Against the yen, the dollar rose more than a full percent, after speculative flows pushed it higher in quiet trade in Asia, where markets in Japan, Singapore and other centres were closed for holidays.

In the absence of economic events or data, traders took profits on currencies which have rallied against the dollar, including the euro, up more than 2 percent so far this month.

Analysts said some investors were becoming concerned that short dollar positions were overstretched, suggesting that a near-term correction may be in store.

“There’s already a lot of long euro/dollar positions in the market so it’s difficult to push the pair higher,” said Lutz Karpowitz, currency strategist at Commerzbank in Frankfurt.

Data from the Commodity Futures Trading Commission showed that currency speculators last week raised short dollar positions — essentially bets that the U.S. currency will depreciate — to their highest since March 2008.

By 1102 GMT, the dollar was up 1.08 percent at 92.27 yen, near the a peak around 92.35 yen touched intraday in European trade, its highest since Sept. 9, according to Reuters charts.

Traders said Japanese exporters had placed sell orders above 92.50 yen, which may cap any dollar/yen rally until Tokyo markets reopen on Thursday.

The euro had slipped 0.4 percent to $1.4650, easing from $1.4768 hit late last week, which was its strongest since September 2008.

Against a currency basket <.DXY>, the dollar rose 0.5 percent to 76.824, off a one-year low of 76.01 hit last week.

The pound hit a five-month low against the euro after the Bank of England said the pound’s long-run sustainable exchange rate may have fallen due to an increased focus on Britain’s economic imbalances.

The euro rose more than 0.2 percent on the day to 90.79 pence, its highest since late April.

Against the dollar , it was down 0.5 percent at $1.6190, near $1.6134 hit earlier in the day for its weakest level in nearly three weeks.

The dollar also got a leg up from waning risk appetite which saw the pan-European FTSEurofirst 300 index <.FTEU3> fall below the 1,000 mark and retreat further from an 11-month ahead on worries the market may have run ahead of economic fundamentals.

U.S. stock futures indexes were down 0.5 percent.

FED AWAITED

Investors awaited a policy decision from the Federal Reserve on Wednesday, and some analysts said optimism about the U.S. economy’s recovery prospects may boost the dollar further.

Federal Reserve Chairman Ben Bernanke last week said the recession was “very likely” over, although he noted that any recovery would be slow.

Stronger-than-expected U.S. economic data in recent months has spurred speculation the Fed may raise interest rates from zero in the near future, but many analysts believe more time is required before such a move.

Some said dollar selling may pick up if the Fed reinforces the view that rates will stay pat for the coming months.

“A clear message that policy is on hold is likely (on Wednesday), which will certainly temper dollar buying on the back of any changes to the quantitative easing timetable,” analysts at BTM UFJ said in a research note.

Markets also awaited a summit of G20 leaders in Pittsburgh later this week, which analysts said was seen as holding potential risks to the FX market even though currencies were not expected to be formally discussed.

The meeting comes as U.S. President Barak Obama has said he will push the leaders for a reshaping of the global economy, while trade tensions between Washington and Beijing heat up and European leaders keep up pressure to curb salaries and bonuses paid to bankers.

Sept 21 (Reuters)

The truth is there were many.

Fundamental and pragmatic banking regulations, which arose from the devastating financial collapses of the Great Depression, for decades strengthened U.S. banks and capital markets, making them the twin engines of American growth and the envy of the world.

The systematic dismantling of those same regulations by greedy bankers began in earnest in 1980, peaked in 1999, and finally climaxed with an insane Securities and Exchange Commission ruling in April 2004, a final decision that paved the way for the implosion of everything regulation was designed to protect.

Just how did we get here?

Wall Street bankers, their exorbitantly well-paid lobbying army of former congressmen and former regulators, their greatly contributed-to sitting legislators and, most egregiously, the self-righteous and still mega-rich “former” Street executives have systematically eviscerated the muscle and bones from the regulatory bodies charged with protecting us from banks’ self-destructive greed. An inordinately powerful group of executive insiders from the once-deeply respected House of Goldman Sachs (GS) have served as U.S. Treasury secretaries and in innumerable other administrative capacities.

A Reflection on Reform

The Depository Institutions Deregulation and Monetary Control Act of 1980, signed into law by President Jimmy Carter, was the first major reform of the U.S. banking system since the Great Depression.

While touted as a boon to consumers, the law was actually a gold mine for bankers. Among other requirements and banker “gifts” the 1980 Act’s provisions:

• Lowered the mandatory reserve requirements banks keep in non-interest bearing accounts at U.S. Federal Reserve banks.
• Established a five-member committee, the Depository Institutions Deregulation Committee, to phase out federal interest rate ceilings on deposit accounts over a six-year period.
• Increased Federal Deposit Insurance Corp. (FDIC) coverage from $40,000 to $100,000.
• Allowed depository institutions, including savings and loans and other thrift institutions, access to the Federal Reserve Discount Window for credit advances.
• And pre-empted state usury laws that limited the rates lenders could charge on residential mortgage loans.

In 1980, in a virtual landslide, Ronald Reagan was elected and grabbed the conservative mantle. A year later, the shock troops of the heralded Reagan Revolution launched their attack and embarked on a massive, systematic de-regulatory campaign.  President Reagan’s first treasury secretary, former Merrill Lynch & Co. Chief Executive Officer Donald T. Regan, became chairman of the Depository Institutions Deregulation Committee.

In a burst of deregulatory bravado in 1982, Treasury Secretary Regan ushered through the Garn-St. Germain Depository Institutions Act. Key provisions of the Act ultimately coalesced with Treasury Secretary Regan’s protection of the lucrative “brokered deposits” business, in which Merrill was a major player, and paved the way for the future collapse of the savings and loan industry.

Some of the provisions in that 1982 Act would later be blamed for thousands of bank failures. The provisions permitted the following:

• Allowed savings and loans to make commercial, corporate, business or agricultural loans of up to 10% of their assets.
• Authorized a capital assistance program – the “Net Worth Certificate Program” – for dangerously undercapitalized banks, under which the Federal Savings and Loan Insurance Corp. (FSLIC) and the FDIC would purchase capital instruments called “Net Worth Certificates” from savings institutions with net worth/asset ratios of less than 3.0%, and would theoretically later redeem the certificates as these shaky banks regained financial health.
• And, most frighteningly, raised the allowable ceiling on direct investments by savings institutions in nonresidential real estate from 20% to 40% of assets.

The history of S&L greed and fraud – which resulted from brokered deposits and deregulation – wasn’t forgotten by legislators. But it was steamrolled by bankers pursuing an even greater unshackling of the regulations that constrained their ambitions.

Shattered Glass

The ultimate prize was to be the undoing of the Glass-Steagall Act of 1933. Glass-Steagall, officially known as the Banking Act of 1933, mandated the separation of banks according to the types of business they conducted. Investment banks, whose securities related activities resulted in relatively large risks, were to be separate from commercial banks, whose depositors needed greater protection. The Act created deposit insurance and the government wasn’t about to allow taxpayer-backed insurance of commercial bank deposits to be exposed to securities related risks. It was a prudent and sensible separation. Bankers tried for years to undermine and overturn Glass-Steagall, but it took time.

In 1987, Alan Greenspan replaced Paul A. Volcker – the stalwart Federal Reserve Board chairman, national inflation-fighting hero and active proponent of Glass-Steagall (and now economic confidant of President-elect Obama).

In its twilight days, the Reagan administration was determined to further fertilize the seeds of deregulation and Greenspan’s Ayn Rand-inspired “objectivist,” free-market philosophies would be the perfect embodiment of the deregulatory movement.

Securitization Enters the Scene

A year later – in 1988 – two very quiet revolutions sprouted that would ultimately hand bankers twin throttles to rain terror on us all.

That year, the Basel Accord established international risk-based capital requirements for deposit-taking commercial banks. In a byproduct of the calculations of what constituted mortgage-related risk (by nature of the loans’ long maturities and illiquidity) lenders should be expected to set aside substantial reserves; however, marketable securities that could theoretically be sold easily would not require significant reserves.

To obviate the need for such reserves, and to free up the money for more-productive pursuits, banks made a wholesale shift from originating and holding mortgages to packaging them and holding mortgage assets in a now-securitized form. Not inconsequentially, this would lead to a disconnect between asset-quality considerations and asset-liquidity considerations.

Meanwhile, over at the U.S. Commodities Futures Trading Commission (CFTC), the appointment of free-market disciple Wendy Gramm, wife of U.S. Sen. Phil Gramm, R-Tex., as chairperson, would result in her successful 1989 and 1993 exemption of swaps and derivatives from all regulation.

These actions would not be inconsequential in the aforementioned reign of terror that was still to come.

In 1993, with her agenda accomplished, Wendy Gramm resigned from her CFTC post to take a seat on the Enron Corp. board as a member of its audit committee. We all know what happened there. Enron’s fraud and implosion became the poster child for deregulation run amok and ultimately helped spawn Sarbanes-Oxley legislation, which has its own issues.

The constant flow of money to lobbyists and into legislators’ campaign coffers was paying off for the banking interests. The Fed, under Chairman Greenspan, was methodically deconstructing the foundation of Glass-Steagall. The final breaching of the wall occurred in 1998, when Citibank was bought by Travelers. The deal married Citibank, a commercial bank, with Travelers’ Solomon, Smith Barney investment bank and the Travelers insurance business.

There was only one problem: The deal was clearly illegal in light of Glass-Steagall and the Bank Holding Company Act of 1956. However, a legal loophole in the 1956 BHC Act gave the new Citicorp a five-year window to change the landscape, or the deal would have to be unwound. If aggressively flouting existing laws to pursue a personal agenda isn’t a perfect example of bankers’ hubris and greed, then maybe I’ve just got it all wrong.

Phil Gramm – the fire breathing free-marketer, Texas senator, and chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs – rode to the rescue, propelled by a sea of more than $300 million in lobbying and campaign contributions. In 1999, in the ultimate proof that money is power, U.S. President Bill Clinton signed into law the Gramm-Leach-Bliley Financial Services Modernization Act, at once doing away with Glass-Steagall and the 1956 BHC Act, and crowning Citigroup Inc. (C) as the new “King of the Hill.”

From his position of power, Sen. Gramm consistently leveraged his Ph.D in economics and free-market ideology to espouse the virtues of subprime lending, where he famously once stated: “I look at subprime lending and I see the American Dream in action.”

If helping struggling borrowers pursue their homeownership dreams was such a noble cause, it might have been incumbent upon the senator to not block legislation advocating the curtailment of predatory lending practices. From 1989 through 2002, federal records show that Sen. Gramm was the top recipient of contributions from commercial banks and among the top five recipients of campaign contributions from Wall Street. [Click here to read "How Subprime Borrowing Fueled the Credit Crisis."]

Since moving on from the Senate in 2002 to mega-universal Swiss banking giant UBS AG (UBS), where he serves as an investment banker and lobbyist, Gramm makes no apologies. “The markets have worked better than you might have thought,” he has been quoted as saying. “There is this idea afloat that if you had more regulation you would have fewer mistakes. I don’t see any evidence in our history or anybody else’s to substantiate that.”

The “New” Math

On April 28, 2004, in a fitting and perhaps flagrant final act of eviscerating prudent regulation, the SEC ruled that investment banks may essentially determine their own net capital. The insanity of that allowance is only surpassed by the fact that the SEC allowed the change because it was simultaneously demanding greater scrutiny of the books and records of what were the holding companies of investment banks and all their affiliates.

The tragedy is that the SEC never used its new powers to examine the banks. The idea was that Consolidated Supervised Entities (CSEs) could use internal models to determine risk and compliance with net capital requirements. In reality, what the investment banks did was essentially re-cast hybrid capital instruments, subordinated debt, deferred tax returns and securities with no ready market into “healthy” capital assets against which they reduced reserve requirements for net capital calculations and increased their leverage to as much as 30:1.  [Click here to read "How Wall Street Manufactures Financial Services Products," an insider's look at how greed on Wall Street results in unscrupulous investment instruments]

When the meltdown came the leverage and concentration of bad assets quickly resulted in the shotgun marriage of insolvent Bear Stearns Cos. to JP Morgan Chase & Co. (JPM), the bankruptcy of Lehman Brothers Holding (LEHMQ), the sale of Merrill Lynch to Bank of America Corp. (BAC), and the rushed acceptance of applications by Goldman and Morgan Stanley (MS) to convert to Bank Holding Companies so they could feed at the taxpayer bailout trough and feast on the Fed’s new Smörgåsbord of liquidity handouts. There are no more CSEs (the SEC announced an end to that program in September). The old investment bank model is dead.

The motivation for bankers to undermine and inhibit prudent regulation is inherent in banker compensation incentives. The September 1993 Journal of Financial Research sums up the problem on compensation by concluding: “Firm characteristics that influence managerial compensation include leverage (as a measure of observable risk) market-to-book ratio of assets, size and shareholder return. Evidence suggests that Bank Holding Companies may be exploiting the deposit insurance mechanism because leverage is a significant factor in our results for incentive-based components of compensation. Our results strongly support the view that fundamental shifts in business activities of Bank Holding Companies have influenced their compensation strategies”.

No one would tempt an alcoholic by putting one in charge of a liquor store and neither would anyone put a fox in charge of a henhouse. So why are greedy bankers being allowed to rewrite banking regulations to enrich themselves while leveraging taxpayers, destroying trillions of dollars of hard-earned savings and sinking us into a potential depression?

Until transparency sheds light on the backroom dealers and influence peddlers that aligned with Wall Street against Main Street, we will continue to be held hostage to the same greed and avarice that manifests itself in too many human beings who actually have the power to execute their personal agendas.

This is the story of how we got here. Where we are is actually even scarier than authorities are willing to admit. In the second article in this three-part series later this week, I will be the unfortunate bearer of the news of where “here” actually is.

Source: How Deregulation Eviscerated the Banking Sector Safety Net and Spawned the U.S. Financial Crisis

The article talked about federal investigators looking into a Dutch-Swiss oil trader, Vitol Group.

The enforcement attorneys were trying to answer a big question: Whether or not oil speculators were behind the big price run-up this past summer — when oil approached $150 per barrel (today, oil hit $38 barrel).

The investigation by Commodity Futures Trading Commission potentially comes at an inopportune time for green investors. Green stocks began to shine with record-high oil prices. Although speculative-driven prices entered the dialogue, most experts blamed China, India, Russia and other booming emerging markets for consuming the world’s oil and gas inventories and driving up prices.

However, since hedge funds are largely unregulated no one really knows for certain the role they played (if any) in pumping up the price of oil.

The probe into Vitol may help answer that question — and determine the viability of green investments.

The Journal reported that Vitol’s trading contracts on the New York Mercantile Exchange at one point in July constituted 11% of all crude-oil bets outstanding on Nymex around the time oil was skyrocketing to new highs. The attorneys are now investigating if, in fact, the percentage of Vitol’s trading contracts were even higher than that.

If Vitol’s trade sufficiently “influenced” oil price fluctuations, some form of legal action could be pursued against the trader.

According to the Journal, Vitol made an estimated $1 billion to $1.5 billion on its record $146.7 billion in reported 2007 revenues, say traders familiar with the company. That works out to an average of $4.5 million to $6.8 million for each of Vitol’s 220 equity partners, although the top seven partners get a larger share of the spoils, the Journal said. Vitol reports its equity value at more than $5 billion.

An important distinction to make about Vitol’s trades is that they covered physical oil, not oil futures. By physical oil we’re talking about stockpiling oil shipments in tankers and other places, to keep crude off the market until Vitol could get its high price.

The Journal made sure that readers understood Vitol’s trading practices did not break the law — at least at this point in the investigation.

In August, though, Vitol emerged as the mystery trader that U.S. regulators reclassified as a large “noncommercial” trader — essentially a speculator, reported the Journal. Vitol’s trades helped reinforce the notion that indeed speculators were behind rising oil prices rather than OPEC and other producers.

This investigation could prove to be real bad timing for Vitol.

Under current SEC Chairman Christopher Cox, the agency has been lambasted for failing to protect investors from the current meltdown. President-elect Obama won’t make the same mistake.

His pick to head the SEC, veteran regulator Mary Schapiro, is expected to mop up the mess and restore confidence in the regulatory agency through new, strict guidelines.

She spent more than 20 years supervising financial markets. In her past position, she served as chief executive of the Financial Industry Regulatory Authority, a broker dealer watchdog. Schapiro has a stellar reputation for integrity and putting investors first.

What does all of this have to do with the price of green?

Well, that’s the big “What if?”

But here is how it could play out…

Schapiro digs up enough evidence to make a painful example of Vitol — and other traders like it. The backroom speculators are forced into the media glare, and pilloried for driving up oil prices.

At the same time, the economy bounces along the bottom and gas consumption stays relatively low.

Combined, these forces conspire to depress oil prices far longer than anticipated today — to the extent that OPEC’s supply cutbacks have only a negligible impact on spurring the price of oil at least here in the U.S.

Overall, this scenario is very bad news for green investors. Low oil totally crushes the economic argument for green technology.

Worse, if the economy remains sluggish for the next few years, the Obama camp could have a difficult time of imposing clean-air surcharges and penalties on American companies.

In the end, we believe that fossil fuels, and nuclear, will continue to reign in the coming years.

Silver followed a similar path until New York opened. The price spike that ensued quickly got extinguished…and silver got sold off for about 50 cents right into the Comex close. From there the price recovered somewhat.

Volume in gold trading on Monday was still pretty light…but three times heavier than Friday’s volume. The HUI tacked on another 3% to the upside. Considering that the U.S. dollar came within an eyelash of gaining two full cents yesterday, I guess we should be thankful that both metals did as well as they did.

As far as changes in open interest go, Friday’s price spike in gold resulted in an increase of 4,300 contracts…up to 295,065. In silver, open interest actually fell 107 contracts…to 85,554.

The Commitment of Traders report came out yesterday. For whatever reason, the boyz at the CFTC used last Monday as a cut-off date, rather than the usual Tuesday at the close of trading at 5:15 Eastern, so the changes in open interest only tell a four-day story. As was expected, there was further deterioration in the Commercial position in both gold and silver once again, as JPMorgan et al sold longs and added to their short positions in both metals. In a nutshell, their positions deteriorated by 1,500 contracts in silver and about 9,700 contracts in gold. As I said last week, and it applies even more this week…this is a “same old, same old” type of rally…as JPMorgan takes the short side of every long trade.

What it means is that unless JPMorgan gets overrun…or stops going short against everyone…this rally will end in the same way as they all have. They will get as many mice in the trap as they think they can…and then they’ll pull their bids, and we’ll have another waterfall decline in prices in both gold and silver. They could do it now (to paint the tape for year-end…or the beginning of 2009). Or they could wait for many more months….as we are nowhere near the old record highs in total open interest in either metal.

In silver and gold news, I note that the U.S. Mint has released its figures for December production in both gold eagles (161,500 one oz. bullion coins) and silver eagles (2,085,000). The mint used 846,000 troy ounces of gold in its gold eagle program in 2008. It’s been a lot of years since the mint went through that much gold in a twelve-month period. Of course for silver, the 19,510,000 one ounce silver eagles produced is almost double whatever the previous record year was.

I see that the silver ETF, SLV, added 987,000 ounces to its stash…and the Swiss silver ETF added another 300,000 ounces as well. There are also rumblings about the Central Fund of Canada adding to its position as well. We’ll find out soon enough if there’s any truth to that.

Over the weekend I see in a yahoo.com news story that Chavez in Venezuela is making more noises about seizing gold concessions “that previous governments granted private operators, in a bid to supplement fall in oil prices with proceeds from state-controlled gold.” And in a similar vein, I noted in a story in aljazeera.net on Sunday that after the military coup in Guinea “Guinea’s coup leader has frozen the country’s numerous mining contracts and gold extractions as part of what he called an anti-corruption drive. In a speech on Saturday, Moussa Dadis Camara said he would execute anyone who embezzles state funds. ‘We have blocked the mining sector. There will be a renegotiation of contracts,’ he said. ‘In gold mining areas, the decision has already been taken: no more extraction until further notice’.” (On Monday…less than 24 hours later…he recanted and said that mining could continue until a final decision was made. – Ed)

In the ‘terrible news’ department came the following. Firstly, a Barclay’s comment posted at Bloomberg saying that “Japan’s economy may shrink 12.1% this quarter.” And in another Bloomberg story the headline read…”Holiday Sales Drop to Force Bankruptcies, Closings”. The first paragraph said…”U.S. retailers face a wave of store closings, bankruptcies and takeovers starting next month as holiday sales are shaping up to be the worst in 40 years. Retailers may close 73,000 stores in the first half of 2009, according to the International Council of Shopping Centers.” In a story out of Charleston, S.C., it appears that the “giant ocean shipping company Maersk will begin pulling business out of the state starting in January and will be gone entirely out of the port by 2010. The shipping company accounts for 20% of all container volume in the port, and if lost would be an estimated $1 billion impact statewide, and thousands of jobs will be cut in Charleston.” And lastly, on the west coast, I read in a commentary on the Internet that “ship bookings for the Marine Exchange…which covers our two busiest ports in Los Angeles and Long Beach…are reporting a 30% fall in ship bookings for the first 6 months of 2009 compared to 2008. If that holds, kiss your ass good bye.” (Maybe that’s an indication of the 12.1% drop in Japan’s economy…plus the drop in Chinese exports. – Ed)

click to enlarge

On Friday I mentioned a story about Russia’s Gazprom cutting off gas supplies to the Ukraine on January 1st over an unpaid $2.1 billion gas bill. Putin has decided to weigh into the fray in this Bloomberg story entitled “Russia’s Putin, Ukraine’s Timoshenko, Discuss Energy” and the link is here.

In an essay excerpted from the latest issue of the Freemarket Gold & Money Report, of which he is editor, GoldMoney founder and GATA consultant James Turk offers his predictions for the precious metals markets for 2009. Turk’s essay is headlined “Gold and Silver in 2009″ and you can find it linked here.

In another life, your humble editor spent a considerable number of years in atmospheric research in the high Canadian Arctic. I know more than a thing or two about both meteorology and climate…and still have many close contacts working in that field. I saw Al Gore’s little documentary “An Inconvenient Truth” and was aghast at how it played to the emotions of the audience with both half-truths and obviously skewed data. Most people I knew in the industry felt exactly the same way…and since then, I’ve seen more and more stories coming out that have debunked the so-called “scientific consensus”. Here’s the latest one that’s shown up…this one’s from The Telegraph out of London, and is entitled “2008 was the year man-made global warming was disproved”…and the link is here.

I see that I’ve carried on quite enough for one day, so I’ll end it here. My last report of 2008 will be tomorrow morning and I’ll see you then.

Source: And Then There’s This… Tuesday, December 30th, 2008

Facts: The open interest in futures contracts on the Comex has fallen to its lowest level since summer 2005, breaking a general uptrend in place since 2001. From a contrarian standpoint, the short-term bottoms in these data tend to favor the buyers over the sellers. However, the statistic went into orbit during the last half of 2007 — it broke away from the upper channel on the charts, creating a bubble in appearance. The current extremity could simply be a symmetrical reaction to that extreme.

Nevertheless, this is a bearish fact, technically speaking, if it represents a lasting new trend.

It is tempting to suggest that the threat of a raid in futures contracts is causing a short squeeze.

It is true that the commercials are liquidating their short positions promptly. But the funds are increasing their short bets, and the liquidation of longs is such that the net short ratio has hardly budged off its mid-September low — which, incidentally, is a level that has coincided with strategic buying points at seven other junctures since the bull cycle began in 2001.

However, the record of this statistic in gold is unique in that during bear markets, the commercials tend to be net long (wrong) most of the time.

So the fact that they are covering their short interests on net does not necessarily presage a rally if a bear market has set in. A bear market would mean that gold prices could fall as far back as US$500.

Fundamentally, the conditions just don’t look ripe for a bear.

I don’t believe the COTs (Commitment of Traders report published by CFTC) have any real predictive value. They tell us only whether the market is too much extended one way or another; they don’t tell us how long those conditions will last. Right now, the structure of the market is healthy. The commercials are covering their shorts, the funds are getting short and the numbers basically favor the bulls. The contraction in open interest worries me a little, but it could be explained in terms of a collapse in spread trades linked to various index products.

In its most recent report on gold demand, the World Gold Council said as much in trying to explain the drop in the gold price in the context of soaring physical demand. In its third-quarter report on gold demand, the WGC noted growth in both jewelry and investment demand across the spectrum relative to both the last quarter and the year-ago quarter. I don’t want to go into a critique of the method here, except to point out that it chronically understates investment demand and overstates jewelry demand.

The inclusion of ETFs all but proves the point.

In just one year, investment demand has grown in importance from under 15% to over 30% of total gold demand, causing the deficit (supply shortfall) to grow nearly tenfold. The WGC interprets this deficit as supply coming from speculative sources, like futures trading or changes in inventories at the various exchanges — like at Comex. Thus, it calls it “inferred investment.” Formerly, it called this the “balance.” But as it grew, the WGC decided it meant something. What is causing it to grow, aside from growing demand in general, is that while the WGC is “identifying” new kinds of demand, it has not kept up with the various sources of supply. Gold bugs have argued for years that the supply of gold is not limited to mine production, officialdom or scrap… that it is not like other consumable commodities.

It is more useful to assume that most of the gold ever produced is held as a reserve, or store, aboveground. And if this is true, then investment demand must be much larger than the WGC calculates, or the price would, frankly, never go up. If the WGC is smart enough to include producer hedging (or dehedging) in the equation, it should also include a measure of demand that expresses itself through all the exchanges and bring itself up to speed on all the sources that supply the market. It assumes that jewelry demand dominates the market, which is incorrect, but even if it were, it still has the wrong idea.

Jewelry demand may be price sensitive in the short term, yet it has grown every year, at successively higher prices, since the bull market began. Despite my objections, however, I am in total agreement with the council’s explanation why gold prices have fallen despite the evidence of soaring gold demand:

“Notably, the selling captured by the [inferred] investment category was mainly by investors with a short-term focus. It largely reflects the fact that gold was caught in the downdraft of other commodities and other assets — it does not reflect a questioning of gold’s value or role as a safe haven. The strong buying in the ETF and bar and coin markets during the quarter, which reflects investors with largely a longer-term focus, suggests that investor belief in gold’s role as a safe haven and store of value is stronger than ever.”

Morgan & Citigroup Gold Analysts Bullish on Gold Regardless of Dollar

No wonder the commercials are covering. The establishment is getting hot for gold.

PMorgan’s gold analysts “urged” investors to stock up on gold this month, citing counterparty risk and tight supplies. See the article here.

Citigroup’s foreign exchange group also put out a bullish tout.

Well, that’s an understatement, actually. “[Gold] continues to look like a bull market to us. We continue to believe that a move of similar percentage to that seen in the 1976-1980 bull market can be seen, which would suggest a price north of $2,000,” Citigroup’s FX group said last week.

What I found particularly intriguing, besides the timing of these calls, was that they both discounted the dollar. That is, they noted, as I have in the past, that the foreign exchange value of the dollar may not be important at this stage. Morgan said, “It is not an absolute given that a rally in gold means a falling U.S. dollar,” while Citigroup (NYSE:C) pointed out, as I also have, examples of just such a situation during the 1970s.

Anyway, it’s not a sure thing yet, and it all makes great fodder for the bull market in gold.

Source: Bulls Rev up for Comex Raid, Commercials Exit Stage Left

And in the latest addition to his Obamanomics plan, the president-elect has also proposed a massive stimulus package of as much as $775 billion over the next two years as part of a historic infusion that’s aimed at overhauling America’s infrastructure, schools, broadband networks and energy use, a Congressional source told MarketWatch.com yesterday.

But making the Schapiro nomination official was considered a key move. In its Thursday morning issue, Money Morning reported that Schapiro had been chosen and that an official announcement would be made later in the day. And that’s just what happened.

Obama named Schapiro as his choice for the top SEC post and nominated former Treasury undersecretary Gary Gensler to run the Commodity Futures Trading Commission (CFTC), which regulates trading in the commodities markets, and called for an overhaul of the U.S. financial-regulatory system in the wake of the credit and economic crisis.

“My priority is to create a regulatory structure that stops future problems in the financial system,” Obama said at the press conference where he announced the identities of the two latest nominees for his team. “Financial regulatory reform will be a top priority of mine.”

In a move that helps further define the Obamanomics platform, the incoming president indicated that a key mandate for both Schapiro and Gensler would be to reign in the multi-trillion-dollar derivatives market, which functions largely outside of the traditional equities market and is mostly unregulated.

“There is a huge amount of money sloshing [around] outside of banks and that is a problem,” Obama said.

A Merger in the Works?

Schapiro, 52, may have one of the toughest jobs in the new Barack Obama administration, for the SEC has come under increasing fire for allegedly failing to demonstrate much initiative in attacking the current financial crisis.

Currently, Schapiro is the chief executive of the Financial Industry Regulatory Authority (FINRA), the largest non-governmental regulator for all securities firms doing business in the United States, MarketWatch reported. FINRA was created in July 2007 through the merger of the National Association of Securities Dealers (NASD) and the member-regulation, enforcement and arbitration functions of the New York Stock Exchange.

Schapiro is also a former head of the CFTC and former member of the SEC. She has been appointed to top finance-related government posts by two Republicans presidents and – now – two Democratic chief executives.

If confirmed by the Senate, Schapiro would take over as head of an agency that has been roundly criticized for failing to detect signs of trouble on Wall Street, where enormous derivatives losses have led to the collapse of the investment banking sector, caused a near collapse of many top commercial banks, and forced the U.S. government to engage in a bailout effort that will end up costing taxpayers trillions of dollars.

Because Schapiro has experience in merging regulatory organizations, and because she’s held posts with all the key players, many observers believe that her nomination signals that the incoming administration is serious about merging the SEC and the CFTC. In fact, outgoing Treasury Secretary Henry M. “Hank” Paulson Jr. has called for the two regulatory agencies to be combined as an interim step in his “blueprint” for a regulatory reorganization in Washington.

Interestingly, Schapiro has publicly supported that “blueprint” for overhaul, both in speeches to organizations, and in testimony in Washington. She is well known for being a strong advocate of the rights of individual investors.

“If the Obama administration decides to merge the SEC and CFTC, Schapiro has the experience at both the agencies to make that transition happen,” Barbara Roper, director of investor protection at the Consumer Federation of America, told MarketWatch.

But Schapiro’s insider experience and knowledge of key regulatory players may also make it more difficult for her to make the tough decisions that will be required if the merger strategy is called for, Roper noted.

“Even though she has a great deal of policy expertise at both the CFTC and SEC, I’m not sure she will be prepared to bring in the broom that the agency needs. She has long years of relationships with people at this agency,” Roper said.

A Solid Resume

Schapiro has plenty of operational, management and regulatory experience. Before FINRA was formed, she had most recently served as chairman and chief executive officer of the NASD, an appointment that took effect in December 2006. Before her appointment as chairman and CEO, Schapiro had spent five years serving as the vice chairman of the NASD and president of its regulatory and oversight division. She’d been with the NASD since 1996.

According to some reports, because the NASD was an industry group, there were often accusations that it overlooked instances in which broker/dealer abuses trampled individual investor rights. Given the more-retail-oriented focus many markets have taken in recent years – with a majority of U.S. workers actually owning stocks via mutual funds or through their employer retirement plans – many industry insiders felt that a new organization was needed, especially one that would view protection of the public as paramount. The creation of FINRA was one offshoot of this push for increased indvidual-investor protection.

In a speech in June, Schapiro talked about the growing complexity of the financial markets and warned that highly sophisticated new products will only make matters even more challenging for individual investors. The upshot: bankruptcies and home foreclosures could jump, and many investors could find themselves facing a future in which they have little in the way of a financial cushion.

“In tough financial times, many investors feel pinched for cash – and some may search for different, often-risky ways to make ends meet, or to maintain a certain lifestyle,” Schapiro told listeners at a “Women in Housing and Finance” conference in Washington. “Troubling trends include investors leveraging or prematurely depleting their retirement savings, trading in their insurance policies in transactions known as ‘life settlements,’ and tapping their home equity through reverse mortgages. We are concerned that some investors may be risking their most valuable assets in an effort to raise cash—including those in or near retirement, who may not have time to recover their losses.”

And the other unfortunate part of that problem, Schapiro said, was that “some unscrupulous financial professionals—many of them unregistered—feed into this investor anxiety, pushing strategies and products that promise to provide balance and safety, but that often end up haunting an investor for a lifetime.”

Schapiro will bring skills – as well as experience – to her new post as head of the Securities and Exchange Commission.

In late 2006, at the time of her appointment as NASD chairman, Richard F. Brueckner, the presiding governor of the NASD’s Board of Governors, described Shapiro as a “highly respected and effective regulator who has proven herself time and again to be a strong investor advocate.”

“She is a proven leader and is uniquely qualified to take over as the head of NASD as it continues to execute its vital mission of protecting investors and ensuring market integrity,” said Brueckner, who was also the CEO of financial-technology provider Pershing LLC.  “I am confident the securities industry will work closely with Mary and support NASD’s efforts to make regulation both more efficient and effective.”

A Career Regulator

Schapiro joined the NASD in 1996 as president of NASD regulation and was named vice chairman in 2002.  As head of NASD’s Regulatory Policy and Oversight Division, she served as the primary regulator of 5,100 securities brokerage firms and the nearly 700,000 registered brokers who were doing business with the public.

The division was responsible for writing rules that governed the conduct of virtually all aspects of the securities industry, including sales practices and financial and operational integrity; examining firms for compliance with those rules; and enforcement of NASD rules as well as those of the Municipal Securities Rulemaking Board and federal securities laws.

At that time, the NASD also had regulatory responsibility for The NASDAQ Stock Market, the American Stock Exchange and the International Stock Exchange.

Before joining the NASD, Schapiro was the chairman of the CFTC, a post to which President Bill Clinton had appointed her in 1994.  The CFTC is the federal agency responsible for regulation of the U.S. futures markets, including the financial, agricultural and energy markets.

As chairman, Schapiro participated in the President’s Working Group on Financial

Markets with the U.S. treasury secretary and the chairmen of both the U.S. Federal Reserve and the SEC.

Prior to her time with the CFTC, Schapiro served for six years as an SEC commissioner. She was appointed in 1988 by President Ronald W. Reagan, reappointed by President George H.W. Bush in 1989, and was named acting chairman by President Clinton in 1993.

At one point, Schapiro was an active member of the International Organization of Securities Commissions (IOSCO) and was elected Chairman of the IOSCO Consultative Committee in 2002 and 2004.

Schapiro currently serves as the “lead director” of Kraft Foods Inc. (KFT), and has been a board member since last year. She’s also a director of Duke Energy Corp. (DUK), a post she’s held since 1999.

Schapiro is a trustee of Franklin and Marshall College.

Obama Stimulus

In discussions with Congressional leaders, President-elect Obama has outlined the basics of a stimulus package worth in the range of $675 billion to $775 billion over two years to Congressional leaders, the published reports state. Obama talked to House and Senate officials Wednesday, but it’s believed the package will likely grow in size.

The package does not consist of another rebate for taxpayers, Congressional sources say. Instead, a number of other programs – such as infrastructure, schools, energy efficiency and health care – will be targeted.

States also will receive aid, and the package would assume more of the cost of Medicaid – perhaps even as much as $100 billion.

Obama transition team officials have declined comment on the financial plan, but Congressional leaders already are calling for a passage of the package. House Majority Leader Steny Hoyer, D-Md., said a package similar to what Obama proposes was needed in light of the Labor Department’s report yesterday that another 554,000 Americans filed for unemployment benefits.

“This package must renew our infrastructure, stimulate our economy by extending unemployment insurance, invest in new energy technologies, and help cash-strapped states protect vital services like education and health care from damaging cuts,” Hoyer said in a prepared statement.

The Wall Street Journal reported there is concern the package could expand to as much as $850 billion as it works its way through Capitol Hill. But Obama is trying to keep the stimulus below $1 trillion, an important psychological barrier, as those on Capitol Hill and Wall Street would be wary of what one insider referred to as the “Dreaded T Word.”

Obama has said that the stimulus needs to be just that – a stimulus, and one that’s actually big enough to “jolt” the wheezing U.S. economy and put it back on a path to growth. Since the just-declared recession actually began back last December, almost 2 million workers have lost their jobs, and more than 500,000 jobs were shed in November alone, according to government data.

Passage would allow Obama to knock out a number of problems with a single blow. The president-elect wants to jump-start the economy on one hand while fulfilling a number of campaign promises with the other. In an ideal world, Obama would like to be able to sign the legislation immediately after he’s sworn in. The Republicans, however, have apparently been quite dismissive of such a time frame.

Obama actually hopes to get lawmakers to assemble a package that could be put before both the House and Senate when the 111th Congress convenes Jan. 6. The president-elect is to be inaugurated on Jan. 20.

“Congressional Democrats urge President Bush to drop his opposition to the recovery package; but if he does not, Congress will ensure that President-elect Obama can sign it soon after taking the oath of office,” Hoyer, the House majority leader, said in his statement.

Source: Obamanomics: President-Elect Taps Career Regulator Mary Schapiro to Head SEC, Proposes $775 Billion Stimulus

I could probably write three letters a week, there is so much happening that is worthy of our attention. The problem today is trying to decide what not to write about, which means I get emails from readers wondering why I don’t mention their areas of particular interest. But at eight pages, I just have to stop. You need a break!

Today, we have to look at the unemployment numbers, and the connection between the credit crisis and the rise in oil of about $16 dollars a barrel in just two days! If there is still room, the dollar is certainly being pushed and pulled by central bankers, who are also worried about inflation. And I doubt we will have room to cover what is a very important rise in inflation in Asia. It is all connected. (And you HAVE to look at the picture of my daughter and associate Tiffani at the end of the letter. Too much fun!)

But first, a quick note. I will be in Las Vegas July 10-12 for the annual Freedom Fest Conference, where I will speak several times, and the line-up of speakers is as strong as for any conference I have ever been to: Denish D’Souza will debate Christopher Hitchens; and Steve Forbes, Ron Paul, Stephen Moore (Wall Street Journal), Charles Murray, George Gilder, John Goodman, and about 100 other speakers, each impressive in their own right, will be there, as will 1,500 freedom-loving attendees. You can go to http://www.freedomfest.com/promo.htm and click on the list of speakers to register. Mark Skousen is the driving force behind the conference, and he does it right. I hope to see you there.

Unemployment Jumps to 5.5%, On Its Way to 6%

The headline number said the US lost 49,000 jobs in May, somewhat fewer than expected. The details were much uglier. It is no surprise that construction saw losses of 34,000, but “goods production” also saw a drop of 57,000 and manufacturing was down 26,000. What was up? Health care (34,000), bars and restaurants (11,000), and government added 17,000 (though, as Phillippa Dunne and Doug Henwood of The Liscio Report noted, the gain was all from local governments, as federal and state governments shed jobs).

So, with all the large losses and few gains, how did we show a loss of only 49,000 jobs? As long-time readers will guess, it is our old friend, the birth/death model, which is the estimate of new jobs created by new and small businesses, which are not covered in the survey. Contrary to some opinions, it is not a conspiracy by a government agency to “cook the books” in an attempt to show a number better than it really is. (If it was, they are doing a really bad job!) It is simply a moving-average projection of the past few years. Like any trend-following system, it will be wrong (sometimes badly) at the inflection points of the change in the trend.

Thus, the Bush administration was right to be upset when the birth/death model significantly understated the growth in jobs during the recovery from the last recession, as Democrats talked about the “jobless recovery.” Subsequent revisions showed that in fact there were a lot of jobs being created.

And now? As the economy rolls through a recession, the system is overstating the number of jobs created. It is just a function of the model. The BLS is very open with the numbers it uses, if you care to dig into them. In October the BLS will announce new benchmarks and apply them in March 2009, although they will only be applied through March 2008. The number of lost jobs through last March will be revised significantly upward, just about the time the recovery is underway. And also in time to help modestly understate the jobs being created in the recovery. As my friend Dennis Gartman likes to say, anybody who trades on the employment numbers deserves the spanking they get.

For the record, “March was revised down by 7,000, and April by 8,000. We’ve now had four consecutive months of downward first revisions, and also four consecutive downward second revisions – unusual strings that support the picture of a weakening employment trend.” (The Liscio Report)

And the birth/death model? This month it added in an estimated 217,000 new jobs. But looking into the details, the model suggested that 42,000 construction jobs were added. The survey showed lost jobs in construction, but the birth/death model added more construction jobs than were lost. Given the current economic climate, that is highly improbable. Ditto for the 77,000 in leisure and hospitality. Do we really think 9,000 jobs were added in financial services or another 9,000 in small manufacturing start-ups?

The reality is that we probably saw a decrease in jobs of at least 100,000. The market was upset with 40,000. What will it do when the monthly number prints 100,000 later this year? And it likely will. The Federal Reserve projects that unemployment will rise to 6%. That means there are a lot more jobs to be lost. And that is if unemployment stops at 6%, which would be a very mild recession indeed.

There are two unemployment surveys. One is for businesses, called the establishment survey, and for whatever reason that is the one most people pay attention to. When they do the household survey, they found that the number of employed people fell by 617,000 last month, spiking the unemployment rate to 5.5%. Some on CNBC said it was just teenage unemployment showing up in the numbers, but that is not true. Teens, according to Phillippa, accounted for just 0.2% of the rise. Adult unemployment rose to 4.8% and accounted for 0.3% of the rise. (By the way, technically, for the three people with no social life actually watching the scorecards, the household survey dropped 250,000 jobs; but after you adjust for factors in the establishment survey and seasonally adjust, you get 617,000.)

One of the best indicators of the direction of employment is temporary employment. If the workload is shrinking, the first thing you do is lay off your temporary help, or simply do not hire them. Normally, unemployment is a lagging indicator, but temporary help is at least a coincident if not a leading indicator. Temporary employment is down 5.7% year over year and is showing continued monthly deterioration with each passing month since last October. That does not bode well either for future employment or consumer spending. We will watch to see when temporary help begins to rebound, to give us a hint that a recovery may be in our future.

What the Tax Numbers Show

Philippa Dunne & Doug Henwood write The Liscio Report. They focus on interpreting the employment numbers and doing in-depth research on tax collections at the state level, plus a lot of interesting “inside” information not typically known by the public. When you see an analyst talking about tax collections at the state level, there is a high likelihood that the source of the number is actually the work of Dunne and Henwood. I find their letter very useful, as I get analysis very quickly after the report comes out, and you always get “the rest of the story” not revealed in the press releases and the media. (www.theliscioreport.com) If I ran a trading desk I would want their reports on my desk.

I called Phillippa about a report they sent out this week. Basically, sales tax and income tax collections at the state level are either down or flat. You can do all the surveys and polls you like, but one of the rules of life is that no one pays a penny more in taxes than they have to. The flip side of that premise is that sales tax collections are a VERY good barometer of economic activity.

A small rally ensued that continued into early New York trading on the Comex, but got capped…for the third day running…at 9:00 a.m. New York Time. From there, it got sold off gently for the rest of the day and into early trading in the Far East today.

Silver suffered the same fate, but managed to rally back into positive territory for the second day in a row…but was capped before it could get anywhere near its 20-day moving average, which is $17.14.

It’s still an open question whether the boys will try to take out the 200-day moving averages on this cycle, or have they already collected all the tech longs they can? I wouldn’t like to see it happen, because of the psychological damage it would do, but if the bullion banks want to do it…they can. Time will tell. Everyone talks about the ’summer doldrums’ in the precious metals. As you can see, there are forces out there that contribute to it.

Not surprisingly, gold open interest on Tuesday fell 5,490 contracts on the $17 swan dive in the gold price…and with silver squeezing out a few pennies of gain, o.i. rose 120 contracts. It would be wonderful if this gold o.i drop was in the COT tomorrow, as there has been huge liquidation since the Memorial Day long weekend…none of which was in last week’s report.

In the Bill King Report last night, there was the following comment…”At the end of 2007 the eight largest banks/brokers had over $500B of Level 3 assets, which represented over 90% of their capital. The amount of Level 3 (Mark to Myth) assets has increased in 2008.” This “Level 3″ debt isn’t worth much. Check out the ABX chart. For the first time, some of these “assets”…if you wish to dignify them with that name…are now worth less than a nickel on the dollar. The chart is here.

I have three stories today. The first is a short one about oil…and some comments that T. Boone Pickens had about the CFTC investigation into crude oil “manipulation” by “speculators”. The Bloomberg link is here.

The second story is about the Fed’s Treasury Auction Facility. As of May 1st, they are providing $150 billion/month in short-term loans to banks and brokerage firms to prevent a total melt-down. Their latest auction for a $75B tranch received 71 bids for $96.62B! From this, it’s easy to see how solid the US financial system really is…LOL! The link is here.

In another sure sign that all is not well, here is a story from The Telegraph in London entitled “Banks’ credit crisis solutions have echoes of 1929 Depression.” The link is here.

“I am enclosing two tickets to the first night of my new play; bring a friend…if you have one.” – George Bernard Shaw to Winston Churchill…followed by Churchill’s response: “Cannot possibly attend first night, will attend second…if there is one.”

Let’s see…Lehman was raising capital on Monday, and was rumored to be buying its own shares on Tuesday trying to support its stock price. Bernanke says that inflation is “significantly higher” than the Fed wants. And lastly, Moody’s has put Ambac’s Aaa credit rating up for review…after their stock has fallen from $95 to $2.50. Everything is fine.

See you on Friday.

Casey Research correspondent-at-large Ed Steer is a keen observer of the financial scene and a board member of GATA.org.

Source: And Then There’s This…Thursday, June 5th, 2008

• Reuters reports OPEC Secretary General, Abdullah al-Badri, as saying “Record-high crude prices have nothing to do with supply and demand but rather are caused by speculation…”
• The Market Oracle claims “there’s no (oil) shortage; it’s just gibberish.”
• And Global Research says, “as much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds.”

But I’m telling you now, they are all wrong. The real driver of the price of oil is supply and demand.

Today, I’d like to prove it to you once and for all.

Speculation, speculation, speculation

It’s the cause of all our ills, apparently.

German and US politicians have called for a ban on futures trading to curb this ‘evil practice’.

The US regulator — the Commodities Futures Trading Commission (CTFC) — has launched an investigation… well actually it’s launched a number of investigations. All of them are a waste of time.

The CFTC is trying to figure out how much of the oil price is down to speculation and how much is down to supply-and-demand dynamics… I wish them luck. They’ll need it.

Political pressure has forced the regulator to produce a report that might make them look stupid.

Why? Because…

Long-oil speculation is NOT rising – it’s actually FALLING

It’s almost as if they are trying to shut the stable door after the horse has run over the horizon. In fact, the horse might actually have died after living a long and fulfilling life by the time this report is produced.

Let me prove it…

Net long positions on WTI futures contracts fell 80% to 25,867 contracts on the New York Mercantile Exchange in the week ended 27 May. This compares with a record 127,491 on 31 July LAST YEAR.

You can see the graph of net long positions on futures contracts on the graph below. See the recent plunge in net longs? This actually makes the speculation argument look very, very wrong — and shows the CFTC is wasting its time.

As you can see large crude oil speculation futures have actually fallen…

Net long positions fell during May; investors took profits on positions as the oil price hit all-time highs. This was accelerated last week when futures exchanges started increasing margin requirements as a way of shaking out speculation.

Oil futures trade on ICE Futures (which used to be known as the International Petroleum Exchange) in London and on Nymex in New York. Because futures are leveraged trades, investors have to deposit margin with the clearing house. This is a refundable deposit to cover any sharp losses if the market moves against the trade.

Both these derivatives exchanges have upped margin requirements significantly over the last week — indeed the margin requirement on some contracts has actually been tripled. The aim is to reduce volatility and force out the more speculative players.

LCH.Clearnet (the UK clearing house) said it upped the margin call due to “a change in the nature of the volatility across the oil curves.”

These increases in margin calls last week were therefore partly responsible for the 4.3% fall in the price of the near-month WTI futures contract from its all-time closing high of $133.17 on Wednesday 21 May to $127.35 on Friday of last week.

You have to agree this is hardly spectacular.

Of course, the move would not take all speculative players out of the market; the big players with plenty of cash for margin will just pay up… but the sign is that the speculative element may not be as large as some people think.

The US CFTC is therefore in a quandary. It has to produce a politically-motivated report on oil speculation at a time when speculation is falling.Rather them than me… but at least the report will be a humorous read.

Regards

Garry White
Editor
Smart Commodities UK

P.S. Garry’s Smart Commodities UK resource advisory explores the very profitable world of natural resources and hard assets. He delves into what’s going on in each sector and reveals the exact stocks you should buy as this unprecedented commodities boom fires on.

Source: Why They Are All Wrong About Oil

Good day… And a Marvelous Monday to you! And welcome to June! Hey! June is busting out all over, all over the meadow and the field… Buds are busting out of bushes and the rompin’ river pushes every little wheel that wheels beside the mill! (And you thought I was just a rocker!) We are having network problems this morning, as some heavy storms ripped through St. Louis on Saturday night. So, the Techie people need to come in and get stuff re-booted, etc. This may go out late… And it may not… At this point, I at least have my laptop working!

Well… Friday saw little movement in the currencies… As I signed off I had told you that maybe someone had said “enough” with the euro (EUR) selling… As the day went on, it certainly looked like that had happened, given the euro’s rise to 1.5550, after looking up to 1.55 early in the morning.

There’s been a return to risk aversion overnight, as some news from the United Kingdom has reignited the fears that the banks may still be sitting on a ton of bad debt… Of course, as Pfennig readers, you already know this, as I’ve told you over and over again there are many more “risk events” for the markets to digest.

Here’s the skinny on the U.K. news… The United Kingdom’s largest lender of buy-to-let mortgages, Bradford & Bingley, came forward to reveal that they had booked a pre-tax net loss of 8 million pounds (after accounting for reductions in the value of its structured investment assets. They also announced that they were going to restructure, and that TPG, Inc. would invest about 179 million pounds.

Well… There you have it… More melting of the U.K. mortgage meltdown… But, hear me now and listen to me later, this isn’t isolated to the United Kingdom.

This is a Big Central Bank meeting week around the world, with the Reserve Bank of Australia (RBA) meeting Tuesday, the Reserve Bank of New Zealand (RBNZ) meeting Wednesday, the Bank of England (BOE) and European Central Bank (ECB) meeting on Thursday. I don’t expect any of these to move rates one way or another at this time. There’s a tiny light shining on the RBA to raise rates, but I think that will come at a later date.

As always, with an unchanged rate environment, the press conference following the meetings will be the more important of the events. I expect the RBA, and ECB to remain hawkish with their intentions to fight inflation, while the BOE and RBNZ are grasping at straws.

The ECB has to deal with the fastest inflation in its 10-year history… That’s not a good thing folks… Not for a Central Bank, whose mandate is to provide price stability. The economy may be cooling, which I’ll talk about in a minute, but inflation is rising – which means rates remain at current levels, or may even go higher as the summer days get hotter.

With the return to risk aversion overnight, the Japanese yen (JPY) has rebounded along with Swiss francs (CHF). It will be interesting to see if the risk aversion can set its teeth into all the “euphoria” surrounding the U.S. markets these days.

The Eurozone economy seems to be slowing down, which shouldn’t come as a surprise. I’ve said all along to expect a slowing of the economy… But not a complete shut-down/recession, and this “slowing” might just be what’s weighing on the euro these days. There’s an important thing to remember about the euro… It’s the “offset” currency to the dollar. So… Look at the two currencies… The dollar, with all the awful fundamentals, a recession, low yields, a war, etc. and then the euro, with a slowing economy… Eventually, the markets will return to the underlying trend.

But first, we might have to endure some euro weakness. But, remember, the dollar has all the bad fundamentals… Sort of like a gauntlet to get through… And while it’s getting beaten, the offset currency is likely to be in favor.

OK… A reader sent me a note about the one-year auction of Treasury Bills, and said, “This is scary isn’t it?” OK… Here’s the skinny on that… You see U.S. Treasury Secretary Paulson is feeling like he’s been “through the desert on a horse with no name” these days. The Treasury is going to issue one-year T-Bills tomorrow for the first time since 2001. With the expanding budget deficit, they have no other choice. The cheese that binds here is the fact that Paulson is indicating that the Fed Reserve, who in the past, had been a regular purchaser of the debt, may not be willing to do so… You see, the Fed is focusing on taking on all that bad debt from mortgage lenders… (Can you say, “The Fed’s focus is all screwed up?”… I knew you could!)

Want some proof that our deficit situation has become completely out of control… How about this little ditty… In the first five months of 2008, the Treasury sold $1.4 trillion of bills, an increase of 36% from the same period last year. Oh, but don’t let that get in the dollar bulls’ way of buying dollars! Deficits don’t matter, right? HOGWASH! You and I know that! But these guys running the country don’t believe it… And that’s a real shame, or sham… Pick one, either one applies!

OK… I have to spend a minute talking about the announced investigation of the CFTC (Commodities Futures). A lot of people believe the investigation will reveal some bad stuff being done to push up the price of oil… Now, I’m not going to sit here and pretend to believe there’s nothing to that… But come on! If the authorities really thought they were going to find something noteworthy, do you think they would announce to the public they were going to investigate? Wouldn’t you want to sneak around and zip the lips until you had the thieves?

I think that this has more “calm the nerves of the public” to it, than it has “to catch a thief”. I mean, come one, we don’t build refineries; we don’t drill where we KNOW there is oil; we haven’t done a darn thing about alternative fuel, despite knowing that we’ve needed to do something since 1973; and we drive gas guzzling cars… But wouldn’t it be better to “blame” someone else for the fact that gas is $4 a gallon? Let’s go after the commodities guys… There’s got to be something there!

It’s supply and demand folks… We have two large countries with billions of people that now demand oil that never really had a demand before… China and India… Take that supply and demand, and mix in a falling dollar, and you have high oil prices.

OK… Today, the data cupboard will show us the color of the ISM Manufacturing Index. You may recall this index has been holding out below the line in the sand of 50, which indicates contraction or expansion, for the past four months. The experts believe the index will have inched up to 48.5 in May – still below 50 – and that should weigh on the dollar a bit today.

We’ll have some other minor reports as the week goes on, leading into the Friday Jobs Jamboree… But I’ll talk more about the Jobs Jamboree as we get nearer to Friday.

The Aussie dollar (AUD), which has been the belle of the ball lately, showed some pimples this morning, after a report showed that retail sales in Australia had unexpectedly declined. I wouldn’t let my shorts get all bunched up over this. As I always say… One swallow does not make a summer… And this is the first “soft” economic report we’ve seen from the land down under. I don’t think we’ll see the RBA back off the rate hikes either!

Currencies today 6/2/08: A$ .9555, kiwi .7850, C$ 1.0045, euro 1.5550, sterling 1.9625, Swiss .96, ISK 75, rand 7.7175, krone 5.12, SEK 6.0175, forint 155.33, zloty 2.1750, koruna 16.15, yen 104.90, baht 32.58, sing 1.3630, HKD 7.8040, INR 42.35, China 6.9325, pesos 10.33, BRL 1.6240, dollar index 72.97, Oil $125.81, Silver $16.86, and Gold… $892.10

That’s it for today… My long time friend and colleague, Chris Gaffney, traveled to San Diego with his lovely family this past weekend to run in a marathon there. I marvel at his determination to do these marathons. Yesterday was darling daughter Dawn’s husband, Jerry’s birthday. We all celebrated at little buddy Alex’s baseball game! Alex just finished four games in five days… That’s crazy! Congratulations to Alex, as he just finished 6th grade! School’s out for Summer! School’s out for ever! OK, enough Alice Cooper for a Monday morning! Kristin’s back from Cancun today! It will be interesting to get her take of the conference! OK… Enough! Time to go! I hope you have a Marvelous Monday!

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Source: Reigniting Fears