No, this rally had another factor pushing it: our friends in the Far East. The Chinese have been quite vocal with their concern over the US dollar and have increased their official gold reserve holdings by 75% in the spring. Smart move.

In the Weekend Edition’s Highlight of the Week, Bill Bonner looks closely at where the recent rise in gold prices puts our “Trade of the Decade.” Read on…

Gold took off [Wednesday]…closing at $1020. Here at The Daily Reckoning, we’re impressed. But we’re not that impressed. Gold, of course, is half of our Trade of the Decade, which we announced almost 10 years ago. We’re bullish on the metal…have been for a very long time. But recent comments in this space have made readers wonder what the Hell is going on…so we will spend a few minutes clarifying.

First, we hope you bought gold many years ago. That would make it simpler. Then, we could say: hold! Gold is an antidote to paper. There is so much paper…and so much more apparently on the way…that the gold play seems like a winner. It’s a bet that the money system that has been around since August ‘71 is going to fall apart.

We still think that is a good bet. Our Trade of the Decade remains. Buy gold on dips; sell stocks on rallies. We’ve done well with this trade; we’ll stick with it a bit longer.

But what if you don’t own gold? The yellow stuff is now over $1,000. In fact, it looks like $1,000 could be a new support level for the metal – with most of the support coming from the Chinese. China has relatively little gold in its central bank. It must see what we see – the weakness of the dollar and of the dollar-reserve monetary system. It must worry about the value of the $2 trillion or so it has in dollars. It must also wonder how it is going to run its economy if the dollar falls apart. American buyers were its consumers of first and last resort. To whom will China sell if its most important customers’ money becomes worthless?

Recent comments by a group of Chinese officials make it clear that they are thinking of these things…and that they have decided to add more gold to their reserves. In fact, all the central banks have become net buyers. No more selling off gold reserves. That is seen as a mug’s game – which it is. Replacing gold with paper? C’mon, what were they thinking?

So China is a buyer. Trouble is, it has to be a discreet buyer. It has too much money. It could cause the price to skyrocket overnight. Then, it would be paying too much. So, perhaps it does what we do – China buys on dips! For example, the order may have gone out: buy gold whenever the price goes below $1,000.

We don’t know what their buying strategy is…but the Chinese are probably going to be big buyers over the next few years.

Should you buy along with the Chinese? Should you compete with the Chinese for each ounce of gold that comes on the market?

Good question. Unfortunately, we don’t have a good answer. So let’s try a different question: Is gold going up or down?

The answer to that is simpler: gold is going up…then down…then up again. It is going up because the feds – including the feds in China – are encouraging speculation. Then, it is going down when the next phase of the bear market reasserts itself and the speculators run for cover. Then, it is going back up…much farther and faster…when the Fed becomes desperate and finally throw caution – and dollars – to the wind. We’re confident this last stage will arrive. Our hesitation is that it will take much longer than we expect. Gold may rise in a deflation…but it soars in a period of inflation. That period could be a long way off.

The above is just an excerpt from Bill’s standout essay from this week. You can read it in its entirety here.

Well, that does it for us…enjoy the rest of your weekend,

Kate Incontrera

Source: China Gets in on the Trade of the Decade

“Of the June total,” reports the Labor Department, “1,235 mass layoffs were reported in the manufacturing sector.”

“All the indicators in the real economy,” said Bill Bonner in his final speech at the Agora Financial Investment Symposium in Vancouver, “are actually getting worse.”

And is it any surprise? What exactly does America make anymore? We have been a nation of consumers for the past decade, spending and borrowing to buy the gee-gaws and gadgets that our friends in the Far East have been so busy producing. But now, consumers are saving…they aren’t buying flat-screen televisions…or new cars…or much of anything for that matter.

And it goes without saying that since the housing bubble has popped, the one sector that was actually producing – the building of residential and commercial real estate – is failing miserably as well.

Caterpillar (NYSE:CAT) announced its results for the second quarter too. Profits were down 66%. In other words, while the banks were making money speculating with taxpayer’s money, Caterpillar was trying to make things and selling them to customers. Caterpillar not only makes things; it makes things that help other companies make things. Things with motors…big things…things that make noise and give off exhaust…things you use to dig holes and move dirt…things you need if you’re going to have a real economic recovery. Unfortunately for CAT, these things aren’t selling.

So what does this tell us? Well…it suggests that there is no real economic recovery at all. The real economy is suffering…sinking…and shutting down.

The banks are not earning their money helping Caterpillar expand. They’re making their money not because of a recovery, but because there isn’t one. In other words, they’re profiting from the financial stress of the early stages of a depression. There’s a post-crash bounce…and the government is sending a lot of money their way.

As for a real recovery – forget it. There’s no evidence of it. Unemployment is getting worse. Housing is still going down. Profits are going down. Those aren’t the things that presage a recovery…they herald a deeper, darker depression.

The depression darkens because people are not just being laid off – their jobs are disappearing. They do not get called back to work. Instead, they stay unemployed until they run out of unemployment benefits…and then the statisticians in Washington drop them off the unemployment rolls. Currently, the first batch of those people to reach the end of their benefits came this week. Last we looked, the Pennsylvania legislature was passing a law so they could continue drawing benefits for a few weeks more.

Unemployment, trade, defaults, foreclosures, bankruptcies, prices, manufacturing…you name it and you have to go back to the end of WWII to find similar numbers. Of course, at the end of the war, the wartime economy shut down. Millions of people who have been in uniform…or making tanks and airplanes…were suddenly out of work. Economists thought the economy would go right back into the Great Depression. Instead, it boomed.

But what was normal for so many years is not normal any more. Now, consumers are paying off debt faster than any time since 1952. The government, however, is making up for them. Goldman may no longer be able to push more credit onto the public; but it can push one heckuva lot of debt onto the public sector. Wall Street firms helped households ruin themselves in the Bubble of 2003-2007. Now they’re doing the same for the government, helping the feds raise money on a scale never seen before in human history.

The above is just an excerpt from Bill’s standout essay from this week. You can read it in its entirety here.

Bill also made the final speech at the AF Investment Symposium on Friday. “I’d like to start by thanking all the DR readers here,” he said to the audience, “you have my sympathies. You have to read 1,500 pages a year – and in ten years it’s been 15,000 pages.”

That’s right. The Daily Reckoning recently celebrated a birthday – our little publication turned 10 this month. We celebrated by “roasting” Bill at an intimate gathering at the Pan Pacific Hotel in Vancouver this past Wednesday night.

Addison Wiggin, started working on the DR in the early days of the Internet Age…when they weren’t quite sure how this ‘daily e-mail’ thing would work – but they knew it was something they had to try. Addison fondly recalled that in those days, he and Bill shared a tiny desk in an office in Paris, and every time Bill got up from the desk, he would knock the power cord out of Addison’s computer, erasing all the work he had done that day.

But the DR has come quite a ways since then. We have figured out the ins and outs of Internet publishing (for the most part) and we now have five international versions. Sometimes we are right, and sometimes our forecasts and musings are wrong…but that won’t keep us from publishing these daily reckonings. We hope you enjoy them.

Here’s to ten more years,

Kate Incontrera

Source: The Real Economy is Getting Worse

Also happening today: President Obama is set to speak on the economy this morning, and Helicopter Ben is delivering a speech on “Four Questions about the Financial Crisis” this afternoon.

Hmmm…he should have called our emergency hotline we have set up for Treasury Secretaries and Fedheads. We could have helped him out with some of the answers to those questions…

CNNMoney.com reports that in the prepared remarks for his speech, Bernanke said, “Recently we have seen tentative signs that the sharp decline in economic activity may be slowing.”

The ‘signs’ he is referring to include recent upticks in home sales and new home constructions, as well as improvements in consumer spending, especially new vehicles.

“A leveling out of economic activity is the first step toward recovery,” said Big Ben. “To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets.”

Bernanke may have wanted to wait until the retail numbers were released before preparing those remarks. Nearly every expert that has been surveyed on this topic believed that U.S. retail sales, which count for half of consumer spending, rose in March, mainly due to the auto industry incentives that began last month.

However, it turns out that retail numbers pulled a fast one – and showed a drop in sales for last month.

Two months of gains has boosted hopes that March’s numbers would follow suit, building a rebound in consumer spending.

But, not so much. The Commerce Department showed that March’s retail sales were down for almost every type of store except necessities, such as food and drugs.

MarketWatch reports: “Retail sales in the first quarter were down 1.2%, compared with the fourth quarter of last year, raising the possibility that real consumer spending may have fallen again for the first three months of 2009 after plunging at a 4% annual rate in the final six months of 2008.

“Economist David Rosenberg of (NYSE:BAC) Bank of America’s Merrill Lynch said he expected consumer spending to decline at a 3.7% annual pace in the April through June quarter.”

“The retail sales figures indicated incentives and promotions by car dealers and clothing stores such as Gap Inc. failed to draw customers hurt by a lack of credit and the highest jobless rate in 25 years.”

In other words…outlook not so good for the economy. Americans have clearly been spooked by the high jobless rate. It seems that everyone knows someone who has been laid off, or had hours cut back…and the possibility of it happening to you becomes very real. So you cut back. You make dinner instead of going out…make do with last year’s summer clothes instead of going on a shopping spree. You want to make sure you have cash in the coffer…just in case.

This behavior begins to add up, as these numbers show. It makes you wonder: is it possible we are witnessing the taming of the American consumer? We’ll have to wait and see.

Now, we turn to Addison, with a report on what news has investors in a tizzy:

“The U.S. stock market dodged another bullet yesterday,” writes Addison in today’s issue of The 5 Min. Forecast. “Goldman Sachs (NYSE:GS) announced late in the day that it had pulled off a $1.8 billion profit in the first quarter.

“That’s $3.39 a share, more than twice as much as the market had anticipated.

“Investors are now wildly confident that Goldman Sachs will be one of the best performing financials of 2009.

“The Dow managed to end the day with less than a percent loss. The S&P 500 and NASDAQ both pulled off small gains.

“Curious how the markets work, though, isn’t it?

“In reality, Goldman benefited from a quirk in its new reporting schedule. ‘Its fourth quarter ended in November 2008,’ reports the Financial Times, ‘but after converting to a bank holding company last year, Goldman adopted a calendar-year earnings period starting in 2009. As a result, the company did not have to include December in its first quarter earnings, a month in which it sustained $1.3bn in pre-tax losses.’

“So Goldman actually made $0.5 billion in the first quarter. But who really cares? The investment bank is up 54% year to date!

“And since their stock is so ‘strong,’ Goldman bigwigs confirmed that they would move forward with a $5 billion secondary stock offering… the proceeds of which will be used to pay back TARP loans. Work it.

“Oh boy, ‘buyer beware,’ warns our short side specialist Dan Amoss. ‘The most responsibly managed banks should survive this downturn because cash flow from good loans should roughly offset the losses from souring loans.’

“‘Regulators will probably grant forbearance, meaning that they’ll look the other way while they allow bank capital levels to get dangerously low in 2009 and 2010. But just because many banks will avoid FDIC receivership doesn’t mean the stocks will be good investments.’”

And back to Kate, reporting from a blustery Baltimore:

“I hear that the government’s turn around on tax returns are up this year, which gets money back in the hands of consumers at a faster pace than previous years,” writes our good buddy Chuck Butler in today’s issue of The Daily Pfennig. “And we all know what happens when consumers get money in their hands: they spend it!”

Very true…but will the American consumer have anywhere left to spend their tax return?

A new report shows that strip malls, neighborhood centers and regional malls are losing stores at the fastest clip in over ten years. In addition, consumers are keeping a tighter grip on their wallets, causing retailers to trim down on the amount of merchandise available in the store, in order to stay afloat.

The report, done by New York-based real estate research firm Reis, shows that “In just the first quarter of 2009, retail tenants at these neighborhood centers have vacated 8.7 million square feet of commercial space. This number exceeds the 8.6 million square feet of retail space that was vacated in all of 2008.”

The report goes on to show that “vacancy rates at malls rose 9.5% in the first quarter, outpacing the 8.9% vacancy rate registered in all of 2008, marking the largest single-quarter jump in vacancies since Reis began publishing quarterly figures in 1999.

Are we still surprised at the disappointing March retail figures?

Now back to Goldman Sachs, which managed a major bounce back from its worst quarter since it became a public company in 1999.

Reporting their results a day early, Goldman said yesterday that it earned $1.8 billion, or $3.39 a share, for the quarter ending March 31.

But as Addison pointed out, above, Goldman did benefit from a ‘quirk’ in their new reporting schedule.

“Leave it to the clever boys at Goldman Sachs to turn dross into gold,” says our friend Barry Ritholtz in a post on his blog, The Big Picture today.

“The bulk of their profits had come from AIG transfer payments – the AIG 100% payouts funded via bailout monies that saw Goldie as one of the largest recipients. Floyd Norris notes that most of the AIG effect was in December. ‘For the first quarter, the total A.I.G. effect on earnings was, in round numbers, zero.’”

Wondering how this is possible? Well…that’s where the beneficial ‘quirk’ comes into play…

From the NYT:

“Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s news release, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ending in February.

“The orphan month featured – surprise – lots of write-offs. The pre-tax loss was $1.3 billion, and the after-tax loss was $780 million.

“Would the firm have had a profit if it stuck to its old calendar, and had to include December and exclude March?”

“Truly astounding,” writes Barry, “the word Chutzpah simply does not do it justice.”

Source: U.S. Retail Figures Pull a Fast One

This from The Daily Reckoning:

The Labor Department reported today that the United States lost more jobs than forecast for August and that the unemployment rate rose to a five year high. The data also indicated that home builders, financial firms and the service industry has trimmed down their payrolls – a clear sign that the effects of the housing slump and subsequent credit crisis are being felt.

“We’re losing jobs in all kinds of industries now,” Roger Kaubarych, chief U.S. economist at UniCredit Global Research in New York, said in an interview with Bloomberg Radio. “This is the clearest recessionary signal we’ve seen.”

The rest of the world is getting the signal as well…markets across the globe are sinking. Apparently, they still had some hope in a speedy U.S. recovery, but no such luck.

Last Friday marked the 10th U.S. bank failure of 2008, as regulators took over Integrity Bank (ah, the irony). How anyone believed the U.S. was on the road to recovery is beyond us.

Bill Gross of Pimco didn’t do much to squash these global fears as he made a plea for further government intervention (i.e., releasing more cash). “This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time,” Gross wrote on Pimco’s website. “Unchecked, it can turn a campfire into a forest fire, and a mild asset bear market into a destructive financial tsunami.”

Still not convinced that the strong second quarter growth was nothing more than a mirage? Here’s something that may change your mind: A report released by the Mortgage Bankers Association today shows that a record 1.249 million homes were in foreclosure during the second quarter. In addition, from the end of March to June 30, 2.9 million homeowners were delinquent on their mortgage payments – up 25% from the same time period last year.

Our friends at Strategic Investment warn that there is an even bigger property bust on the horizon – in commercial property.

The bust could be worse for banks, stocks and the U.S. economy as a whole than the current residential debacle…an almost unbelievable notion. Bloomberg says that the United States could see the worst drop in commercial property since the 2001 recession and Morgan Stanley is calling for a 15% drop over the next two years.

Source: Making a Bad Situation Badder

It should, says Kate Incontrera in The Daily Reckoning.

Because the housing bill approved by Congress yesterday will cost taxpayers $25 billion in fiscal years 2009 and 2010, according to the Congressional Budget Office. And it could wind up costing up to $100 billion in the long term.

The bill is also a major threat to privacy, according to Desidooru Saloon’s Dave Gonigam… 

The big news this morning is that President Bush has dropped his threat of a veto for the housing bill that will bail both Fannie Mae (FNM) and Freddie Mac (FRE) out, and also offer relief to homeowners that have gotten in over their heads and now run the risk of foreclosure.

CNNMoney.com reports that the legislation would allow the Federal Housing Agency to insure up to “$300 billion in new 30-year fixed rate mortgages for at-risk borrowers in owner-occupied homes if their lenders agree to write-down their loan balances to 90% of the current appraised value of their homes…The cost of the FHA program – which would begin on October 1 and be in place for just a few years – would be funded by fees from Fannie and Freddie.”

And of course, since Fannie and Freddie are seriously ill-equipped to offer up those kinds of funds at the present moment, the bill would allow the Treasury broad powers that would provide the mortgage giants with liquidity and a “capital background” – basically an unlimited line of credit.

It is generally understood that this will leave U.S. taxpayers with a gigantic bill to pay – in fact, yesterday the Congressional Budget Office estimated the cost of the “rescue” at $25 billion, and said there is a chance that it could end up costing the U.S. government $100 billion in the long term.

Source: Fannie and Freddie Say Goodbye to Veto

The efforts to turn Canada’s tar sands and Colorado’s oil shale into energy are really just efforts to speed up what would happen naturally over time. But we don’t have time. So we throw excess energy at the problem, trying to cook shale in situ or use huge quantities of natural gas to increase oil production via the tar sands. We don’t have much excess energy, either.

Both processes use tremendous amounts of energy for a small net energy yield (energy returned on energy invested, or EROEI). Yet free solar income rains down on the planet each day. The sun is eight-minute energy! We simply don’t have an industrial system built to run off the modest amounts of energy we can convert from sunlight. We need a new system or a way to convert a higher percentage of sunlight into usable energy.

It’s not the sort of thing you design on your kitchen table. It’s the sort of thing that evolves out of necessity and experimentation. Its evolution obeys the same basic laws that govern the evolution of species… variation, mutation, adaptation. Australia has a wide variety of clever and well-managed companies working on different aspects of the problem.

But in the big picture, we think human beings are pretty good at adapting when they have to. The alternative is non-survival, which also goes by the name of death. True, civilisations seem to go through a life cycle of their own. And perhaps this oil-based one is past its prime. People are quarrelsome and stupid. We may not adapt our way out of this problem before it overwhelms us. But it would be unnatural not to try.

Source: A Hank and a Hurricane Affect the Oil Price

In particular, the slide of twin mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) is spooking foreign investors. This is because one in ten US mortgages are essentially held by foreign institutions and governments.

Foreign investors looked on securities in Fannie and Freddie as just as good as US government securities, says Kate Incontrera. So to keep foreign investors in the country Congress has little choice but to back the US Treasury’s Fannie and Freddie bailout plan…

The dark twins of the mortgage market have foreign investors nervously chewing their fingernails, as one out of 10 American mortgages are, in essence, owned by institutions and governments in other countries.

The Treasury Department reports that as of June of last year, China holds $376 billion in securities issued by Fannie and Freddie, and Japan holds another $228 billion.

While these securities aren’t guaranteed by the US government, the New York Times reports, “the housing giants… have attracted overseas investors with a simple pitch: the securities they issue are just as good as the United States government’s, and they usually pay better.”

Unfortunately, the United States now looks like a giant, international credit risk. And although the idea of Congress issuing a “blank check” to bail the mortgage giants out is worrisome to most, in order to keep the foreign investors the U.S. so heavily relies on (somewhat) confident in the country, Congress really has no other choice. Treasury Secretary Hank Paulson said on “Face the Nation” yesterday that he was “very optimistic that we’re going to get what we need from Congress. Congress understands how important these institutions are.”

Source: Cracks in the Monetary Facade

March’s FOMC minutes were released yesterday…and while they were interesting, what was said in the last meeting wasn’t too terribly surprising.

The minutes show that Fed policymakers were worried that a “deep” recession, rather than a “shallow” one, would permeate the U.S. economy, which spurred them to cut the key interest rate by three-quarters of a percentage point.

The Fed was mostly united in their decision to cut the key lending rate, except for two dissenters, Philadelphia Fed President Charles Plosser and Dallas Fed chief Richard Fisher.

While the majority saw the rate cut as the right decision since “further restriction of credit availability and ongoing weakness in the housing market made a severe downturn a strong possibility,” Plosser and Fisher thought otherwise. The hawks were more comfortable with smaller cuts because of the concern that an inflationary flare-up would occur.

MSNBC reports: “On the one hand, the Fed has been urgently moving to prevent the trio of economic woes – housing, credit and financial – from plunging the country into deep recession. On the other hand, with soaring energy prices and high food costs, policymakers realize they can’t afford to let inflation out of control, either.”

The financial media and experts are placing bets that the Fed will chose to cut rates again next month, as the economy has yet to reach its final bottom.

“There’s no question the U.S. economy is one of the weakest in the world,” Stephen Koukoulas, a London-based global strategist at TD Securities, a unit of Toronto-Dominion Bank, Canada’s third-largest bank, said in an interview with Bloomberg Television. “We do need the policy makers, the Fed and even the administration to come in and kick-start the economy. It’s probably going to get worse before it gets better.”

*** Alan Greenspan has been popping up all over the press lately – after 18 years of Greenspeak, it looks like the former Fed chief wants to set the record straight…at least from his point-of-view.

“I have no regrets on any of the Federal Reserve policies that we initiated back then because I think they were very professionally done,” Mr. Greenspan told CNBC yesterday.

And to the Journal, he said: “I don’t remember a case when the process by which the decision making at the Federal Reserve failed.”

The Financial Times recently ran a piece titled, “The fed is blameless on the property bubble.” James Saft, writing for Reuters says that Big Al argued that the epic bubble was not caused by loose monetary policy, but by “the fall in global long-term interest rates, which, as chairman…of the most powerful central bank in the world, apparently had nothing to do with him.”

Albert Edwards, global strategist at Societe Generale Cross Asset Research in London puts it bluntly: “He was the midwife of serial bubbles that are unraveling.”

Former Fed chief Paul Volcker remains unconvinced by Greenspan’s protests, questioning his cheerleading of the “bright new financial system,” that “for all its talented participants, for all its rich rewards, has failed the test of the marketplace.”

And in a speech to the members of the Economic Club of New York, Volcker chided Bernanke for “toeing ‘the very edge’ of the bank’s legal authority in orchestrating last month’s bailout of beleaguered investment bank Bear Stearns,” reports The New York Times.

“Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank,” Volcker said.

*** We had the opportunity to interview Mr. Volcker for I.O.U.S.A. We met the economic bigwig, who is most famous for fighting the inflation of the 1970’s and 1980’s in his office overlooking Rockefeller Center this past winter.

We asked him the obvious question: Does he see a similarity to today’s economic climate to that of when he was at the helm of the Federal Reserve? And do we need the same sort of forceful hand that he lent to the economy during that time period?

“Well, there are all kinds of consequences and uncertainty in the future if we don’t deal with these problems. But when I look at back on my lifetime, it was obvious that letting inflation get a little bit out of control and not dealing with economic problems effectively in the ’70s led to the kind of crisis in the late ’70s and the early ’80s, and it was very uncomfortable. We don’t want to have to go through big recessions to teach lessons. We’d like to anticipate what needs to be done while maintaining the growth of the economy. And the threat always is an unstable economy, an unstable currency; and that it’s destructive not just to economic life, but it can be destructive of America’s position in the world, which is a concern to me more generally.

“But the great challenge, I think, for democracy, is being able to cope effectively with problems that are pretty clearly out in the future, but require action that require some discipline, some restraint today,” he continued.

“And that’s the test we’re going through, and that’s a question of education and understanding, I think. So I think as people get better understanding of some basic economic issues, the democracy will be better able to cope with those challenges out there in the future.”

This idea of educating America comes up again and again as we promote the documentary. The other night, at a Q&A following a screening at the Philadelphia Film Festival, one audience member suggested that I.O.U.S.A. be shown at every high school in America. We couldn’t agree more. After all, the generation that will have to deal with these debts and deficits should be educated on the subject.

By the way, if any of our readers are in the Philadelphia area, we have a screening of I.O.U.S.A. this evening at 5 PM at the International House.

Until tomorrow,

Short Fuse
The Daily Reckoning

P.S. Be sure to check out Byron King’s latest report in Energy & Scarcity Investor. In it, he details a company that has the technology to “microwave” any item made out of oil…and actually extract and reuse the oil. This company could deliver in-the-know investors a gain of 1,310%.