The S&P 500 is up almost 60% since March. The Dow just had its best quarter since ’98.

Yesterday, the Dow slipped 29 points. Is the rally finally rolling over? Or is this a genuine bull market, just taking a pause?

If it is a real bull market it’s a funny-looking bull – one that is missing parts!

For example, corporate earnings are missing. P/E ratios are rising far above the corporate earnings that support them. This puts the market 35% overvalued on a cyclically-adjusted P/E basis, says Smithers & Co.

And if you look at it in terms of its “q” ratio – a comparison of capitalisation and replacement costs – the S&P is even more overvalued. As for emerging markets, “they’re off the charts,” says the Financial Times.

Another missing part is the consumer. This from David Rosenberg:

“ Consumer confidence not only surprised to the downside in September but the Conference Board index actually fell to 53.1 from 54.5 with both the ‘present situation’ and the ‘expectations’ component failing to build on the August rebound. Before we go any further on the details, let’s recall the following:

Just to put a 53.0 reading into proper perspective. It’s still recessionary… The only categories that actually saw their confidence level rise in September were the ones in the lowest income strata – less than $25,000 (their confidence rose two points). After all, they’re the only ones really benefitting from all the government intervention into the economy and the markets. ”

It’s not hard to figure out why consumers lack confidence: this bull is lacking in jobs, too. A worse-than-forecast report came in from ADP Employer Services yesterday. It said US companies cut 254,000 more jobs in September. And Reuters reports that jobless rate rose in August in all US cities.

The bull is also missing production. Another report told us that manufacturing activity in the Chicago area is still in recession. In the US as a whole, the latest numbers tell us that GDP fell in the second quarter – but by less than forecast.

‘Less than forecast’ might be good news if stocks were at an epic low. Instead, at current levels, it is much like a doctor who tells the family: “Thank God he got medical attention. He’s dead, but not as dead as he would have been without it.”

Another important part this bull market is missing is the retail stock market investor. Hey, this rally has no legs at all!

We have insisted – with no proof, up until now – that the small investor is no longer counting on the stock market for his retirement. He’s seen what can happen. At the low in March, adjusted for inflation, he was back to where he was 40 years ago. That is, in real terms, he had not made a dime from the stock market (aside from dividends) during his entire adult lifetime. We guessed that he was not buying stocks.

Now, here’s the evidence.

According to TrimTabs, only $2.5 billion (£1.6 billion) has gone into equity mutual funds in the last six months. Bond funds have attracted 13 times as much money as equity funds, says a Morningstar report.

“ US retail investors… have watched this rally from the sidelines,” the FT concludes.

Wait a minute. Someone is pushing up stock prices. If not the retail trade, who? We don’t know. Maybe hedge funds. Maybe institutional speculators. The pros have a different outlook.

If this rally turns out to be real, and they miss it, their jobs and reputations are in danger. If it turns out to be phony, on the other hand, they risk clients’ money. On balance… they are better off getting in than staying out.

But just as the pros jump like lemmings into equities… they could all scramble out fast. Give them a fright… and this rally is over.

Where might the fright come from? We can think of several possibilities. One is the housing sector. If repossessions begin to increase… and prices fall… even the pros may put two and two together. Likewise, a shocking unemployment number could cause them to connect the dots.

Another thing that may trigger a sell-off in the stock market: a sudden setback in China…

Today is a big day in China… it marks the 60 th anniversary of the communist rise to power. “The Chinese people have stood up,” said Mao, announcing the victory in 1949.

Then, over the next two decades, whenever the Chinese stood up… Mao shot them down himself. Mao’s long march to power was a huge setback for human political progress – if there is any. The man was a thorough scoundrel and a complete incompetent at everything, except getting power and holding onto it.

Every program was a disaster. When he set out to ‘liberate’ the masses, they ended up as slaves. When he set out to feed them, they starved. When he proposed to empower them with his “democratic dictatorship”, they ended up with bullets in the back of the head.

But 60 years later, the commies are still in power. China is still red.

And yet, thanks to the curious way the world turns, China’s economy is now freer and more competitive in many ways than the US. Go figure.

*** As economies age, more and more people become ‘rentiers’. That is, they get some special privilege… some inside angle… some conniving advantage. The latest numbers, for example, tell us that almost half of all households pay no federal taxes. They collect benefits – jobless benefits, food stamps, education, day care, health care, social security – without contributing to the system that provides them. Then there are the millions of households that pay taxes but receive a large part of their money from the government itself – employees, contractors, lobbyists, etc. Combine these and you have enough to win any election in the country.

But the welfare chiselers and food stamp cheats are small-time crooks. The big crooks go for billions. John Crudele in the New York Post:

“… September 18, 2008 [ US Secretary of the Treasury... Henry] Paulson placed his first call of the day at 6:55am, to Lloyd Blankfein, who succeeded Paulson as CEO of Goldman. It’s unclear whether the two connected, because Blankfein called Paulson minutes later.

“And then Blankfein placed another call to Paulson at 7:05am for what looks like a ten-minute conversation.

“After that Paulson called Christopher Cox, Securities & Exchange Commission Chairman, twice; British chancellor Alistair Darling; and New York Federal Reserve head (and now Treasury Secretary) Tim Geithner two times.

“Then Paulson took another call from Goldman’s Blankfein.

“It wasn’t even 9am yet – 30 minutes before the stock market was to open – and Paulson and Blankfein had already exchanged three phone calls.”

It pays to have friends in high places. That was the day the market learned of Paulson’s bailout proposals. Could Goldman have gotten word before others?

Hey, we’re not accusing anyone…

*** “I can’t make this work. It’s too hard. It’s too complicated. And there are too many other people doing a lot better stuff.”

Jules is free, white and 21 years old. His daddy’s rich (at least he would be rich if he lived in, say, Pakistan) and his mummy’s good-looking. But Jules is worried. He recently graduated from college and has decided to begin a career in music. He has begun a two-piece band, called ‘Royal Native’ and has produced an album. All who have heard it are impressed. But the challenge of turning a pair of talented young musicians into a going, moneymaking concern is daunting. Almost overwhelming.

“There are just so many groups doing similar things,” Jules continued. “They’re all on the internet, just like we are. And many of them are very good. And I don’t know how to distinguish what we’re doing from what they’re doing. We’re not really ‘better.’ And we don’t really have a unique sound.

“You can’t make a go of it on the internet alone. You have to perform. I can perform… but only the country/folk stuff. And that’s just not going to take us anywhere… because everybody does it. Our new sound is ‘techfolk’… it’s good, but it’s done in the studio… you can’t do it on stage. So you can’t perform. And if you can’t perform your stuff, you might as well give up because you’ll never get the ‘buzz’ you need to stand out.

“And there are so many things I just don’t know how to do… so much of this is marketing. I don’t know anything about marketing. And what can I market? You need something unique. We don’t have anything unique. We’re just trying to come up with good music… and that’s hard enough…

“I think I’m going to give up. It’s too hard. I’ll never be able to do it. Besides, all I really want in life is a house in the suburbs, a nice, blonde wife… and a job where I don’t have to work too hard.”

We had to pause and think. What to say to a young man who is just starting out… and who realises what he is up against?

Father-knows-best had this advice:

“Jules… look… you’ve got a long road ahead. This is no time to worry. You’re not supposed to know how things work… or how to get where you’re going. Life is a long hike. It is as if you were walking from Baltimore to Los Angeles. It doesn’t really matter which way you turn when you go out the front door. The important thing is just to keep walking. You’ll have plenty of time to correct your course.”

Until tomorrow,

Bill Bonner

Source: The Rally Rests on a Knife-Edge

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Stitch in Time

The Dow rose again yesterday – up 33 points, to close at 9,320. We set 10,000+ as our objective for this bounce. We’ll stick with it for a while longer.

Make no mistake though. No one knows how long this rally will last – certainly no one here at the Daily Reckoning vacation headquarters. It will continue until it runs out of gas. That could be tomorrow. It could be months from now.

It will run out of gas sooner or later, and probably this fall. A real, durable bull market would require an economic boom – a genuine recovery. We don’t see that happening…

But people must think it is happening…

“There are signs of a recovery in the US… ” was a popular line at last night’s cocktail party. Several friends mentioned it. Each time, we had the same reply – we wouldn’t bet on it.

Yesterday, the price of oil rose; it ended the day at $71. And the dollar stayed where it was – at $1.44 per euro. Investors are betting on recovery – despite our advice.

And when the recovery turns out to be a clunker, they’ll probably put these trades into reverse. Oil will go down; the dollar will go up.

You want to speculate, dear reader? Sell oil… buy the dollar. Wait for another crash this autumn.

Why will there be another crash?

Because people believe something that isn’t true. People believe that there is a recovery… and that it is the result of stimulus efforts by the feds. The results from the second quarter show the economy still contracting… but at a slower pace, just –1% annually, rather than the -6.4% recorded in the first quarter. This is heralded throughout the world as proof that the crisis is receding.

“It if weren’t for stimulus spending, the contraction [in the 2nd quarter] would have been closer to 4%,” says the editorial in the International Herald Tribune. “The stimulus is helping… and more stimulus would help even more.”

Oh? Would it? Let’s look at stimulus-in-action:

Cash for clunkers is a hare-brained scheme… but that doesn’t make it unpopular. The idea is to stimulate demand by, well, giving people money. But instead of just giving them money and letting them choose what to do with it, the feds decide they need a new car. In order to get the money, people have to buy one.

According to the press reports, the program has been a great success wherever it has been put in place – in France and Germany as well as the US.

If so, why not apply the concept elsewhere? How about cash for houses? Cash for liquor? Cash for newspapers? Cash for trips to Europe?

What’s so special about autos, in other words? And why is it a good thing for people to buy cars?

Oh c’mon, dear reader, don’t pretend you don’t know. The auto industry is huge… with many lobbyists and many organized groups interested in its well-being. It is an old and well-established industry with plenty of political clout.

Tomorrow’s industries, by contrast, have no lobbyists… no organized labor… no pet congressmen… no political action committees. So who gets the money?

Here’s the problem: the meddlers are not only up against tomorrow’s industries… they’re up against tomorrow itself. It’s not as if Americans needed cars. Not at all. They’ve got plenty of wheels already. Three car households are typical. And they’re fairly new cars. Americans were on a buying spree during the bubble era, 2001-2007; they bought new cars along with everything else. So, the goal of the cash for clunker scheme is not to increase the size of the US auto fleet, it’s to make it newer.

People don’t need more cars. They only need to replace cars that get worn out. If they bought a car 5 years ago, they may be ready to buy another one. Or, they could probably wait until next year. Along come the feds with cash… and the buyer decides to replace his car this year rather than next.

This is heralded as a success. The feds have stimulated demand. But what about next year?

We’ll have more to say about this on Friday… but the auto example helps us see what a scam these stimulus schemes really are. They claim to boost demand. But they can’t really increase demand. All they can do is roll next year’s buying into the present year.

Sound familiar? That’s the very thing that has been happening for the last two generations. Consumers didn’t want to wait until they’d made the money to take their vacations or buy their houses. They turned to credit. They borrowed against future earnings. They spent money they hadn’t earned yet… thus bringing forward purchases that should have been made in the future. That’s why we have a depression; now, we’re in the future!

It had to come sooner or later. After drawing consumption forward for decades, Americans had to stop. Time had to catch-up. Homeowners had to pay down debt. Ken Rogoff, Harvard professor of economics, believes it will take them 6-8 years to do so.

But consumers spent more than they could reasonably be expected to pay back. They out-spent the future! They bought a ticket to somewhere beyond the future… to a place where they would never actually arrive. In many cases – especially in the housing market – lenders discovered they couldn’t get their money back, which is what led to the credit crunch and the collapse of Wall Street.

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

From one scam to another… that’s the way the feds do it. From bailing out Wall Street they now turn to bailing out the entire world economy – in a similarly fraudulent way. Tim Geithner told the Chinese last week that the US would revive thanks to increased private demand. But the feds cannot really increase demand in the private sector. Increasing real demand would mean increasing real wages. And there’s no sign of that. To the contrary, incomes are going down.

Yesterday’s news tells us that personal incomes went down 1.3% in June. . Incomes had gone up in May, by precisely the same amount – 1.3%, thanks to stimulus payments. Then, too, commentators saw it as a sign of recovery. But what the feds gave in May was taken away in June. The future caught up with the Obama administration’s stimulus efforts within 30 days. Net result = zero.

The June number reflected the biggest drop in income in 4 years. It is not surprising. We’re in a depression, remember? Salaries and wages fell 0.4% in June… the 9th drop in the last 10 months.

*** “It looks like there are finally some signs of recovery in the US,” said more than one person we talked to last night.

The occasion was a cocktail party… held on the grounds of a stately chateau. The summer social season is underway in Poitou. We are attending dinners, plays, cocktail receptions, barbecues and weddings.

Last night, waiters in tuxedos passed out champagne, foie gras canapés, and desserts while hundreds of guests milled about and talked.

“You might want to hedge your bets on this recovery,” we told one Daily Reckoning reader. “It’s probably not going to work out.”

“But I’m confused about something,” he continued. “You’ve been urging me to buy gold for years. And now you seem to be changing your mind.”

“No… no… not at all. I’m still a gold bug. It’s just that I expect this rebound to end… and for stocks to go down, possibly down a lot. The dollar is what people want when they are frightened. The dollar is going down now because they think there’s no longer anything to be frightened about. But when this recovery disappoints them, investors are going to be more frightened than ever. Because they’ll realize that we’re faced with a depression… and that the feds can’t do anything about it. They’re going to rush to the safety of dollars… at least for a while. Probably long enough to shake out a lot of gold buyers.”

Source: Cash for Liquor Anyone?

We’re not so sure. It seems too early to us.

But we’re not even going to think about it. Today, we’ve got to make tracks. We’re traveling.

In light of our voyage we’re turning today’s essay over to guest host Ian Mathias, of Agora Financial’s 5 Min. Forecast. He’ll take over from here…

Your family’s share of the government debt is now over half a million dollars. A record $546,668, to be exact.

That cheery Monday stat comes courtesy of a USA Today study, which claims that each American family’s share rose 12% in 2008. That’s $55,000 in new government debt last year for every US household – thousands more than the median household annual income. Here’s how it breaks down:

Last year’s spike is the biggest since the Medicare prescription drug benefit was added in 2003. According to the rag, the government garnered $6.8 trillion in “new obligations” in 2008, bringing the total US tab to $63.8 trillion. Given our spending record so far in 2009, it’s safe to say your family’s burden is already much, much larger.

And you ain’t seen nothin’ yet… the Social Security program will grow by 1-2 million beneficiaries every year until 2032 as baby boomers retire. Medicare will add just as many each year starting in 2011, when that same demographic starts turning 65.

Unless the US becomes a net saver, “another global financial crisis triggered by a dollar crisis could be inevitable,” forecast former Chinese central banker Yu Yongding over the weekend. (Oy… Beijing is 7,000 miles from Washington, and even they can see this coming.)

Yu’s comments were purposefully timed – US Treasury Secretary Geithner embarked on a sudden PR tour of China this weekend. His mission? Keep the cash flowing from America’s No. 1 creditor.

“No one is going to be more concerned about future deficits than we are,” said Geithner, whose government’s budget deficit will exceed $1.75 trillion this year. “As we recover from this unprecedented crisis, we will cut our fiscal deficit [and] we will eliminate the extraordinary government support that we have put in place to overcome the crisis.”

In the meantime, Geithner assured students at Peking University that China’s investments in US paper are “very safe.”

“I doubt the Chinese believed him,” says friend and currency expert Chuck Butler. “Of course, I’m not a Chinese official, so I don’t really know what they are thinking. But I’ve watched them smile and tell former US Treasury Secretary Paulson that they were going to allow greater currency flexibility, and after he would board his plane, it would be business as usual… Same thing for Graham and Schumer, who thought their prestigious status as lawmakers would get them someplace with the Chinese.

“It all comes down to the fact that the US needs China more than the other way around.”

General Motors, once the backbone of US manufacturing, is officially bankrupt. As you’ve no doubt heard, the company declared bankruptcy this morning. But since it’s 2009, lord knows it can’t be a run-of-the-mill insolvency. The Obama administration has its hands deep in this thing… here’s the fine print of the biggest industrial bankruptcy in US history:

• Uncle Sam gets a 60% stake. The government will pump an additional $30 billion into GM (on top of the $20 billion already squandered). In exchange, the government will be the largest shareholder… leverage it will use to usher GM through bankruptcy and convert it to this “leaner, stronger company” we’ve been promised
• Half of the UAW’s $20 billion health care fund will be converted to GM stock, which will give it a 17.5% stake in the company. 12-20 factories will be closed, at the cost of approximately 21,000 union workers. 40% of the 6,000 GM dealers will have to close, too
• The Canadian government gets a 12% stake, given all GM’s design/manufacturing activity up north
• Bondholders were bought (bullied?) out. They’ll swap their $27.1 billion in unsecured debt for 10% of GM, with warrants to own 15% more. Surely, they learned from Chrysler’s bondholders, who were publicly vilified by President Obama for demanding what was lawfully theirs… so much for that hallmark of American capitalism
• Current shareholders get nada. At least that rule of bankruptcy is still intact. If you were long GM, please consider letting someone else manage your money. Anyone.

“GM Bankruptcy to Bring Taxpayer Ownership,” headlined Bloomberg this morning. Shame on them and the US government for perpetuating this “taxpayer ownership” BS.

We must have been asleep when the “taxpayer” got any say in this one. GM is owned by wealthy politicians in Washington who, under threat of imprisonment, forced their constituents to finance the deal. Insinuating the public has any control is “Orwellian in the extreme” Addison suggested when we discussed the matter late Friday. Amen.

And let’s be really honest… taxes haven’t gone up to cover the GM bailout (or any credit crisis expense), but government borrowing certainly has. If any “taxpayers” truly own GM, their tax returns get mailed to Beijing and Tokyo.

Sign of the times… GM and Citigroup (NYSE:C) are getting kicked off the Dow. Cisco and Travelers will replace them next Monday. Extra irony (and foreshadowing?) in this exchange, as Citigroup is the former owner of Travelers, which it spun off in 2002.

The market had baked in GM’s insolvency a long time ago. In fact, the Dow’s off to the races this morning, even though one of its 30 components is rapidly approaching zero (the “beauty” of a weighted index). The big indexes rose 2% within the first 30 minutes of trading.

“We have reached a pivot point in financial markets,” forecasts Rob Parenteau, steward of the Richebächer Society.

“As we have documented in recent weeks, the list of US macro series showing stable nominal levels over the past three-four months continues to increase. These include retail sales, new orders for durable goods and imports of materials and finished goods. That is not what usually happens in a debt-deflation dynamic, which cumulatively builds on itself. It appears the debt-deflation risk is being contained by extreme fiscal and monetary measures.

“Stability is better than free fall, but it is not the same as expansion, and we believe equity investors have shoved valuations high enough over the past three months that they now require signs of economic growth, not just stability, to carry equity indexes higher. We think the odds of them getting that could improve after we get past the auto production and dealer downshift later in the summer, but the rise in Treasury yields is becoming alarming.

“So from a strategic point of view, we believe equity investors want and need to see stronger economic and earnings results to drive indexes higher, while bond investors need just the opposite to calm Treasury yields down. In addition, through near-zero interest rate policy (ZIRP) and quantitative easing (QE) approaches, the Fed has been trying to push private investors into riskier asset classes while the Treasury’s debt issuance calendar implies they need private investors to prefer owning Treasury bonds, which are generally not the asset of choice in an economic recovery scenario.

“In other words, we have contradictory cross currents here. If the Fed doesn’t intervene to slow or halt the Treasury yield backup, there is a chance the stabilization in unit home sales will wither away. If the Fed does step up QE operations to halt the Treasury yield rise, professional investors taking the ‘green toilet paper’ view will continue to sell dollars and buy commodities. Down the line, that implies higher energy prices for consumers and higher input prices for manufacturers, neither of which we would consider growth-supportive developments.”

Just like last week, materials and energy companies are leading the way today. The great global rebound argument is still hot, and this data point is keeping the commodity fire ablaze: China’s manufacturing sector expanded for the third month in a row in May, its government reports. China’s purchasing managers index registered a score of 53.1 during the month, down just a bit from April but still above the expansion/contraction score of 50.

Oil’s up to a fresh seven-month high of $67 a barrel today, largely due to China’s PMI number. On the other had, the dollar is still falling, giving commodities an even bigger boost. The dollar index fell right through support at 80 on Friday and has plunged another point and a half since. It’s at 78.8 as we write, just off its 2009 low.

Thus, the cost of your European vacation has popped 7% since the start of May. The euro is up 9 cents over the last 30 days, to just under $1.42 as we write. The pound has followed suit, up 11 cents over the last month, to $1.62.

And could parity be around the corner for our neighbor to the north? The Canadian dollar is up to 92 cents today, its highest level since October 2008.

Gold continues to flourish, but silver has been the real precious metal story of late. The yellow metal is up about 9% over the last month, to roughly $980 today. Silver, on the other hand, shot up 29% in May, to $15.50 an ounce.

“In general,” says energy and oil expert Byron King, “the precious metals are up because the big-spending politicians in Washington have no respect for the US dollar. Break out the black crepe and armbands of mourning for the US dollar.

“Specifically, silver has always been the “poor man’s gold.” Silver tends to lurk in the shadows of the price of gold, sort of a stepchild to the yellow metal.

“But on occasion, silver undergoes a slingshot effect. Between the basic industrial demand for electronics, plus jewelry demand (’cuz gold’s getting pricey!), and now the monetary pull… silver is accelerating in a price rise that is – believe it or not – leaving gold in the dust.

“Silver could break $20 sooner than we’ll see gold at $1,200, and the silver miners (my readers own several) will soar to new heights. Do you have your ticket for this ride? All aboard!!!”

Silver may continue to outperform gold. If you’re a believer in historic ratios, silver still has room to rise in order to meet its average gold price ratio over the last decade.

Either that, or gold’s price needs to fall. And in this environment, we’d sooner go long silver than short gold. Do you agree?

So again, we thank Ian for his contribution today as guest host and his insightful above look at the news.

Our regular commentary, such as it is…tomorrow.

Bill Bonner

Source: Your Share of the US Debt

Needless to say, Ted Butler and I had a discussion about yesterday’s goings-on. His guess [and it's only a guess] is that the ‘four or less’ traders in the Commercial category of the Commitment of Traders…all bullion banks…have covered all the shorts they can by rigging the price to the downside…and now they’re forced to cover their shorts in silver and gold by buying in the open market. This action on their part, if true, would have caused the spike up in prices yesterday. Time will tell.

Surprisingly, since both gold and silver prices rose on Wednesday, open interest in both metals fell…but as I mentioned yesterday…we’re in the rollover period before options expiry and first day notice for May, and a lot of switching is going on…and many contracts are also being closed out. Having said all that, gold open interest fell 2,824 contracts to 336,402…and silver o.i. was down 534 contracts to 95,743.

Not a lot to report in ‘other gold news’ this time. The Comex Delivery Report on Thursday showed that 49 contracts were delivered in gold…and two in silver. Not a lot of activity there. Over at the Comex-approved warehouses, I note that 477,032 ounces of silver was removed from the exchange yesterday. Virtually all of it came from Brink’s, Inc. (NYSE:CFL) Over at the GLD ETF, about 30,000 ounces was removed…probably a fee payment. There was no change in SLV.

I have four stories today…three of which are on the same topic. The first one is about Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). With the subprime debacle swept under the rug for the time being…another great hairy mortgage creature has come shambling forth to take its place. These are option ARMS…which are just as bad, if not worse than subprime. The main difference being that there are three years worth that have to be ploughed through…unlike subprime which was over in 18 months. This is the second residential real estate shoe to drop…and this one will be the killer…and it’s starting now! Here’s the graph that tells all.

click to enlarge

And here’s the story that I mentioned above. You can refer to this graph as you read the commentary. Better yet…save this chart on your own computer for future reference. The story, which is posted at globaleconomicanalysis.blogspot.com, is entitled “Fannie Freddie Delinquencies Soar [and they are going to get much worse]“. I thank Casey Research’s own John Grandits for this article. The link is here.

In a Wall Street Journal story that I ‘borrowed’ from lemetropolecafe.com comes this real can of worms…”BofA CEO says was told to be quiet on Merrill”…It appears that “Bank of America(NYSE:BAC) Chief Executive Kenneth Lewis told the New York attorney general he believed former Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke wanted him to keep quiet about the worsening terms of the bank’s acquisition of Merrill Lynch, according to testimony reviewed by The Wall Street Journal.” This is going to get ugly. The link is here.

The next ‘borrowed’ story is “the smoking gun”…the 5-page letter from N.Y. Attorney General Andrew Cuomo to Christopher Dodd and Barney Frank et al. “‘Dave from Denver”, a regular commentator over at lemetropolecafe.com, had this to say about the unfolding debacle…”This is a picture postcard example of what happens when rats are trapped in a corner…they turn on each other.” The link is here.

And lastly…and thanks once again to lemetropolecafe.com…is this piece on the same issue. It’s posted at businessinsider.com. When the lawsuits start flying on this one…Hank Paulson and Ben Bernanke will most certainly be amongst the accused. The commentary is entitled “Paulson Contradicts Bernanke, Blames Bernanke for Lewis Threat”. This will be a pissing match for the record books…but will anybody go to jail? The link is here.

Well…let’s make it five stories today. This last one is from Ambrose Evans-Pritchard at The Telegraph in London. It appears that Germany’s leading institutes forecast a 6% contraction of GDP in 2009…a slump reminiscent of 1931…” It should be no surprise to you, dear reader, that the world’s economy is collapsing in ruins. The story is entitled “Germany’s slump risks ‘explosive’ mood as second banking crisis looms”…and I thank the ‘Charleston Voice’ for bringing it to my attention. The link is here.

Most people still do not understand that the current crisis is not about saving capitalism; it’s about saving the welfare state-crony capitalist-fascist political economy in the US that can no longer pay its bills. – Bill King, the King Report

Today is Friday…and it’s Comex option expiry for both gold and silver. And as we watch the world going to hell in a handbasket…it will be another interesting trading day…to say the least.

All of us at Casey’s Daily Resource Plus thank you for reading our comments here this week…and we look forward to seeing you on Saturday.

Source: And Then There’s This…Friday, April 24th, 2009

Paulson’s remark came in response to Lewis’ request for a letter from Fed Chairman Ben Bernanke, acknowledging the government’s insistence that Bank of America acquire Merrill Lynch, despite the brokerage firm’s mounting mega-billion-dollar losses.

This one little phrase probably tells you everything you need to know about Henry Paulson, the man who put the “secret” in Secretary. And this one little phrase certainly tells you everything you need to know about the structure and actual objectives of the bailout campaigns Paulson orchestrated.

Specifically, the Paulson bailouts sought to divert hundreds of billions of taxpayer dollars toward Wall Street finance companies, and to do so as secretly as possible. In the name of “systemic risk,” the former Treasury Secretary dispensed hundreds of billions of dollars to the likes of AIG, Citigroup, and his former employer, Goldman Sachs, without ever seeking or receiving a single vote from an elected official. Thus, as it turns out, the only system genuinely at risk during Paulson’s tenure was the American system of honest and transparent financial markets.

The initial bailout facilities were created and implemented by Paulson and Bernanke, two unelected officials. And none of the initial bailout schemes ever faced scrutiny from elected officials, much less a formal vote. Even though some of the subsequent bailout programs, like the TARP, did face a vote in Congress, the Treasury Secretary continued to champion numerous ex-legislative activities, like the backdoor bailout of Goldman Sachs through the $170 billion bailout of AIG, and the shotgun takeover of Merrill Lynch by Bank of America.

According to the February 26th testimony of Bank of America CEO, Ken Lewis, before New York State Attorney General, Andrew Cuomo, Paulson strong-armed Lewis into completing the Merrill takeover, without disclosing to B of A shareholders that Merrill’s losses were much larger than publicly disclosed.

“Lewis testified that he asked Federal Reserve Chairman Ben S. Bernanke to ‘put something in writing’ regarding the US government’s plan to support pack of America’s acquisition in view of Merrill’s mounting losses,” Bloomberg news reported yesterday. “After Bernanke said he would consider the idea, Paulson called Lewis and said, according to Lewis, ‘First, it would be so watered down, it wouldn’t be as strong as what we were going to say to you verbally, and secondly, this would be a disclosable event and we do not want a disclosable event.”

Inconveniently, non-disclosable events are also illegal events. “Paulson kept the Securities and Exchange Commission, which is responsible for making sure companies disclose material information to their investors, in the dark, according to Cuomo,” Bloomberg news continued. “The allegations [by Cuomo] suggest Paulson and other policymakers may have resorted to breaking securities laws in order to protect a fragile financial system…”

Do the ends justify the means? Yes, if you’re a muckety-muck at Merrill Lynch or Goldman Sachs. No, if you’re anybody else. Paulson’s groundbreaking lawbreaking facilitated the survival of institutions that deserved death, in the process amassing trillions of dollars of fresh liabilities for American taxpayers who deserved to be left alone.

The adverse effects of these criminal acts extend far beyond annoying your California editor. For one thing, bailing out incompetent executives enables the incompetent executives to continue their incompetent behavior. For another thing, lavishing hundreds of billions of dollars upon ailing, functionally bankrupt companies, promotes a web of deception and illusion that impedes the healing process that would lead to a bona fide recovery.

If you hand $10 billion to any bankrupt company in America, that company will seem healthy for a while. The truth of the matter is that the Paulson bailouts, along with subsequent multi-trillion initiatives, have injected various finance companies with short-term stimulants that produce an image of health, while leaving the underlying disease untreated.

The resulting fraud is that diseased corporate entities appear to be recovering. They can pretend they are A-OK once again, while the top brass at these companies can pretend they no longer require government assistance – certainly not any of that dreaded TARP money that imposes limits on obscene executive compensation.

Eventually, as a result of all these falsehoods, investors begin to imagine that they actually see what the finance companies’ CEOs pretend to see. And before you know it, you’ve got a great big rally in bank stocks, fueled by nothing more than deception, hype and hope.

Is your California editor being too hard on the Wall Street boys and girls? He thinks not…and neither does his colleague at the Australia Daily Reckoning, Dan Denning:

“So the banks have returned to profitability have they? If that were true, bank balance sheets would also be recovering. But that’s not true.

“The big three banks reporting recently – Citibank, Goldman Sachs, and JP Morgan – all reported huge revenues from their trading desks. As we reported last week, Goldman’s $6.6 billion in trading revenues was not only 70% of total revenues, but it was also a ten billion dollar improvement on a $4 billion loss in the fourth quarter.

“JP Morgan reported nearly $5 billion in revenues from trading fixed-income securities. And Citigroup reported $4.69 billion in fixed-income trading. In fact, all of Citigroup’s other major operating segments reported declining revenues for the quarter. Its global credit card revenues fell by 10%. Consumer banking revenues were down 18%. And Citi’s Global Wealth Management revenues were down 20%.

“But something magical happened in the fixed-income trading group for Citi. If you dig into the quarterly report, you’ll learn that fixed-income trading revenues were boosted by a net $2.5 billion positive CVA on derivative positions, excluding monoclines, mainly due to the widening of Citi’s CDS spread.

“That takes some sorting out. A CVA is a ‘credit value adjustment.’ As you can learn here, it’s the credit risk premium of a derivative contract. Once you sort it out, you learn that Citi ‘made’ $2.5 billion on a derivatives position designed to profit when the companies own credit default swaps spreads widen.

“Or, in plain English, Citi profited because it made a bet that the cost of insuring itself against a default would go up. The credit default swap market is the place where you can bet on the credit worthiness of a firm, or, essentially, the chance that a firm might default on its bonds. Citi appears to have reported a $2.5 billion trading gain in the fourth quarter precisely because the market thought the company stood a good chance of failing (hence the widening CDS spread).

“As far as we can tell, if you use this kind of perverted logic, the closer Citi gets to bankruptcy, the more money it would ‘make’ on its derivatives. That shows you how bogus the quarterly number was. The company reported declining revenues in its core banking and lending activities. But thanks to fixed income and this handy $2.5 billion CVA, the company was able to report $1.5 billion in net income.

“Also, don’t forget that all of the banks benefitted from what financial sector analyst Meredith Whitney called back door financing.” Whitney described what amounts to Fed-sanctioned front-running of the fixed income market by the banks. The Fed publicly telegraphed its intention to buy $750 billion mortgage-backed securities from Fannie Mae and Freddie Mac and $300 billion in U.S. Treasury bonds. And that was AFTER it announced in late November of last year it would be wading in as a buyer for all agency bonds to support the U.S. mortgage market. In other words, the big banks were able to take positions in the exact securities that they knew the Fed would be buying. Huge profits were not guaranteed, just highly likely.

“Since the financial statements of the banks don’t break trading revenues out a line item basis, it’s hard to say how much money each bank may have made by frontrunning the Fed’s actions in the bond market.

“But from the looks of it, what we have here is a kind of back door subsidy to bank profitability provided by the Fed. First quarter earnings were strongly boosted by an increase in the valuations of mortgage-backed securities that went up with Fed buying. Before you get all excited about the recovery in financial stocks, you may want to keep that in mind.”

And let’s also bear in mind, dear investor, that the AIG bailout may have contributed mightily to Wall Street’s enormous trading profits in the first quarter. According to a widely circulated theory to which we alluded in the March 19, 2009 edition of the Rude Awakening, Paulson bailed out AIG so that AIG could bail out Goldman Sachs and other ailing Wall Street firms.

Whether directly or indirectly, intentionally or unintentionally, the federal government enabled the big Wall Street banks to produce billion-dollar profits in the first quarter. Certainly, the federal government will attempt to repeat the performance in the second quarter. But we suspect the jig is up. We suspect the trading profits of the first quarter were one-off events that will not become two-off events.

As a result, we suspect that finance company earnings will resume their downward trajectory throughout the rest of the year, as adverse real-world trends swamp government-subsidized trading profits.

The truth is that banking profitability is not actually recovering, and neither is the economy. And that means that every stock market rally rests on shaky ground. The nearby chart tells the tale…or at least most of the tale.

Foreclosures have become nearly as numerous as home sales. Unless and until the two lines on the chart above begin to diverge, rather than converge, a recovery in the finance sector will remain a deception, a recovery in the economy will remain a false hope and a recovery in the stock market will remain a dangerous illusion.

And one final thought: Would America be any worse off if Paulson had simply told the truth?

Source: The Recovery That Isn’t

He should have left it to the ship-breakers. We almost feel sorry for him; Sisyphus had it easier. But Sisyphus was doing honest work. Besides, when Geithner’s tour of duty is finished, the public will pay for his jackass bamboozles for decades, while he moves on to a cushy job at Goldman Sachs…or maybe AIG itself, if it is still in business.

Of course, we are out of harmony with mainstream opinion; but we are always out of harmony. When the USS Bubble was steaming along we fretted and warned: it was too heavily laden with debt; it was off course; the captain and his mates were all morons. Then, when it washed up, we switched to a more cheerful song, with the sound of blowtorches cutting her up…and the furnaces melting her down…as background music. Finally, capitalism was doing its job and happily whistling our tune.

But now that we are jolly, the rest of the world is full of doom and gloom. Thomas L. Friedman, writing in the New York Times, tells us that we have a “once in a century financial crisis on our hands…” We can’t let capitalism do her work, he says; we have to get this wreck out of the mud and back on the cruise circuit!

So far, America’s efforts to borrow its way out of debt have not gone well. The scum gets dredged up from the bottom on Wall Street. But when it is dumped onto the ship, the whole thing just sinks lower. Henry Paulson began the digging with his TARP program in September of last year. Then came TALF. Not to mention various trillion-dollar salvage operations from the Fed. How much do all these rescue efforts cost? The last number we saw – in Barron’s – was $14 trillion.

Last week, Mr. Ben Bernanke announced to the whole world that he was doing the sort of thing that people used to be ashamed of. Instead of dredging out the mud, he was going to blow hot air into the rusty hull. And on Wednesday, he began following in the footsteps of pioneers at the Bank of England, the Bank of Japan, and most importantly, the Bank of Zimbabwe. Buying U.S. Treasury debt directly, he will add trillions to the U.S. money supply. Last year, before Lehman Brothers dove in the water and never came up; the entire monetary base of the United States of America measured $850 billion. With so much gas being pumped, it will soon rise to 5 times that amount – or more than $4 trillion.

Daily Reckoning readers may be having as hard a time keeping up with the bailouts as we are. Here, we attempt a simplification:

America still sinks under the weight of more than twice as much debt as usual. The collateral behind that debt has lost about 20% of its value – or about $10 trillion. Normally, those losses should be born by the capitalists – the reckless lenders and investors who extended loans to people who couldn’t pay them back. But all of the bailouts have one thing in common: they aim to shift the losses from the people who deserve them to the people who don’t…from the culpable to the gullible. Which is why they are so popular. After such a remarkable excursion, many are those who deserve to lose money – from those who bought doublewide trailers they couldn’t afford…to those who lent them the money…to those who securitized the debt and passed it out all over town. That’s why the biggest problem confronting the salvage workers has been to find some other group of innocents dumb enough and rich enough to pay the bills.

Mr. Bernanke’s focused on shifting the burden onto dollar holders worldwide – notably the Chinese – by inflating the currency. But the Bank of China is also America’s biggest creditor and has threatened to get upset if the dollar loses too much value. Besides, inflation is no sure thing. As James Ferguson points out, Japan has been trying to incite inflation for many years – with no success.

Until now, Geithner and his boss targeted the taxpayers. Private losses became public losses…as toxic assets were bought up, or backed up, by the government. But when the public got a look at what the bailouts actually paid for – million dollar bonuses, for example – it was outraged. The mob called for Geithner’s head; the stingers themselves got stung.

This latest plan has a fairer sound to it, but it is a bigger fraud. “The solution depends on getting private money funds to team up with the government to buy up toxic assets” wrote Mr. Friedman, anticipating the Geithner plan by only a few hours and the truth by an eternity. “The president’s comprehensive plan to remove the toxic assets from our ailing banks…is the key to our economic recovery…” he continued.

Geithner has invited investors up to the trough. His plan leaves the government with 90% of the risk; investors will quickly figure out how to get 100% of the profits. The latest estimate tells us that all this salvage work will add $9.5 trillion to the U.S. national debt over the next 10 years. At the current rate, it would still take 20 years to pay it off, even if every dime of savings of every American were applied to the task. Necessarily, the debt sludge will be dumped on the next generation – who don’t vote…and won’t notice the smell for years.

Source: Born Biddable

Testifying after former Fed Chairman Paul Volcker, Geithner told the committee the United States is facing “the mother of all financial crises.” Geithner also urged Congress to quickly pass a robust stimulus plan, Bloomberg News reported.

“If our policy response is tentative and incrementalist, if we do not demonstrate by our actions a clear and consistent commitment to do what is necessary to solve the problem, then we risk greater damage to living standards, to the economy’s productive potential, and to the fabric of our financial system,” he told the committee at a hearing on his nomination.

The credit crunch and housing market collapse require a “comprehensive plan” that must be coordinated with international partners to effectively relieve global economic conditions, Geithner said.

Promising to reform the TARP program, Geithner said the Obama administration will require banks receiving government money to provide proof of increased lending. Some Senators sitting on the panel are upset at how the Treasury-administered financial rescue program has been run.

“We have to fundamentally reform this program to ensure that there is enough credit available to support recovery,” Geithner said.

He said the administration is considering expanding the system to help small businesses and families that are losing their homes and jobs. Former Treasury Secretary Henry Paulson, so far, has limited the program to injecting capital into banks.

The Obama team is also considering further steps to shore up the banking system, including the possibility of having the government take bad assets off banks’ books, according to people familiar with the thinking of the Obama team, Reuters reported.

Geithner, currently president of the New York Federal Reserve Bank, said it was possible the administration could establish a “bad bank” to soak up toxic assets held by banks that are discouraging them from lending.

Banking Regulations Should Change

Geithner also called for “comprehensive” regulatory changes to prevent a future economic crisis of this magnitude – the worst since the Great Depression – from happening again.

“We need to move quickly to build a stronger, more resilient system now, with much greater protections for consumers and investors, with much stronger tools to prevent and respond to future crises,” he said. “Well-designed financial regulations with strong enforcement are absolutely critical to protecting the integrity of our economy.”

His statements echoed the sentiments of our own Shah Gilani, who provided guidelines on how to implement effective regulatory reform in Monday’s edition of Money Morning.

“The inability of the present system of regulation to deal with the complexities of expanding capitalism and protect us from inordinate concentrations of systemic risk has been tragically demonstrated. It is time that the crumbling walls of regulation are replaced with a new singular, transparent, effective and dynamic regulatory apparatus,”Gilani wrote.

Geithner, president of the Federal Reserve Bank of New York, was also grilled by lawmakers about his failure to pay $34,000 in taxes over several years in the first half of the decade. That issue – as well as a second, regarding the employment of a housekeeper without a work permit – fueled the doubts of some Republicans, who were blocking efforts to fast track Geithner’s nomination.

Geithner said his tax errors were “careless” and unintentional, and he apologized to the committee for the toll they have taken on his confirmation process. As reported by Money Morning on Jan. 19, Geithner actually placed phone calls to individual senators, hoping to persuade them his tax problems were the result of innocent errors.

Apparently it worked. Confirmation appears to be a fait accompli as several Democrat and Republican senators on the Finance Committee voiced strong support for Geithner.

Senate Finance Committee Chairman Max Baucus, D-Mont., said Geithner made “disappointing mistakes” that shouldn’t derail the nomination.
“After discussing them with Mr. Geithner, I believe them to be innocent mistakes,” Baucus said.

Source: Geithner Promises TARP Overhaul, Regulatory Changes to Solve “Mother of All Financial Crises”

In the shorter term, U.S. Treasury Secretary Henry Paulson may ask for the other half of October’s $700 billion Troubled Asset Relief Program (TARP), money originally earmarked for bank rescue but now possibly a source for a highly anticipated auto bailout, Bloomberg also reported.

But for Obama to begin his spending spree, and for Paulson to continue his, each will genuflect before Congress to get the money. The combined total is about $1.2 trillion, but some analysts believe that figure could be higher.

Paulson says the money he’s requesting is urgent, and would be asking a Congress that officially isn’t in session until the New Year. As a compromise, Paulson has indicated that he could use the extra money to also help troubled automakers General Motors Corp. (GM) and Chrysler LLC.

So far, banks on the receiving end of Paulson’s spending spree haven’t been shoring up their shoddy mortgage holdings, but rather going on their own spending sprees – increasing stakes in foreign holdings and buying up weakened banks that didn’t receive federal aid.

Safe to say, he’s losing fans.

“Please don’t come here and ask for another penny, because if you do, I’m going to work 24 hours a day with the same people that I worked with to support you to make sure that they do not support giving you another dime,” Rep. Maxine Waters, D-Calif., said at a Dec. 10 House hearing.

That’s not to say it will be easy for Obama, either. Even though he’ll be speaking to a Congress with some of the very Democrats that surfed into congress on his wave of support, the idea of writing out yet another taxpayer check – this time for $850 billion – could struggle to find support.

House Speaker Nancy Pelosi doesn’t said Monday that the pending stimulus package should cost about $600 billion, with $400 billion for investments and other government aid and $200 billion in tax cuts, Reuters reported.

Source: Obama, Paulson May Ask for a Combined $1.2 Trillion from Skeptical Congress

“Over-consumption and a high reliance on credit is the cause of the U.S. financial crisis,” said Zhou Xiaochuan, governor of the Chinese central bank. “As the largest and most important economy in the world, the U.S. should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits.”

This kind of lecture was a deviation from past meetings, which were dominated by U.S. calls for China to better manage its fiscal policies. However, the global financial turmoil that has emanated from the collapsing U.S. housing market has left the United States without a pulpit on which to stand.

“One result of the crisis is that the U.S. no longer holds the high ground to lecture China on financial or macroeconomic policies,” Eswar Prasad, a senior fellow at the Brookings Institution, told the Financial Times. “This may actually help turn their relationship into a more equal partnership with less posturing on both sides.”

Indeed, U.S. Treasury Secretary Henry Paulson, who in the past used summits like these to press Beijing to open its financial system and appreciate its currency, was noticeably more humble in representing the United States yesterday.

“International cooperation and coordination have been robust and we appreciate the responsible role China has played in the crisis,” he said.

Meanwhile, Wang Qishan, vice premier and leader of the Chinese delegation called on the United States to “take the necessary measures to stabilize the economy and financial markets as well as guarantee the safety of China’s assets and investments in the U.S.”

Wang’s remarks followed those of Lou Jiwei, chairman of China’s $200 billion sovereign wealth fund, China Investment Corp. (CIC), who said Wednesday that his firm lacks the confidence to invest in the United States, particularly U.S. financial institutions.

“Right now we don’t have the courage to invest in financial institutions because we don’t know what problems we will put ourselves into,” Lou said at a conference in Hong Kong. “My confidence should come from government policies. But if they are changing every week, how can you expect that to make me confident?”

CIC has lost about $6 billion of the $8 billion it invested in Morgan Stanley (MS) and The Blackstone Group LP (BX) last year. More importantly, however, China last month overtook Japan as the largest holder of U.S. government debt. And according to the Financial Times, officials have privately admitted that they are concerned about the value of the holdings.

Concerned with China’s overexposure to the United States, central bank governor Zhou said policymakers should no only address the country’s slowing economy, but “restructure the development model” and prepare “for a worst-case scenario,” the FT reported.

However, Chinese officials also say that any large-scale unwinding of U.S. holdings would be counterproductive, as the value of U.S. bonds and the dollar would subsequently plummet.

Source: China Blasts U.S. Economic Policy, Expresses Doubt in Financial System