month, down the next trend as starts fell 4.0% from 580,000 in November to 557,000 in December. The consensus expected starts to fall only 8,000 to 572,000…The drop in starts was completely attributed to a lack of single-family construction. Single-family home starts fell 6.9% from 490,000 in November to 456,000. It seems builders are well aware of the pitfalls of starting new construction given that the latest increases in existing and new home sales were propped up by government support. Since new homes constructed today would not come onto the market until after the government stimulus expires, it makes sense that builders would hold off on beginning new single-family homes until they are sure demand has stabilized….

The housing starts number is volatile, you say. Things can still get better, you dream. Not without more government stimulus, I reply. And I offer Exhibit B as another nail in the coffin of a housing recovery:

FHA to Lift Mortgage Insurance Fees – WSJ

The Federal Housing Administration will announce more-stringent lending requirements and higher borrower fees on Wednesday to cushion against rising defaults and stave off the need for a taxpayer bailout of the agency.

The FHA, which has taken on a major role in the housing market during the economic downturn, doesn’t lend money to home buyers, but insures lenders against default on loans that meet FHA criteria. In exchange for that backing, borrowers who take out FHA-backed loans must pay an upfront insurance premium, currently set at 1.75% of the total loan amount. The premium can be rolled into the loan.

The FHA is set to raise that fee to 2.25%, the second increase in the past two years, according to people familiar with the matter. The value of the FHA’s reserves to cover losses has fallen to $3.6 billion, about 0.5% of the $685 billion in loans outstanding, down from 3% a year earlier. Congress requires the agency to maintain a 2% capital-reserve ratio. If the larger upfront fee had been in place last year, the FHA would have boosted its reserves by more than $1 billion.

Also to boost the reserve, the FHA will ask Congress to increase a separate insurance fee that borrowers pay annually, people said. If the agency were to run short of cash to cover projected losses, it likely would have to ask Congress for money for the first time ever.

This move by the FHA will have the effect of rising rates for FHA borrowers (those most in need of a loan with the worst credit) resulting in a further reduction of demand. With the end of government incentives and the effective increase in mortgage rates is it any wonder housing starts are plummeting?

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Tags: commodities, earnings, economy, FHA, G.O.P., housing, housing starts, Investment, Massachusetts, mortgage, Stimulus, treasury bonds, US$

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