According to a July survey conducted by the European Commission (EC), expectations that prices will fall reached their highest level since the commission began tracking comparable data in 1985.

The same survey also showed that excess manufacturing capacity is at its highest point since at least 1990 – another indication that the 16-nation Eurozone region is flirting with a prolonged period of deflation where consumers are reluctant to spend and retailers are forced to keep cutting prices.

Prices in the Eurozone fell 0.1% year-over-year in June. Six Eurozone nations reported negative inflation for the month – Ireland, Portugal, Belgium, Spain, Luxembourg, and Austria. Prices in Ireland fell the furthest, sinking 2.2%, followed by Portugal, where prices fell 1.6%. Belgium, Spain, and Luxembourg all saw price declines of 1%.

Data set to be released tomorrow (Friday) is expected to show that prices slid a further 0.4% in July from a year ago, according to a survey conducted by Reuters.

However, weaker-than-expected price data from Germany released Wednesday could mean an even steeper drop in prices for the region. Consumer prices in the Eurozone’s largest economy fell 0.6% in July from a year earlier.  It’s the first time German inflation turned negative since comparable data was compiled in 1995.

Economists at BNP Paribas said in a research note that they expect Eurozone inflation will fall to –0.6% in July. But the bank also said that it expects the Eurozone’s deflationary period to be short-lived, as the price decline will be exacerbated by low oil prices and seasonal retail discounts.

“The drag on inflation will reach its peak this month, given the favorable comparison with July last year, when oil prices reached their highs,” BNP said.

Still, the International Monetary Fund (IMF) has urged Eurozone policymakers to maintain fiscal stimulus next year and keep interest rates low, as an economic recovery is “highly uncertain.”

“It will be essential to maintain this stance as long as disinflationary pressures persist,” the IMF said.

The European Central Bank’s (ECB) main interest rate currently stands at a record low 1%, but analysts have criticized the bank for not loosening monetary policy quickly enough.

Other central banks “have their own responsibility and decisions and I have already said that as far as we are concerned, we would be very, very keen to avoid to be put in a situation which for us would not be appropriate, namely a liquidity trap,” ECB President Jean-Claude Trichet said last year after the U.S. Federal Reserve announced its decision to cut its benchmark rate to a range of 0%-0.25%.

Source: Eurozone Deflation Becoming a Bigger Concern

U.S. crude oil for August delivery fell 49 cents to $61.05 a barrel by 1745 GMT after hitting a low of $60.29 a barrel. London Brent crude slipped 43 cents to $62.66 ahead of the August contract’s expiry later on Thursday.

The losses come amid lingering worries about global energy demand, contracting for the first time in a quarter century under the weight of the economic recession.

The global slowdown has cut world oil demand by as much as 2.5 million barrels per day, according to the International Energy Agency.

Jim Ritterbusch, president at Ritterbusch & Associates in Galena, Illinois, added that recent government data showing increases in U.S. refined fuel supplies added to bearish sentiment in the oil market.

The U.S. Energy Information Administration said on Wednesday that gasoline and distillate supplies rose last week despite increased domestic refining activity, while crude inventories dipped more than expected.

Oil’s losses were limited by news that China, the world’s second largest energy consumer, saw surprisingly strong growth of 7.9 percent in the second quarter, fuelled by state spending and bank lending.

In the United States, data showed new jobless claims fell to their lowest level since January, but the Labor Department was keen to emphasise an unusual pattern in automotive layoffs had amplified the drop.

JPMorgan and Chase & Co reported a 36 percent rise in quarterly profit, topping Wall Street forecasts. But the bank warned that credit quality in consumer mortgages and credit cards was deteriorating faster than expected.

Also highlighting the ongoing problems facing the world economy is the looming bankruptcy of CIT Group Inc , a lender to hundreds of thousands of small and mid-sized U.S. businesses, after bailout talks with the U.S. government fell apart.

LONDON, July 16 (Reuters)

The Dow crashed 1.4 points yesterday, wiping out Monday’s 1.3 point moonshot. Desperate for something beyond these 0.014% “swings,” the market’s putting China in the driver’s seat today… and these guys still have quite a lead foot:

Chinese auto sales soared 34% in May, year over year. According to the China Association of Automobile Manufacturers, the Red Nation scooped up 1.12 million vehicles last month, outpacing any nation in the world. Consider the course of the last 12 months, and then look at this chart… is China even part of the global slowdown?

We don’t want to get too excited about this growth, as much of these sales are a product of Chinese government stimulus. But I.O.U.S.A. is certainly throwing a bunch of money at this crisis as well, and the same meausre of auto sales here fell 34% in May… so they must be doing something right over in Beijing.

Chinese property sales rose 45% in the first five months of 2009 compared to the same period in 2008, their National Bureau of Statistics announced today. Heh, notice a trend?

Again, these numbers are manipulated by government intervention… but 45%? That’s pretty big. We also note that real estate investment over the same period rose 6.8%, a rise the U.S. certainly can’t claim.

Thus, the market story today is “buy whatever China wants.” Namely, commodities. Oil’s up to $71, a 2009 high. Copper is at an eight-month high of $2.36 a pound. Aluminum, lead, zinc and nickel are all in the same boat.

Stocks like Alcoa and Exxon Mobil helped the Dow to open up 1%.

“Buy what China needs, but can’t make enough of for itself,” Chris Mayer urges, taking this investment theme to the next level.

“In other words, as an investor, buy what the Chinese have to buy. Conversely, don’t compete with China. Sell what the Chinese make plenty of. This next chart captures the idea. It shows China’s ability to produce a commodity against its demand for that commodity.

“You want to be in the lower left-hand part of the chart. In short, the very best places to be are in potash, soybeans, iron ore and oil. In these commodities, China’s share of world production is low. For potash, China represents less than 5% of global production, as shown by the vertical axis. It is also not self-sufficient. As the horizontal axis shows, China’s production of potash is little more than 20% of its domestic demand.

“As for soybeans, China was once the world’s largest exporter. In 1995, it flipped to a net importer and has been the largest importer of soybeans in the world since 2000. Much of its supply is in the hands of companies such as Archer Daniels Midland, Bunge and Cargill.

“More broadly, this speaks to China’s growing demand for food, and its growing dependence on foreign suppliers to keep its rice bowls full. This is why we see China in recent months making deals for food.”

And it’s also why Chris has selected a few worthy stocks in this tiny sector for his Capital & Crisis readers. Get the tickers, here.

Global oil reserves have fallen for the first time in a decade, says BP today, throwing another feather in oil’s cap. Reserves totaled 1.25 trillion barrels at the end of 2008, reads the company’s annual Statstical Review of World Energy. A year earlier, reserves totaled 1.26 trillion barrels.

Thus, at the current rate of consumption, production and supply the world has enough barrels in reserve to last 42 years, says BP.

American oil supplies declined by 4.4 million barrels last week, the Energy Department said late this morning. That’s yet another bullish indicator for crude today, as the Street was expecting an 800,000 barrel increase in inventory.

Higher oil prices helped bump up the U.S. trade deficit to $29.2 billion in April, the Commerce Department reports today. The deficit is up for the second straight month, this time by 2.2%. But the global crisis’ damper on international trade and U.S. consumption is still in full effect… the trade deficit is on track to exceed “only” $361 billion this year, about half of 2008’s.

“Sell bonds, buy energy,” is Dan Denning’s latest pair trade.

“It’s not technically a new decade yet. But if the trade of the last decade was to sell stocks and buy gold, then maybe the best trade for the next 10 years is to sell bonds and buy energy. Gas, coal, oil, conventional, unconventional, renewable, alternative. You have a whole portfolio of choices.

“Gold is no longer as low as it once was. But it’s still not as high as we expect it to go before it starts to look foolish. Meanwhile, today’s government bond market looks an awful lot like the stock market circa 2000. You’re seeing a generational high in bonds. It’s another version of the “high-low” strategy.

“This time around, though, we would add energy stocks to the mix, along with gold… There is probably some truth to the fact that oil’s latest move is driven by investment demand more than, say, demand growth in the real economy. But investors ARE looking for ways to profit from U.S. dollar weakness. Oil is liquid and popular. In the long run, it’s the smaller-than-expected oil supply growth that will drive the market.”

But before anthoer bull market in energy and commodites kicks in… don’t you think we’re due for a bit more pain?

“It’s the dumb money,” writes Bill Bonner, “that thinks you can correct a generation-long period of credit growth in 24 months…with less than 10% unemployment.

“Stocks have now been in a rally for three months. The longer this goes on, of course, the dumber money gets. People come to think the bounce is a permanent bull market.”

“Why would this be the recovery?” asked Goldman Sachs CEO Lloyd Blankfein this morning, clearly puzzled by the idea. “There is no reason to think this is it … So many things have to be sorted out.

“I think it’s going to be a long protracted recession.”

Thus, we’re surprised that traders in Chicago are now giving 70% odds that the Fed will raise interest rates to 0.5% by November. We suspect the Fed will be pumping nearly free cash into this economy into 2010, at least. Perhaps this is Chicago’s way of saying there’s just too much money floating around.

With that in mind, today’s the big day for the U.S. Treasury market. The Treasury will announce the results of its $19 billion auction of 10-year notes today at 1 p.m. Eastern. If it doesn’t go well, it could get ugly for the government’s stimulus plans, mortgage rates, stocks, the dollar, etc. Check us out tomorrow for the details.

Before the auction, the yield on a 10-year note rose to 3.9%, its highest level since November 2008

The dollar is nervously trading up today, along with stocks. The dollar index bottomed (for now) around 79.5 and trades just above 80 as we write.

Heh, and what’s with the dollar strength? Looks like China is controlling nearly every asset class this morning:

“Nobody is talking about dumping the dollar. I don’t think this is realistic,” said China’s Vice Foreign Minister He Yafei. The world’s largest holder of dollar reserves wants the U.S. to know it won’t be selling them… not soon, anyway.

Gold is just a bit weaker today, down $10, to $950 and change.

“I agree with the reader who wrote to you about outrageous executive salaries,” a reader writes, responding to yesterday’s inbox. “Your rather smug-sounding advice was to sell the stocks of companies whose executives’ salaries offended the reader.

“Come on, guys, not reasonable advice, although that’s probably the only remedy that came to your mind. It really is a vast old boys’ network. We outsiders rarely know the true scope of their ‘I’ll scratch your back if you scratch mine’ mutual aggrandizement system, and it’s hard in some sectors to find good stocks whose CEOs are not part of this piggish rip-off system. It’s a clever in-joke kind of thing, and it won’t be ended without punitive action from someone from outside who has serious clout, someone like the president. It certainly won’t be reformed because a few disgruntled stockowners sold their stocks… and it should be reformed. I too find these overcompensated executives arrogant, offensive, not worth what they are paid and assuredly not nearly so brainy as they pretend to be.”

The 5: We received many e-mails like yours. Sorry, but we still don’t get it.

If you don’t like the CEO’s salary in the first place, don’t buy the stock. If it changes for the worse, vote your proxies. Still bad? Sell the stock. If you rode a stock all the way down while the CEO cashed in, that’s a shame…and we can sort of understand you feeling cheated and outraged. But are you really going to go cry to Big Brother? We support initiatives for shareholders’ legal rights and activist investors that put shareholders first. But man… isn’t the government meddling with us enough already?

And we argue there are plenty — plenty — of great stocks out there with CEOs worth investing in. This morning we gathered some of Agora Financial’s long-term investing advisers for an off-the-cuff poll: How many companies in your portfolio are paying their CEOs so much that you feel like shareholders are getting screwed?

Chris Mayer: “I can think of two, but in both cases, the CEOs are exceptionally talented and bring a long-term track record of success.”

Jim Nelson: “Less than 40%. Some are barely making six figures.”

Greg Guenthner: “Since I deal with penny stocks, I really don’t have to worry about ‘fat cat’ CEOs. Most have very moderate salaries when compared to the big boys out there, and some are even paid what could be considered ‘working man’ money.”

Patrick Cox: “None.”

Byron King’s out in Colorado at the American Association of Petroleum Geologists convention… we suspect he’d say much of the same.

“Ultimately, stockholders are the voters who put the directors on the board,” writes our last reader. “Considering that they are also voters in national, state and local elections, is it any wonder that boards of directors screw the stockholders as they do?! Rule by sheeple.”

Cheers,

Ian Mathias

Source: China Leads the Way, The Trade of the Next Decade, CEO Pay and More!

Oil prices and stocks around the world tumbled on Monday after a jump in troubled loans at Bank of America and renewed signs of economic weakness cooled investors’ optimism the worst of a global slowdown was over.

The U.S dollar rallied broadly to trade at one-month highs as the slide in worldwide equity markets boosted safe-haven demand for the greenback, U.S. and European government debt and gold.

Bank of America stock shed 17 percent after reporting its purchase of Merrill Lynch & Co helped to more than double first-quarter profit, but credit quality deteriorated sharply, hurt by a flagging economy and growing unemployment.

Also weighing on sentiment was a key gauge of future economic activity, which fell for the third month in a row in March, showing the U.S. recession may persist through summer.

In another sign of weakness, Germany fell deeper into recession in the first quarter, the Bundesbank said, fueling expectations of a record contraction in gross domestic product.

Most major European and U.S. stock indexes fell more than 3.0 percent as analysts questioned the prospect for corporate earnings.

Shares of Citigroup Inc fell 16 percent after Goldman Sachs said credit losses at the bank continued to grow at a rapid rate, putting a damper on earnings expectations.

“People are starting to peel the results back and say wait a second,” said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. “Can (the results) continue in the next quarter?”

At 1 p.m., the Dow Jones industrial average was off 219.04 points, or 2.69 percent, at 7,912.29. The Standard & Poor’s 500 Index was down 28.93 points, or 3.33 percent, at 840.67. The Nasdaq Composite Index was down 54.10 points, or 3.23 percent, at 1,618.97.

Banking shares took the most points off an index of leading European companies, sparked by Bank of America results.

The FTSEurofirst 300 index of top European shares closed 3.5 percent lower at 786.12 points, the biggest daily percentage drop since March 30.

Deutsche Bank lost 8.6 percent, Barclays fell 7.9 percent and BNP Paribas 6.6 percent.

The DJ STOXX Banks Index fell 5.5 percent.

Oil slid more than 8.0 percent to about $46 a barrel, depressed by a rising dollar and growing caution about the pace of any economic recovery and its impact on oil demand.

U.S. crude for May delivery was down $3.95 at $46.38 a barrel. Brent crude for June fell $3.09 to $50.26.

President Barack Obama said on Sunday the U.S. economy remained under strain and his top economic adviser tempered hopes for a speedy recovery that have driven Wall Street to six straight weeks of gains.

Managing Director Dominique Strauss-Kahn of the International Monetary Fund was quoted Sunday as saying the IMF would cut its global economic forecasts this week and that he did not expect a recovery to start unitl the first half of next year.

“Near term, we don’t see any supportive factors for the oil market,” said Harry Tchilinguirian, oil analyst at BNP Paribas in London. “We have not yet turned the corner on the economy, oil demand is very weak and inventories are high.”

The U.S. dollar rallied, boosted by volatility in global equity markets and expectations the U.S. economy will rebound from recession sooner than other regions.

“There’s no doubt among investors that the U.S. will be the first to get out of this recession,” said Matt Esteve, a currency trader at Tempus Consulting in Washington. “As stocks around the globe move lower, we are seeing a re-emergence of risk aversion and the dollar gets a boost.”

The dollar rose against a basket of major currencies, with the U.S. Dollar Index up 0.82 percent at 86.604. Against the yen, the dollar fell 1.20 percent at 97.94.

The euro fell 0.83 percent at $1.293.

Gold rose about 2.0 percent, with spot gold prices rose $17.25 to $885.15 an ounce.

U.S. and euro zone government bonds rallied as a steep fall in equities helped underpin appetite for less risky fixed-income assets.

Fears about the financial sector were also stoked by a blog which said it had obtained the results of “stress tests” on the health of the top 19 U.S. banks. A spokesman said the U.S. Treasury Department has not received results.

“It’s a pure risk aversion type day today … it’s all about the bond market reacting to very weak equities,” said John Davies, fixed-income strategist at West LB.

The benchmark 10-year U.S. Treasury note rose 26/32 in price to yield 2.86 percent. The 2-year U.S. Treasury note rose 3/32 to yield 0.93 percent.

Asian stocks edged higher. The MSCI index of Asia-Pacific shares outside Japan was up 0.7 percent and Japan’s Nikkei average drifted up 0.2 percent.

April 20 (Reuters)

But the real down-side action was in silver. Once again, there was no price activity worth mentioning until the Comex open…and, like gold, the budding rally got clipped at exactly 8:30a.m….and by the time the smoke had cleared, the silver price had touched $12.60…a 90 cent decline [-6.8%] from its 8:30 a.m. peak of $13.30. Half of that loss occurred in less than 20 minutes…between 10:30 and 10:50 a.m. New York time. Free market forces at work, you ask? Not bloody likely. But when it was all said and done, silver was only down a dime from Monday’s close.

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JPM (NYSE:JPM) and HSBC (NYSE:HBC) were successful in blasting well through both the 50-day and 200-day moving averages in silver…so every leveraged spec Comex long that had been placed since the big take-down to under $12 on March 18th…got blown out of their positions.

In Monday’s rather crazy trading session, gold open interest rose 905 contracts to 372,104…and silver o.i. fell 232 contracts to 92,922. Silver’s open interest numbers for yesterday’s trading should be interesting when they show up on the CME’s website tomorrow. Yesterday was also the cut-off for Friday’s Commitment of Traders report. Hopefully all of Tuesday’s activity will be in it.

The usual N.Y. commentator had the following yesterday…”The European Central Bank’s weekly statement of condition indicates that ‘gold and gold receivables’ fell €82 million last week: 4.15 tonnes at the present book value. This ‘reflected’ the sale of gold by one ‘Eurosystem central bank…and the purchase of gold by another‘. This is the third time in four weeks that this form of language has been used. It is quite distinct from what is said when a coin program is underway: it looks very much as if a CB has broken ranks and is buying for foreign exchange reserve purposes. This could be an important precedent. [Last week, two CBs were reported to have sold 0.65 tonnes in total.]”

In other gold/silver news, I see that there were no gold imports into India in March either. Yesterday was first notice day for delivery into the April gold contract. A total of 8,867 contracts were delivered, with Deutsche Bank (NYSE:DB) delivering 8,500 of them. The big acceptors/stoppers were Bank of Nova Scotia (NYSE:BNS)[2,841] and JPMorgan [3,512]. There were 131 silver contracts delivered. There were no updates at the U.S. Mint…and there was nothing added to either the GLD or the SLV. Comex-approved silver warehouse stocks showed a minor decline.

Four stories today. The first was provided once again by Craig McCarty and was in yesterday’s Financial Times out of London. The headline reads…”OECD predicts 10% jobless rate for 2010″…”One in 10 workers in advanced economies will be without a job next year, ‘practically with no exceptions’, the head of the Organisation for Economic Co-operation and Development said on Monday.” The link is here.

The story is courtesy of the Toronto Globe and Mail. The headline reads…”Chevez promotes ‘petro-currency’ over dollar”…”Venezuelan President Hugo Chavez tried Tuesday to court Arab support for another swipe at America as its economy stumbles: a proposal for a new, oil-backed currency to challenge the global prominence of the dollar.” The link is here.

In a story that showed up on Bloomberg yesterday, the headline read “Calderon Says Mexico Prepared to take IMF Credit Line”…”The peso strengthened on the comments, which eased concern that foreign reserves will dwindle. Activating the credit line makes the funds available and doesn’t imply plans to draw on it immediately, a Mexican government official said.” Once again I thank Craig McCarty for the story…and the link is here.

In his second commentary in as many days, silver market analyst Ted Butler replies to U.S. Commodity Futures Trading Commission member Bart Chilton about whether CFTC reports can be relied upon to demonstrate market manipulation. Butler argues that Chilton simply defaults when he suggests that overwhelmingly concentrated short positions on the Comex may be hedged by long positions in private markets elsewhere. For it is the Comex that sets the price, Butler writes, excessive concentration there is just that, that’s the only market the CFTC can regulate directly, and so it should do its duty. Butler’s commentary is headlined “All Talk, No Action”…and you can find it linked here.

American industry has reached a point where a break in New York stock prices does not necessarily mean a national depression. – Associated Press…December 28, 1929

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I’ve noticed in several news stories that a lot of people think the G-20 meeting in London will be a bust or a waste of time…or both. I heartily agree. The problems the world faces now are totally impossible to solve. They can’t print enough or spend enough…and if they do, we’ll have hyperinflation in spades. It’s my bet [as I've said before] that somewhere in the future…and maybe the not-to-distant future…the world’s economic, financial and monetary system will collapse in a smouldering ruin. I haven’t changed my mind on that one bit.

See you on Thursday.

Source: And Then There’s This…Thursday, Wednesday, April 1st, 2009

As I’ve said many times, and I’ll say it again…NO PROFIT-MAXIMIZING SELLER ever sells like this…EVER! This is price management pure and simple…just like Thursday.

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As for silver, it spent all its time within a dime of its opening price in the Far East…until it began to rise in lock step with gold in London. Its chart was almost a carbon copy of gold’s, but silver did manage to tack on 23 cents before trading ceased at 5:15 p.m. in New York.

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On Thursday’s price spike in gold, open interest jumped a fairly large 6,833 contracts to 376,596. As the N.Y. commentator said…”This is the first time in quite some while that an open interest increase has proportionately exceeded a gold price rise, and suggests overhead opposition is intensifying.” Silver o.i. was up a smallish 667 contracts to 92,548. I’ll certainly be interested in Friday’s open interest numbers when they become available about mid-day on Monday.

As far as the Commitment of Traders report went, there was a marked improvement…as the bullion banks reduced their net short position by 2,937 contracts in silver. They would have done better if they’d broken through the 50-day moving average to the downside…but they didn’t. In gold, the price did spend part of one day about $10 below its 50-day moving average, so the improvement in the bullion banks’ short position was more pronounced. There they reduced their net short position by 15,550 contracts. The bullion banks are still net short about 17.3 million ounces of gold and 179 million ounces of silver…75% of that amount [silver] is the ‘2 or less’ U.S. bullion banks mentioned in the Bank Participation report…and the possibility exists that the lion’s share of this short position is sitting with one trader only…JPMorgan (NYSE:JPM).

The full-colour gold COT graph is linked here…and the corresponding silver COT graph is linked here.

In other gold news, the usual N.Y. commentator was quite animated about a news item that showed up in a CNBS story yesterday. Here are his words…”In an astonishing development, the Chinese Central Bank in its Annual Report, has predicted: ‘in 2009…gold might scale a new peak.’ This is amazing! For a generation [under, I believe, heavy pressure from Washington] Central Banks have been silent or grudgingly cool about gold. And they have bought very little–particularly the FX reserve obese Asian CBs. An astute observer today insinuated that the comment means the Chinese have completed an initial buying round. My own view is that they are signaling to the U.S. administration that they seriously considering ending the Yuan undervaluation/Export bonanza/U.S. Treasury buying model for their relationship with America.” [We'll see. - Ed] The link is here.

There were only 57 contracts delivered in gold on the Comex on Friday…and none at all [again] for silver. This was the fourth day in a row that there has been little or no silver deliveries on the Comex…with 831 contracts still sitting on the books to be delivered. Ted Butler wonders what’s up…especially when March silver is still in backwardation to the May contract by a cent and half. It may mean something…or nothing…but this is not normal ‘business as usual’ in Comex silver. There were no inventory changes for either gold or silver eagles reported by the U.S. Mint…and no change in Comex silver stocks. Surprisingly enough…GLD added a rather substantial 491,000 troy ounces to their alleged gold stash…bringing it up to a new record high of 1,056.82 tonnes. The SLV was unchanged.

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It was a slow news day on Friday…at least there wasn’t much that caught my eye. However, I do have three stories.

The first is from the Atlanta Business Chronicle. It’s a week old, but still interesting, as another state…this time Georgia…ponders using gold and silver coins “for the repayment of debts to the state, notably all state taxes.” More and more of these stories keep popping up. The headline reads “Georgians could pay future state taxes in gold” and the link is here.

And in a story posted at the Financial Times in London, is this headline…”Berlin and Paris unite ahead of summit”…”The leaders of France and Germany joined forces on Thursday to insist that next month’s G20 summit focus on tougher global financial regulations, rejecting US calls for European states to spend more on supporting growth.” The link is here.

To show you how slow a day it was in the hard news department…here’s a story that’s been sitting in my e-mail system since September 22, 2008. Normally I wouldn’t have given this story a second thought, but it was posted at timesonline.co.uk…which is a fairly reputable British rag…so I thought I’d save it for a rainy day. That day is now…and I thank P.S. for the story. Don’t laugh when you read the title…”Japan hopes to turn sci-fi into reality with elevator to the stars”. “Beam me up, Scotty. There’s no intelligent life down here.”

True individual freedom cannot exist without economic security and independence. People who are hungry and out of a job are the stuff of which dictatorships are made. – Franklin D. Roosevelt

While we’re still dreaming of outer space…here’s a music video that really fits. It’s not from that long ago…and is one of the few songs from the last 20 years that floats my boat. Turn up your speakers and then click here.

The Dow looked real shaky for a while on Friday…and the decline was starting to look terminal during the New York lunch hour. But someone showed up to catch a falling knife…and made sure that the Dow ended on a positive note for the week. As GATA’s secretary treasurer said in Washington last April…”There are no markets anymore, only interventions.”

Enjoy the rest of your weekend and I’ll see you right here bright and early on Tuesday morning.

Source: And Then There’s This…Monday, March 16th, 2009

Angela Merkel to Eastern Europe: Drop Dead!

You remember that famous cover story of the New York Daily News? New York was nearly bankrupt in 1975. The city asked the feds for a bailout. To his everlasting credit, Gerald Ford had the backbone to just say ‘no.’

Had he given the city a bailout, Ford (NYSE:F) might have won his race against Carter. He believes that that headline cost him the New York vote…and the election. Then again, had he given New York a bailout…the city might be more like Detroit.

The kindness of strangers is one of life’s delights, but once you begin to count on getting something for nothing you are on the road to Hell. At least, that is our view here at The Daily Reckoning.

Welfare ruined the lives of millions of people. (More on that…below…)

Easy credit – coming largely from the Fed and the kindness of strangers in Asia – ruined the American consumer.

Bailouts, handouts, bribes and giveaways threaten to sink whole industries.

And now the whole world economy will be ruined by printing press currency – something-for-nothing money coming from the central banks.

But that will take time…maybe years. For the moment, we are enjoying the show…

Europe is plagued by debt too – just like the United States. Individual households are generally in better shape than those in America, but governments tend to have more debt than the United States. And in the fringe countries of Europe – Ireland, Spain, Greece, Italy, Poland, and the Ukraine – consumers borrowed far too much money to buy houses. Unemployment is soaring to 15% of the workforce in Spain. Irish banks are going under. And in Eastern Europe, the problems are worse. Typically, a man who wanted to buy a house found that he got a better interest rate if he took out a mortgage in euros than in his home currency. In Poland, for example, many homeowners must now make their mortgage payments in euros, while they earn their money in zlotys. As the financial crisis developed, the zloty fell against the stronger euro, by half. This leaves the Polish householder paying twice as much on his mortgage.

Not surprisingly, consumers are in trouble…so are the banks than lent them money…and so are the countries where they live. Nine of these nations – an Eastern European bloc – got together and asked the European governing council for help. They said they needed $380 billion to get through this crisis. Angela Merkel, speaking for the French and Germans, said no. She might have mentioned, too, that they had already spent $380 billion recapitalizing Europe’s banks.

In America, the government is more accommodating. It is spending trillions to try to bailout the entire global economy. And by the look of things…it is failing.

O! Bama! Where is thy bounce? The whole world needs it.

The Dow did not bounce much yesterday. It was up only 31 points. A disappointing showing. Usually, you can count on a healthy bounce after a big drop, such as stocks got on Monday. But this market has been short on bounces. After Obama got elected, we expected a big bounce. Instead, there was a feeble ricochet of about 15%…and then, stocks headed down again. In the United States, they’ve lost 20% so far this year.

And the more the government tries to pump up the ball, the flatter it seems to get.

HSBC (NYSE:HBC) said it was cutting 6,100 jobs…closing offices all over America…and trying to earn back the $10 billion it lost in the US consumer finance business.

AIG is getting another $30+ billion – after burning through the last $133 billion. ‘Can’t let this insurance giant go under,’ say the pundits, “or the whole insurance business will go down.’

AIG was “irresponsible,” said Ben Bernanke in his little chat with Congress yesterday. He said they made speculative bets that they shouldn’t have made.

But what did he expect? The Fed – under the leadership of Alan Greenspan – threw the biggest financial party in world history. What did they expect the pros to do…stay home and watch TV?

And now the IMF says the global banking system needs another $500 billion. The real figure is probably two to three times that amount. But who knows? We’re still in a period of aggressive price discovery. Until we find out what’s in their vaults…and what it is worth…we won’t know how much it will cost to save them.

Ford and GM (NYSE:GM)sales have been cut in half – sales fell to a 27-year low in February. Blockbuster is eyeing Chapter 11. And skilled immigrants are leaving the US.

*** Obama has, of course, announced his $3.6 trillion budget…and all that goes with it. Including a $1.7 trillion deficit. But his estimates were based on a recovery in the last part of this year. That seems increasingly unlikely. Our guess: the deficit will go over $2 trillion.

Congress has hunched over the numbers. The solemn chicanery of federal budgeting is underway, in other words, as politicians pretend to weigh the merits of the spending plan…

Of course, they are spending other peoples’ money…and none forgets it. The idea is not to reduce spending, and certainly not to return it to its rightful owners, but to make sure it goes to the groups most important for re-election. Besides so much of this money is borrowed from future generations…and foreigners…and who-knows-whom…it is like money from Heaven.

As any system of government matures, more and more people are able to get a purchase on it. It could be a tax break…a licensing requirement that keeps out competitors…a tariff…a subsidy…a job…free food or a welfare check. And as more and more people get something from the government, more and more have a stake in making sure the government stays in business. This phenomenon contributes to the stability of the institution in the short run…in the long run, it guarantees its failure. For each little hustle is a cost…like a leech on the back of a water buffalo. The animal may be strong and fit; but put enough leeches on him and he’ll wither like a dried up grape.

Of course, after a while, the beast begins to stagger and people notice something is wrong. Then, the reformers come out…promising change. But change is just what people don’t want and just what the system won’t permit. There are too many leeches – and the leeches vote.

Obama’s new budget is the biggest bag of leeches to come along since the Roosevelt Administration. We have not seen it in detail. But from what we’ve gathered from the press reports, it has something in it for almost every bloodsucker.

The raw numbers are breathtaking. Whereas the feds have taken about 21% of the nation’s income in recent years, now they’re going to take 28%. The deficit alone will equal more than 12% of total GDP.

Put the feds together with state and local hacks, altogether they will consume 40% of the nation’s total output. Whoa…that’s put it close to the levels of such free-market bastions as Zimbabwe and Algeria, both with 43% of spending done by government…and Hugo Chavez’s Venezuela, where the government spends 41% of GDP.

By contrast, in France, that socialistic, bureaucrat-saturated country with the croissants, 53% of GDP is spent by the government. But wait…in France healthcare is a government industry and so is the passenger train system. In America, 17% of GDP is spent on healthcare. As for the passenger trains…forget it…in America, we scarcely have any. So, if you add the 17% spent on private healthcare to the 40% you actually get a total higher than that of France. Ooh la la…the age of big government is back!

Who pays?

Ah…that’s an interesting subject in itself. Obama says he’s going to soak the rich. But the rich are already pretty well marinated. Reagan’s tax cuts freed them to earn more money – and pay more taxes. Now, the top 5% pays 60% of the costs of government. The bottom 40% pay no taxes at all. They get all government ‘services’…which is to say their boondoggles…for free.

Until tomorrow,

Bill Bonner

Source: The Downfall of the American Consumer

What makes him so confident?

The answer might lie in a fascinating article in the Moscow Times, an English-language daily.  Now I can’t speak to the publication’s credibility; according to Wikipedia, it’s under foreign ownership and isn’t afraid to take an anti-Kremlin line.  But the Wikipedia article is thin, to say the least.  So if all of what follows turns out to be a crock, I won’t be too surprised.  But it’s too intriguing to ignore.

The paper reports the president of Sakha Republic, in Siberia, came calling on Putin recently.  Vyacheslav Shtyrov brought ill tidings: The swoon in world energy markets has hit Sakha hard.  But rather than continue to paraphrase the article, l’ll let the rest of the story unfold on its own:

Sakha is having trouble keeping up with its investment goals for 2020 and the region’s labor market is suffering, Shtyrov said at the meeting.

Putin listened and then took a breath.

“Vyacheslav Anatolyevich,” he said, addressing him by his patronymic, “the global prices of coal, gas, metals and even diamonds have fallen. But the price of gold is rising — and gold is mined on your territory.”

When Shtyrov called attention to miners’ problems with creditors, he was once again rebuffed. “We’ll solve the problem with gold mining,” Putin said. “Especially since — I’ll say it again — I’m well aware that the price of gold is rising on world markets.”

The paper attributes this account to a transcript of the meeting released by the Kremlin.  Assuming this is correct, and the transcript is accurate, Putin is making a remarkable bet here, not just for Sakha, but for his whole country: What low energy prices have taken away, high gold prices will restore.

According to the article, Russian mining firms have been at least as attractive since last fall as names more familiar to Western goldbugs’ ears.  Shares in Polyus Gold have risen 172% since bottoming on November 18; Polymetal is up 207% since its low on November 20.  By comparison, the HUI index is up a little under 80% since its lows last October, the XAU up a little over 65%.

I have no idea whether Putin’s big bet is true, or whether it’s plausible.  But it’s out there.  And it’s fascinating.

Source: Putin’s Fascinating Bet

Mr. Dodd, a man who pontificates on any and every subject under the sun and never lets real knowledge of a particular subject area stand between him and the nearest microphone decided to try out the “N” word – Nationalization! Traders viciously dumped the dollar on Dodd’s “deliberation.”

Dodd Speaks, the Dollar Sinks

And of course the games continue!

The dollar was sharply lower on opening in Asia last night with nationalization of U.S. banks ruling the headlines. But of course the U.S. isn’t the only one flirting with bank nationalization. Take a second look at Europe and Japan (and just about anywhere you care to look) and it’s ugly!

The euro has already reversed 200 pips from its high overnight, likely due in part to Mr. Trichet’s weighty assessment that Europe’s financial system is under huge strain. I say weighty because one should never confuse Trichet’s statements with anything dribbling from the constantly flowing font that is Dodd.

We were of the opinion U.K. banks would beat others to the race toward complete bank nationalization. But it’s probably splitting hairs as de facto nationalization seems the order of the day. Why buy financials in your 401(k) when you own them anyway?

I used to tell people that currency analysis was like being the judge at an ugly contest – the least ugly wins. But now, there is little that separates the degree of ugliness among all competitors. Thus, we have gold printing over US$1,000 and who knows where from here.

Gold has soared against the euro, pound, Aussie and U.S. dollar; though it hasn’t made a new high yet against the buck.

Gold Has Already Climbed Against the Aussie, Euro, Pound and Buck

We’re still sticking to our story that the world reserve currency will be buoyed at a time like this. But I have to admit that I’m covering my eyes when I see the U.S. government’s supercharged attempts to spend its way out of a debt deflation…ugh.

Replacing public debt to the same or increasing degree in which private debt is written down (public debt really means private debt because the private sector does all the wealth creation – while government mostly destroys it trying to “help” us) is no way to allow the system to cleanse.

But with pontificating pandering politicians never more than two minutes away from a microphone, we seem to be stuck there. And I have to wonder why we aren’t seeing any “traction.” Is it to cry, or maybe time to buy more gold? Maybe both!

Source: Only Gold Is Winning the Ugly Contest

It’s not on life support just yet, but it certainly finds itself in an increasingly precarious position, due to the numerous negative factors swirling around the financial world.

One of these factors is something you might not be aware of, given the furor here in the U.S. It’s happening half a world away over in Eastern Europe and is just beginning to get some attention now.

So pack your bags and I’ll fill you in…

Pain In Prague And Poland

In Eastern Europe, the economic problems are two-fold…

1.       The region is experiencing a similar downturn to the one in the U.S.

2.      Local currencies are enduring a significant slide against the euro.

For example, the FOREX exchanges in Prague (Czech Republic) and Warsaw (Poland) have hit multi-year lows. And so-called “toxic foreign currency options” have sent the Polish Zloty into a downward spiral.

So while on the surface, you may see that Eastern Europe has enjoyed strong growth over the past couple of years, scratch below it and you’ll find that this growth was fueled by credit.

Today, citizens in countries like Poland and Romania are losing their jobs and having trouble paying their loans. Sounds familiar, huh?

But just to make matters worse, many of the banks either lent money in euros or receive money from their parent banks in the same. So even if the loans are paid back, they’re worth as much as one-third less because of the falling currencies.

It Wasn’t Just Americans Sucked In By Cheap And Easy Money

We’ve heard a ton about how some American banks got carried away with the availability of easy credit and started dishing out money to practically anyone who asked for it.

But it’s a similar situation in Europe. Austrian, Swiss, German and Italian banks own a majority of banks that do business in Eastern Europe. And these foreign banks have lent boatloads of money to countries such as Poland and Romania.

Not a good predicament to be in, to say the least… not for anybody.

According to The Economist, Austria has lent $230 billion euros to the region, which is equal to about 80% of its GDP – a mind-blowing amount.

And the chickens are coming home to roost now, with Austria’s finance minister, Josef Proll quoted thus in Vienna’s Der Standard newspaper: “A failure of 10% would lead to a collapse of the Austrian financial sector.”

Nope… Not good at all.

The European Bank for Reconstruction and Development estimates that bad loans will make up 10% to 20% of total loans. And the fact that Eastern European countries have to repay – and presumably reborrow – $400 billion this year is a mighty tough number to meet in the tight credit market.

A recent Bloomberg article even floated the notion that big countries like Germany and France might be forced to bail out not just banks, but entire countries.

Because of this, it’s quite reasonable to imagine that if big European banks start falling apart as a result, we’ll experience the ripple effect in the U.S. And with the investor psyche already perilously fragile, quite frankly, our markets can’t suffer another systemic crisis without severe ramifications.

So what’s the solution?

If Eastern Europe Goes South, Head For The Exits

There are some who argue that Eastern Europe is fertile enough ground that foreign banks will do whatever it takes to ride out the storm. After all, those banks have generated meaningful profits in that neck of the woods in the past, and they’ll doubtlessly want to do so again when the smoke clears.

But while they’re probably right, it’s certainly worth monitoring this situation. If it gets worse, you can expect rapid deterioration in our markets as well as the contagion spreads. You’ll want to move your money to safe investment vehicles and fast.

The flight to safety could include assets like the U.S. dollar, which could benefit as Europe’s currencies head south. But this in itself is a risky bet, given its volatility.

As we’ve stated here several times over the past few weeks, we think gold investing is one of the best options at the moment. In addition to highlighting a lesser-publicized reason why gold could head even higher from here, we’ve also alerted you to a gold price indicator that can tip you off on when the metal could rise, plus reasons why you should invest in gold.

Source: The Global Economy: How The Credit-Crippled Europeans Could Sink Your 401k