Sunday, December 23, 2012

QE4, the Fiscal Cliff & the Buiding Disaster

Phoenix Capital Research recaps some of what I have posted and tells you why we are already in trouble.

  1. We're likely already in a recession again (though we really never left one since 2008)
  2. The Fed will soon be buying 90% of all new fixed income.

Thursday, December 20, 2012

CPI: How the Government Steals from You

One of the things I try to accomplish with this blog is to illustrate how the economy works to the non economist who wants to understand better how the economy works and effects their pocket book. Today. One of my most popular posts was one of my earlier ones explaining how real vs. nominal rates affect your wealth. Almost a year later its still one of the most viewed posts.

Today we will examine CPI, how its been calculated over the years and how it impacts you, especially with regard to social security. Its especially timely given that in the fiscal cliff negotiations, one of the proposals is to yet again change how CPI is calculated in order to save the government money by providing less social security while taxing others at higher rates.

Saturday, December 15, 2012

Marc Faber Unleashed

Marc Faber of the GloomBoomDoom Report is one of my favorite economists not just because he is one of the rare economists who understand markets rather than just theory, but because his track record proves he sees what's happening and what's coming. Dr. Faber is one of the few that saw the 2008 crisis coming.

In the extended interview below he gives his opinion on many subjects and explains the source of the crisis, a subject either not understood or ignored by most of the media. Its a 50 minute interview that I believe is worth your time, but if you don't have the time, here are the quick notes:

  • Credit from 2000 to 2007 expanded by 4.2 Trillion economy total credit by 21.3T (note: this means $21 Trillion of new credit was needed to create $4 Trillion in new growth. The same .2 negative multiplier I've noted previously in a Charle Biderman interview.)
  • Credit expanded at 5 times GDP, i.e. $1 dollar of debt created .20 of economic output.
  • QE is leading to higher wealth inequality.
  • Cost of living in the US rising at 5-8%
  • US Government bonds are a bubble that will burst one day.
  • Student loan debt is now over $1 Trillion is also a bubble.
  • Canadian real estate is in a bubble, especially in Vancouver.
  • To believe China doesn’t have economic cycles is a fallacy. In my view it is hardly growing and could crash.

The interview is very interesting but the one thing I thought was most important was the above description of how it now takes $5 of new debt for every $1 of new economic activity in both the private and public sector. This is proof of the debt saturation of our economy and once again shows why Obama's $800 Billion stimulus was a failure. Its also very instructive of what we might expect if we go over the "fiscal cliff". If government spending is cut it is believed by all economist to have a negative effect on US GDP growth. But what the negative multiplier indicates is that each reduction of spending may have a far less impact on the economy than expected. The converse of the negative multiplier implies that a $5 reduction in new deficit spending may only cause a $1 reduction in economic activity. Perhaps in the long run that's not such a bad thing.

Wednesday, December 12, 2012

Fed confirms $1 Trillion new stimulus per year to infinity

As expected, The US Federal reserve has decided continue quantitative easing past this month when the $45 Billion operation twist was set to end. This had been "sterilized", meaning they were using maturing treasuries to buy new treasuries. After December 31st, it will be unsterilized (ie new printing). They will also continue to buy $40 Billion per month of toxic mortgage assets to remove them from bank balance sheets bringing the total to $85 Billion per month or a little over $1 Trillion per year.

From CNBC:

The Federal Reserve met market expectations Wednesday with another round of easing, this time with a pledge to keep interest rates low until unemployment falls below 6.5 percent and inflation tops 2.5 percent.

Sunday, December 9, 2012

Teresa Ghilarducci Wants to Confiscate Your IRA, 401k & Pension

Back in August I wrote about Teresa Ghilarducci from the Schwartz Center for Economic Policy Analysis who wants to solve all of our problems by creating "Universal Retirement" benefits. This post has obviously received a lot of attention given that it has remained the most read post both since this blog was created as well as the most read on a daily basis.

 I had pointed out back then that there are currently about  $2.9 Trillion in 401k's and IRA's. This is a sizable sum our bankrupt government would like to get its hands. I explained that they would confiscate the money in exchange for IOU's that would essentially become the basis of a second social security program. Of course, much like social security you would not be able to name a beneficiary and there would be no guarantee that the money wouldn't be spent on whatever the government wanted. It would merely be a one time confiscation with a new entitlement on the US balance sheet.

The US Fed Monster to Buy 90% of New Treasury Issues

Back in September during the heat of the Presidential election, I posted that the US media was making a big deal about Romney's "47%" comment while ignoring something quite stunning that he said. Romney had mentioned:

"...the Fed's buying like three-quarters of the debt that America issues."
 "We're living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who's loaning us the trillion? The Chinese aren't loaning us anymore. The Russians aren't loaning it to us anymore. So who's giving us the trillion? And the answer is we're just making it up."

Saturday, December 8, 2012

Gresham's Law Applied to Gold & Silver

A better explanation is that when money is not valued correctly or its price is distorted it may be pulled out of circulation when its perceived value is greater than its distorted "market" value.

Let's say the price of some metal (say gold or silver) is manipulated by market participants...lets just say by some company like JP Morgan, who artificially keeps the price low by say...using paper derivatives, unbacked by any metal. Let's also say some currency, say the US Dollar is over valued by its users who are unaware the Federal Reserve is debasing the dollar by printing trillions. The result would be an overvaluation of the US Dollar and an undervalued distorted price of metal.

Some market participants, who were aware of the distortions would use their Dollars to buy the metals, attempting an arbitrage between the two forms of money. This could be done by individuals who want to preserve their wealth by changing currencies (from dollars to gold) or by countries like China who want to get rid of foreign reserves in the depreciating currency to buy sound money.

Now you know how Gresham's Law effects gold, and silver and why shortages will result. Gold and silver will be hoarded by those who understand its true value (as well as that of the dollar) until the prices reflect their true price.

Friday, December 7, 2012

More BS at BLS but Revisions to Reality

In previous months I wrote about some of the pre-election shenanigans in the jobs numbers and a manipulated unemployment rate that did not reflect reality including a blatant omission in new jobless claims in one of the nation's most populated states, California. Today we get more BS but with some revisions that reflect reality


Job Creation Hits 146,000, Rate at 7.7%

So once again, the job number is well below the 200 to 250k needed to lower the unemploymnet rate through job growth. So why has unemployment dipped again? Its the same old story.

Sunday, December 2, 2012

Well Isn't This Interesting?

If you haven't already, please vote in the new poll on the bar to the right:

Will we go over the fiscal cliff? Someone seems to think we will.

Beware Chasing Yield

Often times here at Macrowealthpreservation, I post updates on factors effecting gold because I believe that its one of the few places where, in this environment, wealth can be both preserved and even grown given the government controlled markets we have experienced since 2008. Today however, I just want to point out the dangers of chasing yield, especially in the area of high yield or "junk" bonds.

The Fed's ZIRP (zero interest rate policy) have lowered interest rates to levels few professionals ever thought possible. This has resulted in savers seeing little opportunity to earn interest in savings accounts, money markets, CD's, or relatively safe bond funds. Indeed, many of these pay essentially zero and substantially less than the real rate of inflation. Even when compared to the government's CPI, which massively under reports the real inflation level people experience, savers using conservative instruments that I mentioned above are actually losing purchasing power. The Bureau of Labor Statistics reported recently in October that the CPI for the previous 12 months was a well controlled 2.2%. If you are getting even 1% from a CD (you can check rates at you are at a loss when you minus out the 2.2% of CPI. Its much worse if you follow Shadowstats and see that its more like 10% when calculated in the 1980 based method.

Friday, November 30, 2012

Billionaire Eric Sprott: Gold to rise 500%

From KWN:

“There’s been some discussion on the web of various dealers having difficulty fulfilling orders.  I’ve confirmed through my channels that there has been a very big increase in demand in the last six to eight weeks.”

“We can see that by looking at the US Mint statistics.  For example, in this month, which is not complete yet, gold sales have more than tripled from the same time last year.  Silver sales are up 120% so far.  You can kind of sense that the demand for both gold and silver is back to very significant levels.

That’s not just in North America by the way....
“We read articles of how the Indian demand has picked up here recently.  They think they are going to have a big 4th quarter demand for gold.

Are we Going Off the Fiscal Cliff?

To the right of this post is a new section to vote on a question. So what do you think? Are we going off the fiscal cliff??

Monday, November 26, 2012

The Velocity of Money

This four and one half minute video from Lauren Lyster on Capital Account sums up money velocity for the non-economist.

And to get a good look at the money velocity from the St. Louis Federal Reserve:

From the video and the chart above you can see that even as the money supply has massively expanded through Fed quantitative easing, that the velocity has dropped below 1, meaning there is no multiplier. One new dollar is producing less than one dollar of economic activity. Part of this is explained by the large banks holdings of cash the banks keep on deposit with the Fed as "excess reserves" rather than being lent to businesses and consumers. In addition, large corporations have been sitting on hoards of cash as they watch the US government battle over Cap-N-Trade, Obamacare and tax policy, all things that effect business decisions and have created uncertainty.

You may also recall from a previous post a similar concept of the money multiplier from new debt spending and why the $831 Billion stimulus failed. That multiplier was also less than one. Charles Biderman estimated it to be about .2 (point two). So for every dollar spent there was 20 cents of new economic activity.

From the perspective of the Fed, these lower multipliers are considered evidence of deflation and "justify"the massive printing of new dollars irregardless of their effect in other areas. The low multiplier also explains the relatively subdued levels of inflation (though real inflation is higher that what the CPI suggests).

Monday, November 19, 2012

Exchanges Accepting Gold as Collatoral

During the 2008 crisis when stocks, bonds and derivatives were selling off, gold was sharply sold off too. Many pundits pointed to this sell off as proof that gold wasn't the safety asset gold bugs had claimed. Now we know that gold was being sold off because it was the asset with the least losses and was being sold by traders and bankers to meet margin calls on their plummeting stocks, bonds (especially mortgage backed) and derivatives. Today, exchanges are now beginning to allow institutional clients to use physical gold to meet margin calls. To me this means three things:
  1. Gold is being recognized as a top tier asset.
  2. The exchanges recognize that when the inevitable happens, bonds (Europe PIIGS) will fall to their true intrinsic value (zero). At that time gold will fill a very important need: one of the few assets not perfectly correlated in a disaster.
  3. Exchanges recognize the Bank of International Settlements (BIS) will likely make gold a Tier 1 asset, which means it could be recognized at 100% face value rather than 50% value today as a Tier III asset.
For more background and to "connect the dots" you may want to reread: China Prefers Gold to US TreasuriesWill Gold Finally Become Tier 1 Capital, and How Tier 1 Capital Affect Gold.

Below is from Phoenix Capital Research via Zerohedge:

Tuesday, November 13, 2012

China's gold reserves should reach 6,000 tons in the next 3-5 years

I pointed out recently that China is moving away from US Treasuries and acquiring tons of gold (literally). Now China has shown their hand. From Zerohedge:

"...the China Youth Daily quoted State Council advisor Ji as saying that a team of experts from Beijing and Shanghai have set up a "task force" last year to consider growing China's gold reserves. "We suggested that China's gold reserves should reach 6,000 tons in the next 3-5 years and perhaps 10,000 tons in 8-10 years," the paper quoted him."


From Bloomberg:
  • China needs to add to its gold reserves to ensure national economic and financial safety, promote yuan globalization and as a hedge against foreign- reserve risks, Gao Wei, an official from the Department of International Economic Affairs of Ministry of Foreign Affairs, writes in a commentary in the China Securities Journal today.
  • While gold prices are currently near record highs, China can build its reserves by buying low and selling high amid the short-term volatility, Gao writes in newspaper
  • China’s gold reserve is “too small”, Gao says.

Yuan globalization, backed by gold. China sees two things happening:
  1. The US is self-destructing economically but is getting away with "murder" because the USD is the global reserve currency (for the moment) and is still backed, as far as we know, by the world's largest gold hoard.
  2. China is preparing to fill the vacuum left by the US when the dollar collapses or fades to obscurity by backing their own currency either implicitly or explicitly with gold.
China has essentially guaranteed the price of gold will be supported for years to come even as the US Federal Reserve has guaranteed the dollar will decline. Once you know these two things, it doesn't take a genius to figure out where your wealth should be if you want to preserve and grow it.

CFTC's Bart Chilton: Yes, PM's are Manipulated

Its frustrating that the investigation continues but at some point it will end and hopefully we get some real action taken. Even if not, just getting the position limits in place would massively degrade a bank's ability to manipulate prices.

And btw, when he refers to a trader he cannot name, you can bet its either JP Morgan or HSBC.

Monday, November 12, 2012

Data Points

From KWN:
“On Friday in the United States, the Department of Agriculture released its report showing the number of people receiving food stamps in August.  The total is 47.1 million people, which is a new record high, Eric, but here is what I believe to be a staggering comparison.  The number of people receiving food stamps increased in just that one month by over 420,000, while only 96,000 new jobs were created in August.”
So 4.3-times more people started receiving food stamps in August than got jobs.  Even the miracle 175,000 monthly increase in jobs that was reported just before the election pales in comparison to the number of new people receiving food stamps in August.

What this shows me, Eric, is that despite all of the hype coming from the politicians and central planners, the US economy continues to deteriorate rapidly

Yep, four times as many people were added to food stamps than jobs created. 

Sunday, November 11, 2012

China Prefers Gold to U.S. Treasuries

I pointed out in an October post that China had imported a massive 512 tons of gold YEAR TO DATE.

Prior to that I posted a remarkable quote from Romney at that now infamous fundraiser where he made the "47%" comment. As a reminder:

From Motherjones:

Romney: Yeah, it's interesting…the former head of Goldman Sachs, John Whitehead, was also the former head of the New York Federal Reserve. And I met with him, and he said as soon as the Fed stops buying all the debt that we're issuing—which they've been doing, the Fed's buying like three-quarters of the debt that America issues. He said, once that's over, he said we're going to have a failed Treasury auction, interest rates are going to have to go up. We're living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who's loaning us the trillion? The Chinese aren't loaning us anymore. The Russians aren't loaning it to us anymore. So who's giving us the trillion? And the answer is we're just making it up

Connecting the dots? China is not buying significant US Treasuries anymore and are taking delivery of physical gold. Here's the update on demand for foreign owned Treasuries:

Friday, November 9, 2012

Best Investment Under Obama the Last Four Years: Gold & Silver

This is a fantastic interview and must watch. Hear James Turk's take on where the Dow/ Gold ratio is going and his estimate at where they will meet.

The first 13 minutes are a MUST WATCH.

In another week I hope to return to regular posting and provide a some analysis for investing in the next four years under a second Obama term.

Thursday, November 1, 2012

Is This What A Job Recovery Looks Like?

US Planned Layoffs Jump to a 5-Month High:

The number of planned layoffs by U.S. firms jumped 41.1 percent in October to the highest level in five months, although the number includes more than 10,000 jobs in U.S.-owned auto plants in Europe, a report said on Thursday.
 Employers announced 47,724 planned job cuts last month, up from September's 33,816, according to the report from consultants Challenger, Gray & Christmas. It was the highest level since May. U.S. automotive companies said they will let go of 11,615 workers, though that includes 10,900 Ford Motor [F  11.015    -0.145  (-1.3%)   ] layoffs that will affect workers in Belgium and the U.K. (Read More: Ford to Shut European Plants, Cut Jobs as Losses Mount)
The planned layoffs were modestly higher than the 42,759 announced in October last year. The total for the year so far stands at 433,725, down from 521,823 for the same period in 2011.
Read more

Monday, October 29, 2012

BLS May Delay Jobs Numbers Until After Election (UPDATED)

BLS now says they will release employment data this Friday-on time.

You may recall in early October I posted a story called BLS(BS) Strikes Again where I noted that the lower jobless claims was attributed to "one large state" that did not report their numbers. The number were revised upwards by 3,000 workers.  In addition, I pointed out that the seemingly impossible drop in unemployment (the biggest drop in 24 years), where only 114k jobs were added, was the result of the "household survey" that samples 50k households. Because the sample is small it often has a large margin of error of about plus or minus 500k jobs! As a result we would expect that this was merely an outlier that would be adjusted in the final jobs figure to be reported this Friday.

Or maybe not.

Today, the Wall Street Journal reports that the BLS will try to release the figures:

The U.S. Labor Department on Monday said it is “working hard to ensure the timely release” of the October jobs report, saying it intends to released the report on schedule Friday despite Hurricane Sandy.
“It is our intention that Friday will be business as usual,” said Carl Fillichio, a senior press advisor at Labor. Mr. Fillichio’s statement provided clarity to an earlier Labor statement that said the agency would assess how to handle data releases this week after the “weather emergency” is over.
Friday’s employment report will be the final read on the labor market ahead of the November elections. Initial reports that a delay was possible briefly fueled speculation that the jobs data, good or bad, might not be revealed until after the elections.

Given the likely correction in the household survey that will likely correct upwards the unemployment rate and the strong likely hood that new unemployment figures will be higher given all the layoff notices going out, the administration would like nothing better than to have these numbers delayed until after election day.

Too conspiratorial? Maybe, but it would fit a pattern lately of flawed data coming out of the government.

We'll see.

Friday, October 26, 2012

Q3 GDP Prints at 2%. More Funny Numbers?

In the second Quarter GDP first printed at 1.7% and then was revised downward to 1.3% which is quite anemic and well within the the fudged CPI variance between the BLS(BS) and reality. Though 2% doesn't sound too bad consider this:

click to enlarge graph

Government consumption, primarily defense spending was .71%! Pretty unusual if you look at the graph above where government consumption was a drag (negative) on the economy. I'm sure, however, this is completely coincidental.  So if GDP was 1.29% without this one time spending and revised down by .4 as it was last quarter we would be left with .89% GDP for the quarter. That would be more than just anemic, but indicative of a coming recession.

But does it make sense? Well, given that corporate earnings reported over the last two weeks have not been good and the seemingly endless announcements of layoffs, it would indeed, seem to make sense.

Oh, and to add to that list of newly unfortunate newly laid off you can soon add another 10,000 at UBS.

Thursday, October 25, 2012

It Wasn't Just my Imagination

In the beginning of October, in a post titled More BLS(BS) and dead fish I noted that there had been an uptick in lay off notices lately. It wasn't just my imagination:

As I said then, we may be entering a recession once again before we've recovered from the last one. If so, this would be similar to that of the Great Depression where there were periods of growth but without a full economic recovery. 

Sunday, October 21, 2012

China Gold Imports Up 512 Tons Year to Date and Counting

Over the last ten months I have pointed out that demand for physical gold was increasing and that much of the demand was coming from China. Because China does not often provide information on their gold holdings it is often difficult to know just how much gold they have. This has led to much speculation. Today though, we get a least a partial update (Though I suspect given Chinese lack of transparency the real number may be even higher):

First it was more than the UK. Then more than Portugal. Then a month ago we said that as of September, "it is now safe to say that in 2012 alone China has imported more gold than the ECB's entire official 502.1 tons of holdings." Sure enough, according to the latest release from the Hong Kong Census and Statistics Department, through the end of August, China had imported a whopping gross 512 tons of gold, 10 tons more than the latest official ECB gold holdings. We can now safely say that as of today, China will have imported more gold than the 11th largest official holder of gold, India, with 558 tons.
Yet despite importing more gold than the sovereign holdings of virtually all official entities, save for ten, importing more gold in July than in any month in 2012 except for April, importing more gold in 8 months in 2012 than all of 2011, and importing four times as much between January and July than as much as in the same period last year, here is MarketWatch with its brilliant conclusion that the 'plunge' in gold imports in August can only be indicative of the end of the Chinese gold market, and the second coming of infinitely dilutable fiat.
“China’s near-term appetite for gold appears to be waning as bullion imports from Hong Kong slow,” HSBC analysts said in a note following the data release last week.

Anecdotal evidence also pointed to the cooling trend, with one Hong Kong bullion dealer saying the word from mainland clients was that gold inventories are saturated.

“What we are hearing from our customers is that they were buying gold rapidly over the last couple of years, but they would now see some of their stocks sold off before they rebuild some of their inventories,” Scotia Mocatta managing director Sunil Kashyap said in Hong Kong.
There is spin, and there is of course, reality. We urge readers to identify where on the chart below is the evidence of Chinese disillusionment with gold:

Furthermore, with the status quo cartel in desperate need of China stepping up its monetary easing, and jumping right into the race to debase, which is absolutely critical to halt the plunge in tech company revenues and earnings, any interim slowdown in purchases is merely a springboard for even more purchase in the future once inflation does come back to China with a bang.
Incidentally, one thing that MarketWatch completely forgot about is that in Q4 Chinese gold purchasing, all monetary else equal, is set to spike in Q4. From the South China Seas:
Fung expects gold imports on the mainland to stay soft this month as prices have continued to remain high.

"However, gold consumption is likely to climb again in the fourth quarter, a traditionally peak season when Chinese people buy gold jewellery for weddings and presents," he added.
All rhetoric aside, one unspinnable aftereffect of China's relentless appetite for gold comes from a different place, namely Australia, where gold just surpassed coal as the second most valuable export to China. From Bullionstreet:
Australia's gold sales to China hit $4.1 billion in the first eight months of this year as it surged by a whopping 900 percent.

According to Australian Bureau of Statistics, the yellow metal became the second most valuable physical export to China, surpassing coal and only behind iron ore.

The unprecedented jump in gold sales, along with continued acceleration of export revenues for other commodities led by coal, up 80 per cent to $4bn, caused total exports to China to rise by 10.7 per cent for the year to August, the Bureau said.

Perth Mint supplied most of the gold to China through a variety of banks.

Analysts said Chinese buyers are hoarding the precious metal amid a slowing economy, property-buying restrictions and uncertain financial markets as its central bank increases its holdings.

China's foreign currency reserves of gold are low and its move to build them up will provide an important base demand for gold, they added.
In other words, take the chart above, showing only Chinese imports through HK, and add tens if not hundreds more tons of gold entering the country from other underreported export channels such as Australia. One thing is certain: China no longer has any interest in buying additional US Treasurys. What it does have an interest in is up to readers to decide.

For previous stories on Chinese gold buying click the links below:

 Titanic War in Gold Between East & West

 Hong Kong to Open 1,000 Metric Ton Gold Vault

 China Imports More Gold From Hong Kong In Five Mon...

 News From the "London Trader"

 More Gold is Leaving "The System"

 John Embry on China & Gold

 More on China and Gold

 China takes advantage of US Fed stupidity

Wednesday, October 17, 2012

How Gold Gets to $12,884 per Oz (Updated w/ Further Explanation)

In my last post I pointed out the relationship between gold and both the monetary base and the national debt. Gold prices in US dollars has an extremely high correlation to both. Today, via Zerohedge, I'll point out gold's value using the metric of the "coverage ratio" which is merely the price gold would have to trade at to back the amount of dollars printed 100% by the gold the Fed claims we hold in our national vaults.

As we will see, this historic average has been 40%. That is, we could back 40% of the currency outstanding with the national gold holdings we have. To be on a true gold standard would require 100% backing of our currency with gold. Today, as you will see below, the ratio is at the historic low of 17%. Which means we have printed so much money in recent years, we can only back 17% with gold at the current price. Below, the chart shows the required gold price at several ratios given the an anticipated $700 Billion of added dollars to the Fed's balance sheet through continued QE operations.

Even though we have presented comparable scenarios looking at the coverage of the US money base in gold terms previously, aka "gold coverage" ratio, including once from Dylan Grice, and once from David Rosenberg, now that we have drifted into a new, previously unchartered and very much open-ended liquidity tsunami, it is time to revisit the topic. Luckily, Guggenheim's Scott Minerd has done just that. Not only that, but he presents three distinct gold pricing scenario, attempting to forecast a low, medium and high price range for the yellow metal.
To wit: "The U.S. gold coverage ratio, which measures the amount of gold on deposit at the Federal Reserve against the total money supply, is currently at an all-time low of 17%. This ratio tends to move dramatically and falls during periods of disinflation or relative price stability. The historical average for the gold coverage ratio is roughly 40%, meaning that the current price of gold would have to more than double to reach the average. The gold coverage ratio has risen above 100% twice during the twentieth century. Were this to happen today, the value of an ounce of gold would exceed $12,000.” 

Tuesday, October 16, 2012

Gold Price Got You Down?

Here's just a reminder of one of the factors with the highest correlation to gold:

Now I may not be a genius, but I can see that as long as the national debt is increasing, so to must gold. And Where is our national debt at?

Click here for a live update

Jeff Clark from Casey Research also points out the high correlation with the monetary base:

Friday, October 12, 2012

The US Will Be the Last Domino to Fall

Michael Krieger is a former oil analyst for Lehman Brothers and writer of opinions about global macro economics for the investment community around the world. Many of his opinions reflect my own, though he is much better at articulating them than I am. For this reason I'm re-posting  his writing. Michael describes in the post below his surprise that the central banks have been able to hold things together as long as they have since the crisis of 2008 just as I have been. But unlike me, Michael sees a bigger picture and sees the collapse has already begun in other countries and will soon spread here. Markets can often seem completely calm on the surface just before things quickly go terribly wrong. This was the case with Greece sovereign bonds. Greece enjoyed low interest rates as a member of the EU until one day...they didn't anymore. Markets are like that. They can switch on a dime. Pay special attention to his analysis of the Dow:Gold ratio and his thoughts on Treasuries. The most important message though is that time is running out to prepare.

Titanic War in Gold Between East & West

As gold moves mostly sideways since the announcement of QEternity its worthy to note there is a titanic struggle in the gold markets between central banks of the West who want to keep gold prices down to hide the negative effects of unlimited printing and Eastern (mostly China) central banks that are using the artificially low prices to acquire huge amounts of gold to diversify their currency reserves and hedge their US dollar and Euro positions in government bonds. There's no way to know how long this struggle continues or which way gold might break in the short term but one thing is for sure: Western central banks must supply the gold that Eastern central banks are taking delivery of. Paper derivatives are not going to satisfy the Chinese. They know the game. So how much gold will Western central banks give up to preserve the current price? Who knows, but I'm sure this won't end well for those of us in the Western hemisphere. John Embry has more:

Thursday, October 11, 2012

BLS strikes again. Jobless #'s Missing CA!


Just a quick note following the manipulated jobs figures. Today the BLS(BS) reported the number of new jobless claims dropped from an adjusted figure of 369,000 last week to 339,000 this week.

From the Department of Labor:

The Labor Department said weekly applications fell by 30,000 to the lowest level since February 2008. The four-week average, a less volatile measure, dropped by 11,500 to 364,000, a six-month low.
Applications are a proxy for layoffs. When they consistently drop below 375,000, it suggests that hiring is strong enough to lower the unemployment rate.

Only problem? The new numbers are missing a "large state" that did not submit their numbers in time.

From businessinsider:

  • It is likely that some of the jobless claims in one large state--California--were not included in the claims reported to the Department of Labor this week.  This happens occasionally, our source says. When a state's jobless claims bureau is short-staffed, sometimes the state does not process all of the claims that came in during the week in time to get them to the DOL. The source believes that this is what happened this week.
  • The California claims that were not processed in time to get into this week's jobless report will appear in future reports, most likely next week's or the following week's. In other words, those reports might be modestly higher than expected.
  • The source believes that the number of California claims that were not processed totalled about 15,000-25,000.

Read more:

I'm sure this was just an oversight by the Democratically controlled state of California.

In normal times it would be absurd to think that agencies of the government would manipulate economic data. But one wonders, in light of a highly politicized EPA and National Labor Relations Board that has openly pushed a partisan agenda, just how far and deep does the rot go?

If you go back to my last post you'll see a list of mass layoffs announce by large companies. Ask yourself, "Do the unemployment numbers and new unemployment claims numbers make sense?"

UPDATE 10/12/12

Looks like California is denying the state is them, but businessinsider is holding to their guns.

Click below for more

Tuesday, October 9, 2012

More BLS(BS) and dead fish

Suspicion of the 7.8% unemployment rate is rising not waning.

From Trimtabs:

  • Largest September one month gain in BLS data since 1948!
  • Rarely in September do the number of employed increase.
  • Has happened only six times. Four times it was less than 100k.
  • 775k This time!
  • Since 1955 every September the number of part time workers fell. This time it exploded.

Friday, October 5, 2012

Unemployment at 7.8%????

The Bureau of Labor Statistics (BLS) reported today that 114,000 jobs were created last month and the unemployment rate fell to 7.8% (U-3). Some have been a little more than skeptical. Rick Santelli of CNBC, who had predicted the rate would cross below 8% before the election said, "I told you so!".

Jack Welch Tweeted: Unbelievable jobs number..these Chicago will do anything..can't debate so they change the numbers".

One might be excused for a little suspicion. The economy must add anywhere from 150-200K jobs per month to just keep up with the population increase. So how does an anemic 114K jobs lower the unemployment rate the most in 24 years??

Tuesday, September 25, 2012

REITS Are the Solution to the Housing Crisis

There were many causes of the housing crisis that hi the US in 2007 and set off the depression that began in 2008. Many of the problems remain but the biggest question is what do we do now? 

When the housing market began to decline many problems were created. Banks that held hundreds of billions in Mortgage backed securities found that what they had thought were low risk securities discovered they were taking huge losses. Home owners could not afford their mortgages anymore and the down real estate market put them “underwater”, that is, they owed more than their homes were worth. Many individuals chose to walk away from their debt to start anew while many others were foreclosed on by the banks. Banks hate foreclosures because they must recognize the loss, begin what can be expensive procedures to remove the occupant, and are stuck with property they don’t have the means to maintain and run a high risk they will be either occupied by squatters or gutted by criminals seeking a quick buck. Clearly, kicking homeowners out is undesirable for both parties. Banks then must sell the home in a declining real estate market bringing down the comps for the remaining neighbors, creating a “death spiral” that put the remaining neighbors under water.

Up to this point, banks have chosen to let many foreclosed homeowners stay in their homes paying nothing. This is known ad foreclosure stuffing. As stated above, this allows banks to put off the recognition of the loss and allows them to put off selling the home in a declining market. Whether banks foreclose or not they face a decline in revenues and accounting losses. A home owner who moves out loses their home and their families lives are put in upheaval. But for a new healthy real estate market to emerge, prices must correct and be allowed to fall to their real value. Only then will new buyers step in at the lower prices because one, homes are more affordable to young people who begin household formations and two, because people still view a home as their biggest investment and want to think the odds are in their favor their investment will increase in value rather than become a “money pit”.

Up to this point the Federal government has tried to help by easing requirements for homeowners to refinance. But this does little for people who are underwater by over one hundred thousand or more. Accounting standards were also suspended to allow banks to “mark to model” rather than “mark to market” making a joke of our accounting system which is a cornerstone of a free market since analysts rely on reasonable accounting to value companies. Meanwhile, the Federal Reserve has in both QE1 and the current QE3 bought mortgage securities to provide liquidity to banks. Certainly this is helpful to banks who get the bad debt off their balance sheet but is does little for the homeowners and worse it socializes the losses from the banks to the US taxpayer who see the value of their dollar reduced by the money printed by the Fed to buy the bank’s mortgage securities. So neither of these programs helps reset the market, rather they both stretch out the time it will take for the real estate market to find its new, lower equilibrium. Neither of these solves the documentation problem where documents on mortgages were incomplete, fraudulently signed or where documents are completely missing. This has clogged our courts with cases of homeowners suing their bank or fighting eviction and no clear indication as to who the real owners is legally.

The solution is REITS

Thursday, September 20, 2012

Money Going Down a Black Hole

For the past four years the Federal Reserve, the President and Congress have operated under the Keynesian notion that we can spend our way through the recession/depression/financial crisis, and that if we did, economic growth would eventually return. Keynes had the idea that during an economic down turn governments should engage in deficit spending as a counter cyclical economic force to speed up a recovery. Keynes even postulated that it didn't matter how the money was spent. A work crew could be hired to dig a hole while another was hired to fill it in and the result would still be economic activity. Of course I'm over simplifying some what. Keynes also thought we should run surpluses when times were good. But it is essentially this theory that both the US government and the Fed have operated under in their attempt to get the economy moving again.

In February 2009 congress passed the American Recovery and Reinvestment Act of 2009. The bill's total cost was  $831 Billion dollars. It was then thought that there would be a "multiplier" effect, that is for example, for every dollar spent on the stimulus, there would be say $1.50 of economic activity generated. This is precisely what Christina Romer (Chair of the Council of Economic Advisers in the Obama Administration) had predicted. So in other words, the $831 Billion spent would generate about $1.2 Trillion in new economic activity. This was the basis of the Obama administration's projections for unemployment shown below:

Obviously the actual results were not what had been expected. Why? According to John Cochrane:

Estimated macro models used for policy evaluation—whether old Keynesian or new Keynesian—have this basic mechanism built into them. However, they differ greatly in their predictions of the policy impact because of different assumptions about expectations, the marginal propensity to consume, the speed of price adjustment, and crowding out of other spending. For example, Christina Romer and Jared Bernstein used old Keynesian models to predict the effect of the stimulus package of 2009 before it was implemented. They predicted large effects of the package with multipliers around 1.5. In contrast, in research with John Cogan, Volker Wieland and Tobias Cwik, I used a new Keynesian model to predict the effects of the 2009 stimulus. We predicted a much smaller effect, with multipliers averaging 0.5, even less when you include transfer payments.

As we will see it was actually much lower...about .2. Yep, for every $100 spent, we generated $20 of economic activity. Not a very good investment. It is explained rather well in the video below from Charles Biderman:

So we are spending far beyond our means (Over $1 Trillion each year for the past four years) and an extra $831 Billion on a stimulus that has not generated enough economic activity or growth to justify its use.

Its just as bad or even worse at the Fed where they have bought $2.5 Trillion of junk assets from banks and newly created treasury debt. The new QE3 will take us to about $5 Trillion over the next few years but is just as doomed to fail as QE1 & QE2. Why? The Fed operates under some assumptions that are dislocated from reality.

First, is the money multiplier which I've explained before using the example of the Fed's fractional reserve where a bank can take $100 of deposit money and make $900 in loans. QE is partially about getting more money to banks by buying Treasuries from banks in the hope they will make loans. In this way the money multiplier would create new economic activity in the economy. The problem however, is that the banks aren't lending or are being extremely tough with their underwriting of new loans. Anyone trying to get a new mortgage knows what I mean. So the money sits on their balance sheets or is lent back to the Federal reserve where they get paid for their excess reserves or they buy new treasuries paying a risk free rate of return of 2-3%. The result is that there is no money multiplier in the real economy.

The graph below from the St. Louis Fed shows the money multiplier has fallen below 1 since 2008:

The combination of both of these types of multipliers (monetary and fiscal) being essentially between zero and one explains why both monetary and fiscal stimulus have not worked so far.

Wednesday, September 19, 2012

The Romney Comments the Press Didn't Tell You

I'm sure you've heard Romney's comments made at a private fundraising event about the 47% of American's who pay no Federal taxes. Its all over in the press. This is not about that. This is about the comments the press didn't bother to tell you about from the same fundraiser.

From Motherjones:

Romney: Yeah, it's interesting…the former head of Goldman Sachs, John Whitehead, was also the former head of the New York Federal Reserve. And I met with him, and he said as soon as the Fed stops buying all the debt that we're issuing—which they've been doing, the Fed's buying like three-quarters of the debt that America issues. He said, once that's over, he said we're going to have a failed Treasury auction, interest rates are going to have to go up. We're living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who's loaning us the trillion? The Chinese aren't loaning us anymore. The Russians aren't loaning it to us anymore. So who's giving us the trillion? And the answer is we're just making it up. The Federal Reserve is just taking it and saying, "Here, we're giving it.' It's just made up money, and this does not augur well for our economic future.
You know, some of these things are complex enough it's not easy for people to understand, but your point of saying, bankruptcy usually concentrates the mind.
 Click below for more.

Tuesday, September 18, 2012

The Gold Debit Card (Patent Pending)

No, not gold status, gold bullion.

For the past few years I've watched the Fed print money to deal with the economic malaise we've experienced since 2008. It became evident that rather than let markets clear, deleverage and reform the rot in our economic system, that we would "extend and pretend". First it was to get us through the initial crisis that saw our financial system on the brink. Then, as time went by I saw that "pretending" had become the new normal. Congress didn't do any substantial reform. Frank-Dodd was passed essentially as an empty bill with no realistic plans towards its implementation. Even today, the CFTC has delayed implementing position limits on gold and silver futures allowing JP Morgan and HSBC to (allegedly) manipulate the prices by creating naked short positions out of thin air. The Fed, once they had dropped interest rates to zero, seemed to have only one policy tool left: PRINTING DOLLARS.

Once I recognized this, it became clear that the US dollar which had already been devalued under President Bush and Fed Chair Alan Greenspan, would be massively further devalued bu President Obama and current Fed Chair Ben Bernanke. At first I looked to other currencies, primarily the Euro, but soon it became apparent that the rot and dysfunction in the financial markets was not a uniquely American problem, it was the entire western world and Japan.The US, Europe, Japan, Great Britain and even Switzerland (!) have all embarked on quantitative easing (printing) to deal with profligate spending, an excess of debt and faltering economies. No currency, it seems, will be a refuge or preserve purchasing power. Only gold seems to be up to the task.

Click below to continue

Saturday, September 15, 2012

$3,350 Gold & $190 Crude

The consequences of unlimited quantitative easing are just now being contemplated as "endless easing" becomes official policy rather than a thought experiment. One consequence will be the repricing of assets, including gold and silver, in the ever devalued currency of the USD. For now, the US dollar is still the "petrodollar" that oil is primarily priced, so a devaluation of the dollar means the price of oil must go up as the dollar is devalued.

BofA has their own take on it given that the Fed will increase their balance sheet from $2.2 Trillion to $5 Trillion over the next few years. From Zero Hedge:

n other words, for once we actually were shockingly optimistic on the US economy. Assuming BofA is correct, and it probably is, this is how the Fed's balance sheet will look like for the next 2 years:

Or, in terms of US GDP, the Fed's balance sheet will have "LBOed" just shy of 30% of all US goods and services.


It gets worse:
Since the Fed is effectively becoming the marginal player in both the MBS and Treasury markets, a very relevant question is how much private market debt is left to sell. Short answer: not much. According to BofA's calculation, the Fed will own more than 33% of the entire mortgage market by 2014.
 That's half the story.
On the Treasury side, in just over 2 years, "Fed ownership across the 6y-30y portion Treasury curve is likely to reach about 50% by end of 2013 and an average of 65% by end of 2014." You read that right: in just over 2 years, the Federal Reserve will hold two thirds of the entire bond market with a maturity over 5 years (which by then will be part of the Fed's ZIRP commitment, yield 0% and essentially be equivalent to cash).
No wonder that David Rosenberg is worried that the Fed will soon run out of securities to buy (well, there are always equities of course, but the Fed will not monetize those until some time in 2015 when hyperinflation is raging).
And speaking of hyperinflation (and our earlier note that nothing "else is equal") the real question is if indeed the Fed will own $5 trillion in "assets" in 27.5 months, what does that mean for gold and crude? The answer is plotted below:

In case it is unclear, the answer is:
  • $3350 gold
  • $190 oil.

In coming days I'll provide analysis as to why continued QE will not work, except to inflate the price of commodities and (temporarily) the stock market.

Thursday, September 13, 2012

To Infinity and Beyond!

 I was going to write a long post on the effects of QE3 to infinity announced by the Fed when I came across an extremely well written piece that describes both the plus side and coming negative side of endless printing on different asset classes. It supports the goal of this blog to examine the macro economic environment to preserve and grow wealth. You can read it here. I have also shown it below:

The Dark Side Of QE: The Next Chapter In Our Story

I am about to tell a story with a very happy beginning and a very sad end. Unfortunately, it happens to be the story we are living in today, but because we are still in the happy part of the story most people cannot see what is coming ahead. I will provide that for you here.

The immediate knee jerk reaction to the Fed's announcement today is that the Fed printing $40 billion per month and pumping it into the banking system is fundamentally strong for every type of asset in the world. Those that graduated from college in 2009 and have only been watching the market for a few years would believe this is a fact.

In essence: buy everything and just keep on buying.

Now that we know we are on the path of QE to infinity it is very important to understand how an endless running stream of new money fundamentally impacts assets differently. You'll notice a repetition of the word fundamentally because for long periods of time assets can move in the opposite direction of their fundamentals. Think of the 100% par value of subprime mortgage tranches in early 2006 or the multi-billion dollar valuation of in 1999. Over time assets have a tendency, like gravity, to revert back to their fundamental value. This is what causes booms, busts, opportunity, and disaster.

Before we go any further, let's quickly review how QE actually works. The Fed shows up at the doorstep of primary dealer (the largest) banks with a printed bag full of money and asks them if they can come in and buy some mortgage bonds. The banks agree, hand them the bonds, and take the bag full of cash. The banks now have a new lump sum of money to spend or do with what they like. This is also new money that did not exist in the economy before which is how the money supply is increased. In reality, there are no knocking on doors with bags of money, this process takes place electronically with a few key strokes from either side. The outcome, however, is the same.

Click to continue reading