I have to confess that – deep down – this makes me smile. The reason: I know that the real question to ask is “When will gold go on to set new highs?”

So let me cut right to the chase. This breakout run in gold prices will last.

The “Golden Staircase” tells us so.

After bottoming out about $250 an ounce about nine years ago, such key fundamental catalysts as increasing demand, lower supply, inflationary fears and a flight to safety have been driving the price of gold northward.

But gold is like any other financial asset in that prices don’t rise in a straight line – especially if they’re rising a long way. But they follow a clear and discernable pattern.

As asset prices rise, they often initially overshoot. Then they “correct” – fall back a bit. Then they “consolidate,” or trade sideways, usually for a period of six to 18 months, but sometimes for even longer.

It’s this period of sideways trading that creates the horizontal “step” in the “Golden Staircase” – a technical-analysis tool that lets us “see” the foundation for the next step up in the long-term uptrend in the price of gold.

The formation of the newest “step” in the staircase was started in mid-2007. That’s when the $1,000 price level was first breached. On Tuesday, Sept. 8, when gold prices eclipsed that key barrier on Tuesday, Sept. 8, it was the fifth time they’d attempted to do so.

Each of these attempts has helped define $1,000 as a ceiling.  But in a “Golden Staircase,” the ceiling eventually becomes a new floor.  So once the $1,000 price point is eclipsed in a decisive manner, it will become a key “support level” for gold prices.

You can also think of it as the top surface of a new step.

And that’s precisely the juncture where gold finds itself right now. [Editor's Note: Please see accompanying graphic: "Gold 'Steps' Toward New Highs"].

From a technical standpoint, the outlook for gold is bright, indeed. But the fundamental picture is even more bullish.

Barrick’s Bullish ‘Bought Deal’

Now, I realize it was probably pure coincidence that the world’s largest gold miner, Barrick Gold Corp. (NYSE: ABX), announced it would raise $4 billion on the same day gold flirted with $1,000.  But the conspiracy theorist in me likes to believe otherwise.

For Barrick Chief Executive Officer Aaron W. Regent, this so-called “bought deal” was a conscious strategic move. Barrick has a reputation for wisely using hedges to its own advantage.  The strategy served the company well in its copper-production business. And when gold prices fell in the late 1990s, Barrick turned to this strategy again – and again benefited nicely.

Recently, however, Barrick’s bankers have been coaxing the company’s leaders to ditch the hedges in order. The reason: In an environment of rising gold prices, hedged bets dampen profits. Removing those hedges, by contrast, elevates profits. But it also elevates the company’s risk.

So when a company such as Barrick makes a strategic decision to raise equity capital in order to close a large portion of its infamous hedge-book, that’s a highly bullish sign for gold prices.

When Central Bankers Become Gold Buyers

A third Central Bank gold agreement has recently been ratified. And, interestingly, it’s a weaker version of its two predecessors.

New limits will allow for only 400 metric tons to be sold annually, down from 500 metric tons in the previous deal.  The deal is bullish on its face. And, even better, this more to it than meets the eye.

You see, the last 10 years of these agreements have seen some 4,000 metric tons unloaded into the market.  And even into the face of the $80-billion-selling headwind these divestitures created, gold has managed to stage a rise from $250 an ounce to the current $1,000.

And story gets better, still: According to the World Gold Council, the world’s central banks became overall net buyers of gold as of this year’s second quarter – the first time that’s happened since 2000.

China Goes For the Gold

In the post-financial crisis global economy, China is quickly becoming the proverbial “800-pound gorilla” – the player that has to be courted, but that can’t be tamed.

And now, in a signature move, China has decided to take a remarkable step, choosing to take control of its own gold.

Just this month, in fact, Hong Kong announced that it would bring all its gold bullion back home, recalling the reserves from depositories in London. Hong Kong has just completed construction of a high-security depository at the city’s Chek Lap Kok Airport (Hong Kong International Airport), and plans to market the facility as a safe storage option to other Asian central banks, commodity exchanges, precious metals refiners, commercial banks, and exchange-traded funds (ETFs).

This development can (and will) be spun in all sorts of ways, but what it really means is that China has lost confidence in the West.  After last fall’s near-meltdown of the global financial system – a financial cataclysm due almost entirely to major missteps by Western economic powers – China’s Beijing-based leaders want much greater control over its own assets.

And who can blame them?

China’s Ravenous Gold Appetite

At more than $2.3 trillion and counting, China’s foreign currency reserves have become the stuff of legend in recent years. But here’s the rest of that story, with apologies to the late Paul Harvey: According to a late August Financial Times report, “Beijing recently revealed that it had been secretly buying gold for years in order to diversify its foreign reserves, and has almost doubled its bullion holdings.”

China’s official gold reserves now run 1,054 metric tons. That means its holdings have doubled in just six years.

And when you consider the risk China faces on its $2.3 trillion in paper (foreign currency) reserves – much of them U.S. dollar denominated – it’s understandable that China has been ardently seeking shelter.  In a late-July special report for Money Morning called “The Three Triggers of the Global Gold Bubble,” I told readers:

“All it would take is a loss of faith in the greenback. It’s important to understand that dollars are nothing more than paper and ink, backed by the full faith and credit of the U.S. government.  In a year in which the budget deficit could easily top $2 trillion, this does not reassure me.

The dollar holds its value only as long as the greenback’s holders maintain their faith in the currency. The moment people decide they don’t want your dollars, they become worthless, or at least worth much less.  In that case, it will take a lot more dollars today to buy the same thing you bought with many fewer dollars only yesterday.”

For China, this is a very real concern. Especially when it comes to the Beijing’s concerns about the loose-credit stance of the U.S. Federal Reserve. China’s Cheng Siwei, former vice chairman of the Standing Committee of the Chinese Communist Party, recently told Great Britain’s Telegraph newspaper that “If [the Fed] keep[s] printing money to buy bonds, it will lead to inflation, and after a year or two, the dollar will fall hard. Most of our [Chinese] foreign reserves are in U.S. bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen and other currencies.”

In an exciting addendum, Siwei noted that while gold is solid alternative, “when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets.”

This statement tells us a lot. For instance, there’s definitely an upward price bias contained within gold’s recent price consolidation. And don’t expect gold’s price “floor” to fall too far below the $1,000-an-ounce level: China will almost certainly step in to scoop up all it can.

Meanwhile, it seems that China’s populace is catching on to the ideas of its central government.  In the just-mentioned FT article, the newspaper said “the rising tide of wealth among middle-class Chinese has made China the second-largest gold jewelery market in the world since 2007, behind only India.”  The article goes on to say “Total gold demand in China last year was nearly 400 [metric tons], up by 21% from 2007.”

The lesson here is clear: China’s growing appetite for gold is a powerful trend that will benefit gold investors for years – even decades – to come.

Warning: The IMF Is Now The World’s Central Bank

This fundamental bullish sign for gold is perhaps also the most ominous for the world’s financial well-being.

In an August maneuver that somehow stayed off the radar screens of most global investors, the International Monetary Fund (IMF) Board of Governors “voted” to create new “money” in the form of Special Drawing Rights, or SDRs.

As Money Morning told readers back in April, SDRs have been a unit of account used by the IMF since 1967, and denominated in a basket of currencies, including the dollar, pound, yen, and euro.

But now they’ve become a convertible asset.  China, Russia, and Brazil will begin purchasing SDR bonds later this year, with China’s share starting at a whopping $50 billion.

As Bloomberg News reported, “the allocation … will not increase the fund’s pool of money available for lending [but] will provide members with an additional method to obtain hard currencies.”

And that’s scary, because the implications are enormous.

The IMF has become the world’s central bank.

The IMF can create SDR debt instruments out of thin air, without having hard assets to back them.  The IMF’s own Web site explains the basic process, noting that “SDR allocations provide each member with a costless asset.”

Sorry, but I have to ask.  What in the world is a “costless asset?” How can you “create” an asset that has no cost to either produce or acquire? And if it costs nothing to create, how can it have any real value?

It’s outrageous. And it would even be comical – laughable, even – if the implications weren’t so dangerous.

The IMF no longer has to depend on borrowing – much less on contributed assets – to increase the funds it has available to lend.

So a new international fiat currency has just been created and added to the long list of national fiat currencies already in use.  Like most of its brethren, this “currency too an this one, too, can be expanded at will by a handful of un-elected officials. And, as one writer recently stated, “hyper-inflation is the terminal stage of any fiat currency.”

Consider yourselves forewarned. Worldwide inflation is now a bigger threat than ever. Expect the IMF to embark on its own monetary printing spree. A tidal wave of inflation could be headed our way.

Folks, this is going to get ugly.

The Next Bubble?

I have said in the past, that gold could very well be the next bubble.

Now, it seems, that idea is gaining acceptance.

In a recent interview with Canada’s BNN (Business News Network), Canada’s serious business program, Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research (NYSE: MHP), said that “if we end up with concerns about the U.S. dollar, we could probably end up with a bubble in gold prices.”

I rest my case.

How to Play Your ‘Golden’ Opportunity

So what can you do to protect yourself?  Well, it seems that even former U.S. Federal Reserve Chairman Alan Greenspan knew the answer to that question.  In May 1999, while testifying before the U.S. House Banking Committee, Greenspan actually said that “gold will always remain the ultimate form of payment in the world.”

That’s one piece of Greenspan-given advice that I believe investors should take.

As the price of gold advances, gold-miners will be the “go to” stocks to play. They will benefit from leverage as the yellow metal advances in price.

To measure the health of gold stocks, an often-used proxy is the Amex Gold Bugs Index (HUI), a weighted benchmark composed of 15 of the world’s largest gold-and-silver mining companies. However, the HUI only includes those companies who don’t hedge their gold production beyond 1.5 years. That was done on purpose. The index was designed to provide significant exposure to near-term movements in gold prices. In an environment of rising gold prices, these stocks tend to be much more profitable.

To then gauge whether gold stocks are a relative bargain, we look to the HUI-to-gold  relationship.  By dividing the HUI “price” by the price of gold (HUI/gold price), we get a ratio that’s a very useful value indicator.

From mid-2003 until mid-2008, this ratio held around the 0.50 range, meaning the HUI bought about 0.50 ounces of gold.

In last fall’s stock panic, we saw this relationship insanely stretched to 0.20.  In late October 2008, the HUI only bought 0.20 ounces of gold.  That was totally irrational and unsustainable.

Gold stocks were trading at levels not seen in nearly two decades.  Extremes like this simply cannot last.

Today, we’ve seen that gap close as I had predicted in January.  To see how the HUI-to-gold relationship looks now, check out the graphic below.

This chart provides a ratio that tells us the “buying power” that gold stocks have to buy gold. The ratio had improved from the 0.20 ratio of last fall and was recently as 0.42. Expect that to continue to shift toward the 0.50 level. In fact, it will most likely overshoot, running up to 0.65, before settling back to the historical norm in the 0.50 neighborhood.

The message here is that spectacular gains are still in store for gold and silver stocks.

The biggest bang-for-buck still lies with the junior gold sector.  The best proxy for this is the S&P/TSX Venture Composite Index (CDNX), otherwise known as the Toronto Venture Exchange. It consists of about 75% resource stocks.

The CDNX has been steadily carving new highs almost uninterrupted since March, now posting a whopping 80% gain since its December 2008 low.  That’s an impressive performance. Remember, this is an index.

The players in this sector promising the best returns are the junior gold-and-silver companies either already producing, or with near-term production.

In the next 12 months, some will likely throw off returns of in the multiple hundreds of a percent, or even multiple thousands of a percent. Major miners really need them to replace depleted production and to grow their reserves. So many will be takeover candidates.

And with gold breaking and sustaining the $1,000 barrier, junior gold and silver miners are the place to be for explosive returns.  Just hold onto your hat.

Source: The ‘Golden Staircase’ Points to Record Prices for Gold

As weird as that is, it gets weirder later in the article when Peter Orzag of the White House’s Office of Management and Budget (OMB), whom the article called “Mr. Obama’s top budget man”, has “tried to put a positive spin on the situation. By 2019, he argued on his blog, America’s primary deficit (the difference between revenue and spending excluding interest payments) would be only 0.6% of GDP.”

Excluding interest payments? Hahaha! Why in the hell would you exclude interest payments? Hahaha! You shake your head in amazement that this is the kind of Silly, Stupid Crap (SSC) that is everywhere these days! “Excluding interest payments”! Hahahaha!

Immediately I realized that, again, I was too hasty, and this brilliant little stratagem could solve my problems at work! My main problem is that money comes hard these days, customers don’t buy as much these days, and they don’t want to spend what little money they have with (and I quote) “a disagreeable moron” like me these days, which makes me fear for my job and the bankruptcy of the company these days.

However, with this new ploy in hand, now we’ll see who the moron is when I cleverly arrange for the company to borrow money with an interest-only/ balloon-payment-at-the-end loan, that comes due after I retire, so that it looks in the meantime like money is coming in but no money is going out because I “exclude interest payments”! It’s like free money! Hahaha!

I know there is an obvious flaw in the plan, and it gets even weirder when you learn that this same Mr. Orzag and this same OMB, for some bizarre reason that I assume only makes sense if you are mentally ill or taking drugs, or both, presupposes that “the average interest rate on government debt in 2019 is the same as the rate of economic growth.” What? Hahaha!

Of course, The Economist gets it wrong when the say, “Federal debt will read 77% of GDP in 2019, up from 41% in 2008”, in that they are only counting the federal debt held by the public, and conveniently ignoring that whole freaking giant glob of debt held by the Social Security Trust Fund and dozens and dozens of other places where public money has been “invested” by buying government bonds and thus giving the cash to Congress to spend, a fact that is so obvious that it makes me laugh in Utter, Utter Contempt (UUC) at such a rookie mistake, which makes you wonder what kind of boneheads they are hiring at The Economist magazine since the actual debt is almost $12 trillion and the GDP is $14 trillion, making the debt-to-GDP ratio 86% already!

But before I get too hard on The Economist magazine, I will note that they are exactly right when they say that the reappointment of Ben Bernanke as chairman of the Federal Reserve “ignores the fact that Mr. Bernanke was complicit in creating the loose monetary conditions which fuelled the financial frenzy in the first place. As a governor of the Fed earlier this decade, he was even more convinced than Alan Greenspan that central banks had no business raising interest rates to head off asset bubbles.”

The good news in the article is that polls show that Americans are waking up the fact that the Federal Reserve is a disastrous failure and it has ruined the dollar and America, which I interpret from the news that “Americans think less of the Fed than of the Internal Revenue Service.”

And since the smart play is to buy gold, silver and oil when the government is behaving so badly, the best news was not in the article at all, but for us greedy money-grubbers who want to make a lot of money without working and think that gold, silver and oil is the way to do that because that is what seems to be the lesson of the last 4,500 years, it is wonderful news that the majority of investors are not yet buying gold, silver and oil, which makes sense because it is mathematically impossible for the majority of investors in anything to make a profit, and only a minority betting against the crowd can, by mathematical imperative, make a profit!

You cannot see the Utter Mogambo Sincerity (UMS) in my eyes, and so you will just have to take my word for it that this is only one – one! – of the many, many reasons why I say, when buying gold, silver and oil, “Whee! This investing stuff is easy!”

Source: Clairvoyant Economists Still Pessimistic

Today’s “legacy assets” are toxic derivatives; a decade ago it was gold reserves. Both are proving hard to shrug off, but for very different reasons. Both legacies also come thanks to previous central-bank history; the fossils remain only too livid today.

And 10 years from now, if not sooner, just how welcome will the current central bank must-have become – freshly printed government debt, bought with money that doesn’t exist until the central bank wills it?

Seeking first to defend against inflation and war, the West’s central banks built up huge reserves of the ultimate hard money –gold bullion– during the early-to-mid 20th century. Long before the turn of the millennium, however, these hoards grew to look quaint and expensive. Unyielding and relatively useless to industry, gold simply sat there, down in the vaults, costing money to store but returning no interest.

Who needed crisis-proof gold when Western Europe (if not the Balkans or Mid-East) was enjoying its first generation of peace-time in history? And who needed fine gold when the Nasdaq index of tech stocks was priced for 20% annual earnings growth over the next decade and more?

In short, who needed gold when we’d got Alan Greenspan, as the New York Times asked in May 1999. “The argument against retaining gold is that its day is past,” wrote Floyd Norris with uncanny timing, just two days before Gordon Brown’s Treasury announced its ham-fisted sale of half the UK’s gold bullion hoard.

“Once it was useful as a hedge against inflation that would hold its value when paper currencies did not. Now financial markets have their own sophisticated ways, using exotic derivative securities, to hedge against inflation.”

You could butter your toast with the irony. But it wouldn’t taste sweet or provide much nutrition. Whereas a further glance back at history might.

“With huge gold stocks available for sale, [governments] may discourage excessive price increases but naturally do nothing to prevent sharp decreases,” reported an investment piece for Medical Economics published in October 1977. (Our thanks to the author for finding and faxing it to BullionVault this week.)

“The government specter [over the gold market] can’t be expected to disappear quickly,” F.D.Williams continued, some 32 years ago. “Gold will continue to be part of many national reserves for a long time. The stocks are so large, they can’t all be dumped at once.”

Compare and contrast with today’s unwanted bequest – those toxic derivatives the US Treasury chooses to call “legacy assets” as if it played no role at all in producing them. Unlike state-hoarded gold, it only encouraged their creation; it didn’t want to look after the damn things. And quite unlike the market for state-hoarded gold, a ready stock of willing mortgage-bond buyers also looks unlikely to gather.

“The PPIP, which was beset by multiple delays as regulators tried to figure out the best means of removing many of the troubled assets from banks’ books,” as CNN reports, “is still not up and fully running yet.” It’s not been for lack of incentives. The $2 trillion Public-Private Investment Partnership, announced to much fanfare in March, offers huge leverage – entirely at tax-payer expense – plus some or other hold-to-maturity value to risk-cushioned investors, albeit as yet unknown. Private investment groups can use up to $1 of non-recourse loans, plus another dollar of Treasury finance, for every $1 they spend on taking toxic housing derivatives off the banks’ busted balance-sheets. Yet as a report published this week by the Congressional Oversight Panel put it:

“Whether the PPIP will jump start the market for troubled securities remains to be seen. It is also unclear whether the change in accounting rules that permit banks to carry assets at higher valuations will inhibit banks’ willingness to sell. Similarly, it is unclear whether wariness of political risks will inhibit the willingness of potential buyers to purchase these assets.”

Funnily enough, as the US authorities struggle to sell toxic debt, Western Europe’s Central Bank Gold Agreement has also stalled in 2009. This comes, however, despite prices and private-investor demand both holding near record levels. First signed ten years ago this September, back when no one at the New York Times, Economist, Financial Times or big central banks could see a use for the metal (simply owning this secure, liquid store of value is use enough, by the way), the CBGA capped annual gold sales and made them plain in advance for the coming five years. It aimed to avoid a repeat of May 1999, when the UK Treasury’s announcement drove prices down to what then proved their floor. In contrast to Washington’s PPIP, however, central-bank gold sales weren’t arranged in the hope of achieving maximum price, but merely curbing a rush for the exits instead. And as it is, they needn’t have bothered.

Gold prices have since risen three-fold and more against all major currencies, even while the 16 signatories to date sold almost one-fifth of their hoard in aggregate. Thus gold’s weighting in their reserves portfolio has doubled regardless, rising as gold outperformed all other assets from the start of this decade.

Hence the dramatic slowdown in central bank gold sales since the financial crisis began in August ‘07. Because it’s tough selling gold when its use becomes so clear, so present. Here in the fifth and last year of 2004’s renewed CBGA, “Net central banks sales likely to be in the order of 140 tonnes this year, down from 246 tonnes in 2008,” reckons London market-maker Scotia Mocatta. Yet the annual ceiling for CBGA sales currently stands at 500 tonnes!

The new agreement – just signed and due to commence on Sept. 27th – tips its hat to the facts, reducing that limit by one fifth. But who’s left to sell any way? Just as in the gold mining sector worldwide, the “easy metal” has already gone from West Europe’s vaults, pretty much emptying Spain, the UK and those excess Swiss holdings which maintained the Franc’s 100% gold-backing until the turn of this century. The two largest holders, Germany and Italy, continue to face down political calls for “mobilization”, refusing to yield one ounce so far despite signing all three agreements. France, the third largest owner, has pretty much sold the 600 tonnes from its hoard announced when it joined the central-bankers’ Cash4Gold party in 2005. That leaves only the International Monetary Fund’s 400-tonne sale, hardly enough by itself to meet the next half-decade’s 2,000-tonne limit.

Back at the Federal Reserve, meantime, tomorrow’s central-bank legacy – of freshly printed Treasury bonds bought with magic money from nowhere – continues to swell. Yes, the Fed’s stockpile of T-bonds may be smaller today than it was back in August ‘07 before the Great Inevitable broke, thanks to record Wall Street demand for the safety of Washington’s debt. And yes, the Fed isn’t quite collecting new bonds from the Treasury door directly, waiting instead a few days or so before picking them up (as Brian Benton, Chris Martenson and others have found) from those primary dealers who do bid at auction, rather than out-and-out monetizing the debt for all to see with its newly created cash.

And sure, private-sector demand for Treasuries continues to look so strong right now – what with overnight rates at 0%, plus the ongoing collapse of house prices, world trade and jobs creation – that the Fed says it will stop financing Uncle Sam’s spending in, umm, October rather than in September as previously stated.

But hoarding gold looked rather more sensible amidst the violence and misery of the mid-20th century, and no one at the Fed or Treasury guessed two years ago that they’d be offering leverage incentives to try and revive the market in mortgage-backed derivatives. When the global economy gets off the floor…or risk assets become more attractive to private investment…or China and Japan find they really don’t have any space left for US debt in their central-bank vaults, the market into which the Fed will want to sell its Treasury hoard will look very different to the market from which it’s currently buying.

Whether a decade from now, in 2010, or perhaps this fall – when the $300 billion of quantitative easing ear-marked for Treasuries is spent – trying to quit the Fed’s newest “legacy asset” could prove tougher even than finding ready buyers for today’s toxic junk. And given the soaring interest rates and potential US bankruptcy that in turn might trigger, spurred by whatever’s added to the Treasury’s $11.7 trillion of debt between now and then, perhaps buying gold will look a smart move to the Western world’s central bankers once more.

Regards,
Adrian Ash

Source: Gold Will No Longer Be a Toxic Derivative to Central Banks

Good day… And a Terrific Tuesday to you! Well, no data yesterday left the markets drifting about the open waters. Stocks rebounded, which gave the risk assets a bias to be bought, but for the most part, the day was much like being a drift in the ocean, with no direction or cares!

That will all change beginning today with the Nonfarm Productivity report for the 2nd QTR… Long time readers know my dislike for this data, as I believe it simply shows that one person works longer hours! The Fed Heads used to be all over this data like a cheap suit, and probably still trip over themselves to see the data when it prints… But to me, it’s not what Big Al Greenspan made it out to be…

Tomorrow is the big data day this week with both the Trade & Monthly Budget Balances printing for July… The Trade Deficit should tick up some, as Oil prices have gained in recent weeks, and the Monthly Budget Deficit? Oh my! It is forecast to be $180 Billion in the red! Which annualized would be more than $2.1 Trillion! But don’t worry about it folks, no biggie according to the folks in Washington D.C. The Treasury will just issue more bonds, and the Fed will buy up any that don’t get bought, and pay for them with money they printed up fresh that day!

You know that I’m be facetious with the “don’t worry” talk… I’ve been talking about this deficit spending for quite a few years now… I like the fact that others have joined in now that the numbers have gotten so large they are as obvious as a man with a hatchet in his forehead, but at least they’ve joined the “stop the deficit spending movement”…

Speaking of The Treasury issuing Bonds… This week alone the Treasury will auction $37 Billion of 3-year Notes, $23 Billion of 10-year notes, and $15 Billion of 30-year bonds… Even using “new math” that brings this week’s issuance to $75 Billion! That sound? That sound you hear is foreigners choking on all this issuance! Does anyone know how to apply the Heimlich maneuver?

The “got yield” scenario I talked about yesterday, didn’t play out yesterday, as stocks came back… The A$ saw some selling along with kiwi, reals, and any other “high yielder”… The selling wasn’t bad, so we can probably put it down to profit taking.

I’m doing some research on the years around the depression, looking at market movements, and confidence levels… It’s amazing the things that were being said right up and to the stock market crash about how everything was fine… Then skip ahead to the 80’s and you had the same things going on with lofty praises for the S&L industry, especially one by Big Al Greenspan, and then the S&L industry circled the bowl… Makes you wonder, and I’m not talking about wondering who wrote the book of love… No, I’m talking about how this should make you wonder, or question, what’s being said about how great stocks are right now… When the President makes comments about “a good time to buy stocks”, you’ve got to stop and think folks… Just stop!

OK… I wanted to give everyone an update on the popularity of the BRIC MarketSafe CD we introduced last month… With over a week to go until we reach the funding deadline, this CD has received a ton of newsletter writer coverage, and interest… The funding has gone quite well, and we expect to open this CD with a very large amount of cash… That’s exciting for me, as I saw this as an opportunity to deal in “speculative” investments, without market risk, and jumped on getting this available to our customers…

I also wanted to follow up on the Jobs Jamboree data we talked about yesterday morning… I had a very nice reader tell me that I “hadn’t fallen off turnip truck” as the participation rate fell! That’s right! As she said to me… “So, all those poor men and women that were hit at the beginning of the recession have the great pleasure of no longer being counted as either employed or unemployed.”

I also wanted to follow up on last week’s talk on the Weekly Initial Jobless Claims that fell for the previous week… I had a reader who recently became unemployed in California tell me the problems with trying to file as unemployed! Let’s listen in to him explain his attempt to file as unemployed…

“Filled out the unemployment application on-line the day I was laid off.
About four days latter they send you another form to fill out and return. If not returned immediately, you lose your benefits.

Received a letter indicating they would call me 7 weeks after applying, to determine eligibility. It is scheduled for September 27th at 1 PM to 3 PM.

About two weeks afterwards, found there is no way to reach a human. The only way to reach them is EMAIL, which takes a couple of days to respond. EMAIL has a canned response, we will contact you on Sept 27th.”

OK… Enough of that! China came out with some data today… While exports continue to suffer the stimulus that the Gov’t put into the economy, which made sense due to the fact that the Gov’t had a war chest of cash to put into the economy, which is the exact opposite of the situation in most countries including the U.S. Chinese Industrial Production growth was strong, marking three consecutive months of improvement in Industrial Production. The ongoing recovery of domestic demand is good, while consumer demand keeps holding up well with July retail sales growth up 15.2% year-on-year…

Now, I fully understand how there can be questions about the validity of Chinese data… But come on! We don’t live there, we have no idea! And they don’t have a John Williams (Shadow Stats) to show everyone that the Gov’t’s official data prints are misleading and most times inaccurate!

I saw this report on the Bloomie this morning from Zillow… “Almost one-quarter of U.S. mortgage holders owed more than their homes were worth in the second quarter and that figure may rise to as much as 30 percent by mid-2010 as job losses and foreclosures climb.”

That’s depressing stuff… Very depressing… So! Before I go to the Big Finish, I’ve got to find a “feel good” story… Of course if I were the Gov’t I would have a pocket full of those, to pull out whenever the consumers needed one! HA! But, I’m not the Gov’t! thank goodness! Whenever I think of the Gov’t, I think of those words that Ronald Reagan spoke regarding the scariest words a person can hear… “I’m from the Gov’t and I’m here to help”

OK… The euro looks to be catching some wind in its sails this morning, as it has gained 1/4 euro since I came in… I know that’s chicken feed, but Hey! You’ve got to start somewhere, and after Friday’s bloodletting, the tourniquet was applied on Monday, and today maybe we’ll see it gain back lost ground… For… It is “Turn-around Tuesday!” (well hopefully it will be!)

And if the risk assets (like stocks) are rebounding, Gold and Silver should be on the docket to rally too… And a quick look at the Bloomie tells me they are indeed, rebounding… So, now, let’s go to the Big Finish!

Currencies today 8/11/09: A$ .8365, kiwi .6715, C$ .9125, euro 1.4170, sterling 1.6475, Swiss .9250, rand 8.13, krone 6.2125, SEK 7.28, forint 191.80, zloty 2.9370, koruna 18.19, yen 96.50, sing 1.4460, HKD 7.7505, INR 48.02, China 6.8350, pesos 12.96, BRL 1.84, dollar index 79.12, Oil $70.73, 10-yr 3.78%, Silver $14.43, and Gold… $947.60

That’s it for today…Try to make your Tuesday Terrific!

Chuck Butler

Source: $75 Billion in New Treasuries this Week

Even Alan Greenspan admitted he had “found a flaw” in his own thinking. We will have to imagine the giggles from the back of the room – if anyone had been awake. It was as if Stalin had confessed to being rude to his mother or Bernie Madoff copped a plea for shoplifting. The mea was fine, but the culpa didn’t seem to measure up to the facts. He, more than any living human being, was responsible for the biggest financial debacle in history; you’d hope he’d be a gentleman about it and hang himself.

Meanwhile, the queen of England visited the London School of Economics and had a question: how come economists were not on top of this thing?

Last month, they replied. In a three page letter they avoided the simple truth – that their trade was no more reliable than fortune telling and marriage counseling. The letter claimed that a “psychology of denial” prevented government and financial eyes from seeing the catastrophe in front of them. It was “a failure of the collective imagination of many bright people”, they said.

In fact, it was the exact opposite — imagination run wild. Economists imagined a world without yesterday or tomorrow… a world in which you could run up debts forever and never have to pay them back.

Last week, Timothy Geithner promised the Chinese that the US economy would recover thanks to demand from the private sector. That was his way of reassuring America’s biggest creditor that the public sector wouldn’t continue to run huge deficits – practically an outright lie. But it’s one thing to stiff the Chinese; it’s another to stiff time.

Adjusted for inflation, the US consumer’s earnings barely rose from the ‘70s. By some measures, he had actually less disposable spending power in 2007 than he had in 1973. And now his income is going down. The June number reflected the biggest drop in income in 4 years. Salaries and wages fell 0.4% in June… the 9 th drop in the last 10 months. How is it possible for him to spend more?

We pose the familiar question only to set up an unfamiliar answer. In the past, the consumer reached into the future. In many cases, he reached beyond the future… into never, never land. Consumers spent money they hadn’t earned yet… thus bringing forward purchases that should have been made years later. The accumulated effect of this was to add $35 trillion in extra spending to the world economy – from America alone – over the course of the great credit expansion, 1945-2007. That’s why we have a depression now; because consumers already spent what they would normally be spending now.

Time always gets even. Now, it is the past that is doing the reaching. The automobile bought in 2006… the house bought in 2005… the vacation taken in 1999 – the ghosts of yesteryear spending reach for Americans’ paychecks. Of course, in some cases, consumers spent more than they could reasonably expect to pay back – ever. They reached so far the poor ghosts are disappointed. Lenders realized that they’d never get their money back, which is what led to the credit crunch and the collapse of Wall Street.

Of the big five – Bear, Lehman, Goldman (NYSE:GS), JPMorgan (NYSE:JPM) and Merrill (NYSE:SQD) – only two survived intact. And we know now that Goldman only survived because Henry Paulson, former CEO of Goldman, then Treasury Secretary, arranged a hidden bailout. He had the government step in to save AIG, which owed Goldman $13 billion.

From one scam to another… from bailing out Wall Street to bailing out the entire world economy, the more stimulus programs fail to bring a recovery, the more economists call for more stimulus.

What are they thinking? Since neither the private sector nor the public sector has any savings from the past, additional demand from either sector must be borrowed from the future. (Setting aside ‘quantitative easing’… or Zimbabwe – style stimulus… an even bigger fraud.)

The purest illustration of how this works is in the popular ‘cash for clunkers’ programs. Instead, of letting the consumer buy a new car when he is ready, the feds give them money to buy now. So, he buys in 2009 and not in 2010. What good is accomplished? It is as if they didn’t expect 2010 to ever arrive… as if they thought they could stop the sun and the seasons… and the Chinese… forever. Like moths in amber, their wings will never tatter… nor will their faith flag. The dollar will always be strong. US bonds will always be in demand. And the future will never arrive.

But the more economists try to stitch up the future; the more it gets away from them. After the 2010 sales have been moved forward to 2009, they will have to reach into 2011… and then 2012… all the way to the end of time.

Source: Stitch in Time

And if you are wondering, “Like what kind of monetary idiocy, Magnificent Manly Mogambo (MMM)?” then all I have to do is smile enigmatically and silently point to where it shows that the Fed used some of the money that they created to buy up another whopping $9.3 billion in Treasury debt, agency debt and miscellaneous other worthless debt from banks last week. Last week!

The surprising thing to me about last week is that the reserves in the banks went down over $102 billion dollars in the same proverbial One Freaking Week (OFW), which is one of those things that seems like a lot, but what it really means to me is that the banks are flush with cash after selling their toxic assets to the Fed, and they were not using the Fed-supplied reserves because nobody was borrowing any money. Simple!

Not so surprising, but equally as simple, the Monetary Base went down by $103 billion last week, too, since bank reserves are included in it.

This must all be pretty unnerving to the foul Federal Reserve and the complicit Congress, as they all desperately want taxpayers to “eat the losses” of bankrupted morons-in-suits, which is, of course, an outrage, but that is, alas, the way it has to be because the numbers are Too, Too Huge (TTH), and the time when we could have averted all of this by getting our sorry butts back on the gold standard (as required by the Constitution!) was long, long ago in the ’60s and ’70s. If then!

Of course, we would never have become a gigantic “welfare state,” which is made manifest with something in the USA Today recently about how one out of every six dollars of income in America is now in the form of a government check for some kind of public assistance.

I sneer, as an increase in people wanting a government check is hardly news, and it goes along with how governments (local, state and federal) now have budgets so big that they, combined, spend half of all money spent in the USA, which is The Big, Big Problem (TBBP), and which has been growing since the ’60s when we stopped being a nation of people “yearning to breathe free” and able to “pursue happiness” in a free-market capitalist economy, and instead morphed, cancer-like, into one where the government equalizes outcomes by redistributing money from the successful (progressive taxation and “negative tax”) and jobs from the competent (affirmative action).

And since it is too late to stop now, and since there are no solutions (since nobody in all of history has been able to find a solution to the problems of a malignant, distorted, big-government “services” economy choking on obscene levels of debt both public and private), then there is only one thing left to do if you are using a paper money; attempt the impossible again by again printing up more money! Hahaha!

Of course, it is impossible from the start, sort of like how my “happy marriage” was impossible from the start, and we were hardly out of the church when she is yammering at me to get a job.

I mean, if the total output of goods and services of the course of a year (Gross Domestic Product) of the USA is around $14 trillion and the GDP of the whole world is around $50 trillion, it all pales to insignificance compared just to the sheer amount of losses at risk in derivatives alone, a clot of pure Vegas gambling contracts which is variously calculated as totaling from hundreds of trillions of dollars up into the quadrillions of dollars, which is not to mention the huge debts supporting bubbles in stock prices, bond prices, housing prices and size/spending of government, a situation made temporarily tolerable by abnormally low commodity/food/energy/ prices and insanely low interest rates.

This is, obviously, an absurd situation made only possible by the staggering stupidity and appalling arrogance of the Federal Reserve, a sad situation made horrifyingly manifest by its horrid chairman Alan Greenspan during the crucial period 1987-2006, where he blithely created all the money, credit and an “anything goes” lack of regulatory oversight that financed and allowed all the absurd debts incurred, an ignominious feat made possible by the almost-impossible-to-believe incompetence and self-serving arrogance of Congress, decade after decade, consistently deficit-spending and further distorting the economy with every dollar, and both were abetted by a corrupt education system that wasn’t smart enough to see the obvious historical fact that such a bizarre big-government system could not endure and a lamebrain “free press” that came to be populated by “journalists” who passed off the garbled facts of self-professed “expert economists”, woeful ignorance and personal biases as “news.”

Uh-oh. By that distasteful outburst, I can see that my medications are wearing off! I soon find that contemplating the iron-clad security of gold and silver doesn’t help much, and only the actual fondling of an ounce of gold and an ounce of silver in my hands can calm me down after getting worked up about how sheer incompetence destroyed America.

And after a few minutes alone with my gold and silver, securely ensconced in the fabulous Mogambo Bunker Of Ultimate Paranoia (MBOUP) and ruminating about how 4,500 years of human history says I am doing the smart thing by buying gold, I actually find myself saying, “Whee! This investing stuff is easy!”

Source: Beginning With Economic Impossibilites

Although it is difficult to speak while gritting one’s teeth, laughing hysterically and trying not to vomit up blood in sheer anger and outrage, The Heroic Mogambo (THM) rises to the occasion and bellows, “No inflation beyond food and energy! Hahahaha! Relax, everybody! The guys who are afraid of deflation say that you should be afraid of deflation, too, since there is no inflation beyond food and energy! Hahaha!”

And since inflation is the thing I most fear, I knew that I needed money, and fast. So I spent most of the week setting up Step One of my plan, which involved setting up a fall-guy using the DaVinci Code method to find the words “Danny in accounting will loot the employee pension fund” somewhere in the Bible, but it was pretty much a bust.

Discouraged, I found, instead, an email with some clever anagrams, and I found one that seemed to be pertinent to the times, in that nowadays every moron government and all their moronic neo-Keynesian econometric buffoons (who have been the instigators of the economic disaster that has befallen the world, thanks to them and the despicably incompetent Alan Greenspan, former chairman of the Federal Reserve) are so desperate that they are “quantitatively easing” So Damned Much Money (SDMM) that we are, in a nutshell, freaking doomed!

Anyway, the anagram that tickled me is in taking the word DESPERATION and then re-arranging the letters to get A ROPE ENDS IT! Hahaha! It works on so many levels! Hahaha!

An upshot is that all of this “quantitative easing” of SDMM, and the reference to the anagram, is that most of the money that the Fed is creating is used to buy government debt! This increases the national debt, so it is not surprising that Agora Financial’s 5-Minute Forecast reports, “Your family’s share of the government debt is now over half a million dollars. A record $546,668, to be exact”!

Naturally, I am thinking that at 5% interest, each family owes, in addition to the $546,668 principal, a princely $27,333.40 in interest this year alone!

Fortunately for the government, they do not have to actually tax each family $27,333.40 this year because the government will just sell more Treasury debt, bought by the Federal Reserve with money they created just for the purpose.

Unfortunately, the family will pay it anyway, except in the form of higher prices as all this new money creates inflation in consumer prices!

The 5 says that they were quoting a USA Today study, which claims that each American family’s share rose 12% in 2008. That’s $55,000 in new government debt last year for every U.S. household – thousands more than the median household annual income.”

Perhaps as a result of all this bankrupting idiocy, the London Times reported that Treasury Secretary Geithner told the students at Peking University during his visit to China that “we believe in a strong dollar,” and that all the trillions of dollar’s worth of US debt owned by the Chinese “are very safe.”

If he had been addressing the usual kind of American morons that big-shot officials usually address, like the Economics Club of New York, Princeton, Harvard or Congress, then the audience would have sat there, dumbfounded, before applauding politely and saying, “Duuuhhh! Okay!”

But in China, Geithner’s speech was greeted with laughter! Hahaha! This shows that the Chinese are very perceptive and not stupid, in contrast to the USA, as this is the kind of response that it really, really, really deserves.

If Mr. Geithner really wanted to act smart, he would ask the Chinese why they have suddenly added their growing hoard of gold to their money supply. And if the Chinese wanted to be gracious hosts, they would have told him.

If he had asked me why I am buying gold, I would have told him, “Because this investing stuff is easy when a Federal Reserve creates 13% of GDP so that the federal government can spend a third of GDP! Whee!”

Source: An Economy at the End of its Rope

Most of the complicated lending spreads that define a crisis in credit have returned to normal levels. For starters today, the mighty “TED spread”

Kind of a mouthful of a chart, eh? In simple terms, the TED spread is the difference, in percentage points, between how much it costs the banks to borrow dollars and how much it costs the U.S. government to do the same. The lower the spread, the more freely money is being lent around the country.

The spread is now at its lowest level since August 2007.

Alan Greenspan’s favored Libor-OIS spread is back to pre-crisis levels, too. This complicated affair of interbank lending compared to overnight index swaps was at 87 when Lehman died, peaked at 364 on Oct. 10 and this morning is barely 52.

Our point? While the crises in employment, housing, banks, stocks and life in general still seem as pertinent as ever, the numbers claim that the credit crisis is a thing of the past… for now, at least.

Source: The End of the Credit Crisis?

I read twenty or thirty books a year on average. A fascinating book I am reading now is Secrets of the Temple: How The Federal Reserve Runs the Country by William Greider. I’ve absorbed more than a few books on the inner workings of the Fed these past few years. But this is the first time I’ve gotten around to Greider’s magnum opus.

Secrets of the Temple is more than two decades old now. It was finished in 1987, before Alan Greenspan’s time (which is fine by me, as I am more than sick of that guy). Here and now in 2009, it feels like the perfect time to be reading Greider’s book. So much of what we are going through now has keen resonance with the past, the subject matter is more fresh and relevant than ever.

Greider opens the book in the summer of 1979, shortly before Jimmy Carter’s famous “malaise” speech… and just as the sweep of history is about to force the President’s hand. The Carter administration did not want to appoint Paul Volcker, a stubborn outsider with a vocal conservative bent, as Chairman of the Fed. Carter was in fact warned by his minions against doing so. But by the time the decision came, Carter felt he had little choice in the matter.

In addition to a gripping narrative covering Volcker’s tenure at the Fed, Secrets of the Temple digs deep into the question of money. Greider takes you on multiple journeys as you read… back and forth through the grand sweep of history, to see how the Federal Reserve was truly formed and why, and deep into the hidden nooks and crannies of policy and politics. The author’s own biases are not concealed from the reader, but that does little to take away from the story.

An Alien World

It really is eye-opening how swiftly times can change. Just a few years ago, the trials and tribulations of the 1970s seemed like ancient history – forever sealed in the vault of the past. The very mindset of the 1970s seemed unfathomable. A period of aggressive and relentless inflation that lasted for years on end? An entrenched conviction that inflation was here to stay, never to depart? Relative to the last quarter-century, it almost sounds like an alien world.

And in many ways the economic climate of the 1970s really was an alien world, at least in comparison to what most of us know. There are two terms that help describe why that inflationary past feels so inaccessible to us – chronological snobbery and recency bias.

“Chronological snobbery,” a phrase attributed to C.S. Lewis and Owen Barfield, refers to mankind’s general habit of seeing the present as superior to the past. To imagine the people and problems of twenty, fifty or a hundred years ago, say, is to imagine a world of folks less enlightened than we are… and thus, to put it bluntly, to see the mistakes of the past as “dumb” errors we are too smart to commit ourselves.

“Recency bias,” a more common term, refers to the human habit of placing too much psychological weight on familiar events. If conditions persist for a certain amount of time, it is natural for people to assume those conditions will last forever. This isn’t a conscious bias so much as a subconscious one. People don’t realize it when they shift from “it’s always been this way” to “this is how it will always be.” But that is exactly what people do – especially when entire careers have played out under one general set of conditions, as is the case with the current crop of Wall Street money managers who, prior to 2008, knew nothing but low inflation and equity bull markets.

The Turning of the Wheel…

The best antidote to recency bias – and to chronological snobbery for that matter – can be found in the study of market history.

It is easier to stay detached, and to see all the various possibilities in the turning of the wheel, if one is familiar with the major cycles that have come and gone. Someone who spends little or no time thinking about market history will likewise have little or no reason to question his or her own bias towards the present day. Someone who grasps the idea of multi-decade-cycles, however, will be more open to the possibility of breathtaking change.

As we head into ever more turbulent times, your humble editor is more convinced than ever that getting the big picture right will be vitally important. What type of world will we be living in? What mental models will prove most useful…. what lessons learned from the past most worthy of dusting off?

As I read Greider’s book, my conviction is strengthened that the 1970s could be a powerful historical analog. And I am openly beginning to wonder… could Barack Obama turn out to be the next Jimmy Carter?

…and a Familiar Rhyme

The parallels here are deeper than just the men. They also relate to the deeper philosophies that the Carter and Obama administrations bring to the table, and the type of problems both administrations were forced (or will be forced) to deal with.

It is perhaps a further irony that, at exactly the same time America is faced with the twilight of fiscal hegemony in the eyes of the world, the country now seems poised and determined to heap even more spending on the pile than has ever been witnessed before.

This is not an endorsement of President Obama’s Republican opposition (or of any political party anywhere). It is merely a reflection on what may be coming next. What’s more, this observation is not just political in nature – or political for its own sake – but could have a very powerful effect on what happens to your money. Because if the 1970s rhyme holds true, we are going to enter an era in which fiscal policy is weak, debt burdens are high, and growth is lax for years and years to come. And that means serious inflation.

We obviously have no clear bead on what 2012 will look like. But I suspect the brainy, idealistic and breathtakingly accommodative (dare I say Carteresque?) policies of the Obama administration will eventually lead to a loss of fiscal control… in turn leading to a backlash so strong that Obama could be forced to find his own Volcker. (Assuming the genuine article isn’t up for a rematch.)

Tomorrow we’ll dig deeper into the Obama/Carter parallels, and make a more detailed case for the similarities between then (the 1970s) and now. And then, as always, I’ll ask you what you think…

Source: Is Barack Obama the Next Jimmy Carter? (Part One)