No, It Is Not Entirely Different This Time - But It is More Insidious

There are some differences and they are significant.

The US is not on a gold standard, so the devaluation of the dollar does not have to occur in a stepwise function with an official restatement of value. This time the Fed can simply monetize debt and provide more dollars as it wills. That is fiat.

The US is not a net exporter to the world, as it was then. This is why Smoot-Hawley was harmful to the US recovery. The major nations of the world, such as Germany, Italy, and Japan, became engaged in their own domestic industrial recovery including rearmament. Today the US is the consumer for the world's exporting nations. And it also owns the reserve currency.

The New Deal was a bottom up Jobs Program. The Deal this time is a new version of trickle down. The second wave down in the Great Depression caught many of the professionals who had made millions shorting the initial market declines, or at least survived the Great Crash by selling early. The next wave down in the current credit collapse is going to boil the middle class, a few degrees at a time.



Geither: None Would Have Survived - Rolfe Winkler

US Dollar (DX) Daily Chart

The dollar rallied today on slightly higher interest rates, and hopes that the Fed will be able to raise short term rates more quickly than expected next year. The August Fed Funds futures ticked up a bit, raising the probability to 40% of a raise in the second half of 2010.

It is going to be interesting to see how Ben achieves this change in policy beyond the jawboning. Raising the interest paid on Excess Reserves is one way to do it, without actually draining funds directly from the real economy.

There is sort of a cocky smugness at the Fed that they believe they have inflation all figured out, given the Volcker experience. Just keep raising rates until you break it, and run a bluff on expectations as you go. We'll see how easy it is when the time comes.



As for the dollar, this appears to be a technical reversal of the low end of the downtrending channel, at least for now. Bucky has its work cut out for it. Without structural reform, the economy cannot build a recovery on low paying temporary jobs.

Timmy and Obama were on the airwaves today, touting programs to create jobs for next year. This will take money, and a resolve in the Congress that we do not yet see. Programs must be accompanied by reforms, or this is just The Credit Bubble, Part Trois.

Net Asset Values of Certain Precious Metal Funds and ETFs

Gold and Silver took some pretty stiff corrections as the jobs data provided a very temporary rally in stocks, but higher rates to the bonds, and with that some strength to the US dollar.

So far all this is well within our expectations. We bought back some of the trading positions which we sold on 2 December around 1225 when gold hit 1166 today, but will wait now to see if this support holds.

Later: Fresh update on the chart. Very quick move down to support levels. I will consider adding to the small position we bought back if gold can hit the 50 percent retracement level around 1150 on the daily.

Last: It did hit 1150 and I did execute some buys. The mining positions are hedged with SDS and TWM, but the bullion is a straight up buy.

November Non-Farm Payroll Report - It's Alive!

It's Alive! Well, Ben at least made the frog jump in response to repeated jolts of the dollar electric.

As you may have already heard, the US Non-Farm Payrolls Report for November came in better than expected with a loss of only 11,000 jobs, as compared to expectations of a loss of 111,000. And on cue, right after the Jobs Summit. The One is in Pennsylvania today claiming Economic Mission Accomplished. Now that's entertainment!

The economy has responded to Ben's monetary lightning. It has moved after an expansion of the monetary base that has not been seen since the early stage Great Depression, and a dollar devaluation which is still working its way through the system.

More importantly this sets the trend that the government wishes to sustain. Remember, we are not adding jobs, and especially permanent jobs that pay a solid living wage; we are losing jobs less quickly, and adding back marginal and temporary jobs for manufacturing jobs that continue to bleed out.

But for now that is enough for the markets it appears.



Most importantly it creates a definite bottom in the long term jobs trend.



The imaginary jobs report, aka the BLS Birth Death Model, is ticking along as a 'plug' in the numbers without a corresponding reaction to the underlying economy. The number did have an inordinate impact this month of November because of the slight seasonal adjustment. As you know the Birth Death model is added to the raw number prior to seasonality.



This chart makes the trends clear, but also shows the convergence between the raw and adjusted numbers in November. This is divergence is going to become a yawning gap as the BLS adjusts for seasonal hiring. There is a lot of temporary hiring for the holiday season in the US, and these jobs are eliminated in January. So the BLS adjusts the raw number significantly higher.



The improvement in the unemployment rate was largely due to people dropping off the radar of the government as their benefits run out. You can see this if you look at their estimate of the population of available workers. The number is shrinking, and the people drop into the 'discouraged' category.

This is revealed by what is called the "Labor Participation Rate." It dropped in November from 65.1% to 65%. Less people are working against a more stable measure of the population, civilian workers over the age of 16 that have not disappeared, at least as far as the government is concerned.



The question now is sustainability. The Fed and Treasury have jolted the corpse of the US economy back into a semblance of life. But can it sustain itself without a continuing printing of money to the point of hyperinflation?

Watch the median wage, and the actual spending numbers. This will tell us if the monster has a pulse of its own, and can be taken off the Fed's lightning. And if it is, what is it most likely to do once it gains momentum?

Deflation is rather unlikely unless there is an exogenous shock or a major policy error of tightening rates too quickly, almost deliberately. As this would be economic suicide we assume Ben will not jump off the ledge.

We also assume this will help Ben's nomination for a second term. And will make it highly difficult for Obama to wring another stimulus out of the Congress.

But, has the Bernanke Fed discovered the means to permanent prosperity for all? Is it enough to print money and through it from helicopters, if even to only a select few corporations? What are the unintended consequences yet to emerge?

The stage is being set for stagflation, if not a hyperinflation as John Williams puts forward fairly well in his latest special report from 2 December. We are still skeptical of that outcome.

Gold Daily Chart

We had a dead hit on the target of 1225, and the market seems to be withdrawing with stocks ahead of the US Non-Farm Payrolls Report.

If this is to be a normal pullback in this uptrend, then we would expect to see the 1190 level hold on the daily close. We would then look for a consolidation.

If this is to be a correction of the rally, then a pullback no greater than 50% of the breakout would be normal.

If there is to be a test of the breakout support around 1170, then it could be a rare buying opportunity if it holds and forms a bottom.

Our longer term target for gold is much higher than this.

Gold Chart Weekly Updated - Taking Some Profits

Gold bullion is nearing our intermediate price objective for the breakout which we have been following since US$1,020 per ounce. Here is the updated chart. Please note that these chart formations set minimum measuring objectives, but not 'tops' as in limits.



Trading discipline would suggest taking the initial investment off the table here, but let at least some, if not most, of the trading profits run. The daily chart has a higher objective of around US$1,250 and we may very well see an intra-week push up to that level before the end of the year.

Tim and Ben seem determined to inflate an asset bubble, and a continuation into the year end and beyond is certainly not out of the question. The Fed established its repuation for recklessness in the bubble which they inflated from 2003 to 2007, which manifested in stocks and housing. Have they learned any lessons? It seems like only new ways of doing the same old things, and on a grander scale. Larry and Ben have not had an original thought since 1994, and Timmy is a 'useful pair of hands.'

We are entering the period when we would start to anticipate a pullback and consolidation, at least, if not a correction in what has been an extraordinary run. We would prefer this, than a parabolic high. But we have to emphasize that the formation on the charts is a measuring objective, a target if you will, but not necessarily a top.

Mitigating our outlook is the apparent attempt by the US monetary powers to inflate the equity bubble, possibly into year end. Otherwise the fundamentals on many of the financial instruments are looking a bit frothy.

While we do not touch our long term metals positions, as we have not done since 2001, we will vary the trades and leverage as the intermediate situation indicates. But it should be clear that our trading suits our particular age and outlook, and financial condition and needs, and quite frankly, nerves.

And our nerves are getting old, and the markets in general seem a bit 'on the edge.' Le Patron's capacity for risk tolerance is not as vibrant as in day's long past. Although we do confess to a restless desire to short the US equity market, and waiting is becoming an act of will.

Investors who are more aggressive or conservative, with differing time frames, will best seek individual investment advice as always from a qualified advisor (especially if you can find one who is thinking 'out of the box' that is.) We cannot and do not give any individual counsel, and merely look at the markets themselves, and discuss generic trading tactics, and sometimes our own positions.

Despite a very recent surge in popularity, gold and silver are hardly mainstream investments, and few understand them. This will change. But it has not changed yet.

We want to emphasize that 1225 is NOT our ultimate price objective or a top call. This is a minimum measuring objective from the breakout from an ascending triangle of 1225 on the weekly chart. IF you accept that an inverse H&S pattern can be a consolidation pattern, then 1275 is the minimum measuring objective.

What is our ultimate price? Well, to answer that, we would have to know how thoroughly the Fed and Treasury intend to debase the dollar. Further, we would need to have a honest accounting of the gold holdings of the US, and any allocations or encumbrances on them from leasing activity.

Without such knowledge forecasting a 'top' is difficult. But for now here is one target price from a favorite analyst, David Rosenberg.

America's Lost Decade in Equities

For the first time since the 1930's this decade represents negative returns for the SP500. Remarkably this chart represents nominal total returns.

Adjusted for the weaker dollar and inflation, the 'buy and hold' philosophy, especially for those nearing their retirements, has been a disaster. But it has been great times for speculators and insiders and the productive economy.

Part of the problem is with the 401k concept as a supplement if not replacement for pensions and savings, as well as portfolios for educational purposes. Their implementation offers too few choices for the average person. Do you wish to buy corporate stocks or corporate bonds? Or money market funds where the value is not guaranteed? Short term Treasuries, if you are fortunate.

The piling into corporate bonds in the US today may be in part driven by this lack of genuine choice, the seeking for 'conservative choices' and is setting up the many for staggering losses in the event that stagflation does indeed occur. Bond funds are no safe havens.

Two tax reforms, or at least stimulus, that the US might consider is increasing the annual allowance of $3,000 which the taxpayer may claim from prior capital losses against current income. The amount has been the same for many years, and an increase would help the average person clean their books up a bit. A second program might be stimulus, in allowing the average person to take for example $10,000 out of their IRA or 401k tax free for one time.

The Reformer will not do anything that does not benefit Wall Street, but if the US wishes to obtain some serious reforms in its financial system there is a rich ground to sow the seeds of renewal, given the neglect and abuse of the last twenty years.

The banks must be restrained, and the financial system reformed, and balance restored to the economy before there can be any sustained recovery.

Going the Way of AIG with Dollar Holders as Patsies

The Guidotti-Greenspan rule states that a nation's reserves should equal short-term (one-year or less maturity) external (foreign) debt, implying a ratio of reserves-to-short term debt of 1. The rationale is that countries should have enough reserves to resist a massive withdrawal of short term foreign capital.

The rule is named after Pablo Guidotti – Argentine former deputy minister of finance – and Alan Greenspan –former chairman of the Federal Reserve Board of the United States. Guidotti first stated the rule in a G-33 seminar in 1999, while Greenspan widely publicized it in a speech at the World Bank (Greenspan, 1999).

Guzman Calafell and Padilla del Bosque (2002) found that the ratio of reserves to external debt is a relevant predictor of an external crisis.

This is an interesting application of the Greenspan-Guidotti Rule by Porter Stansberry below because it includes the value of the gold at market prices, as well as the oil in the Strategic Petroleum Reserve, and all the foreign reserves on the books of the US against the total foreign debt owed in using the Greenspan-Guidotti rule for its default assessment.

Those who argue for a stronger dollar because of deflation due to domestic credit destruction overlook the reality of the yawning imablance of US debt to external creditors, and the need to deal with it without writing it off like a home mortage.

Yes, the US has lots of buildings, and minerals in the ground, and forests and proprietary software, and overpriced financial assets, and tranches of dodgy mortgages to sell. We are discussing AAA liquid assets here, without significant counterparty risk. Those peddling US debt instruments to Asia these days are getting a very cold reception.

What Porter Stansberry says is valid, with the important exception that the US still owns the world's reserve currency. Otherwise it would be well on its way to a hyperinflationary climax.

This is why we do not expect the default to be like the Lehman Brothers over-weekend implosion, nor as dramatic as the crisis in Dubai, or more historically the failure of the post-Soviet Russia. The US is too big to fail.

The dollar will devalue to unexpected lows, not with a bang but a whimper.

More AIG than Lehman, with high profile big-talking executives, self-serving accounting, bonuses to the perpetrators, de facto bailout and subsidies from frightened central bankers, and all that until the rest of the world can adjust. The US will most likely wallow in stagflation until it can get itself together again, barring a global conflict.

There are structural issues for sure. The US is still the consumer of the world's export products, especially manufactured goods. The problem is that they are paying for it with paper that is increasingly worthless. And it is militarily the only remaining superpower.

Do not expect this to be a straightfoward default. The US money center banks are wielding weapons of financial mass destruction, and are not afraid of gooning it up in the markets for real products, as they still exercise significant pricing power.

It may be our currency, but it's your problem.'' John Connolly, Treasury Secretary, in response to European anger at the 1971 US gold default

So, it will take time for the exporting nations to grow their domestic markets, and to find new customers at home and abroad. It will take time for the nations to agree on a new currency regime, as the US has now pulled the rug out from under them once again with the quantitative easing of the dollar. But that adjustment effort is now well underway. With regard to change, "It is not necessary to change. Your survival is not mandatory." - W. Edwards Deming

The downside of structural change after a long decline is that once it occurs, it is difficult to obtain one's prior reputation and position.

"When governments go bankrupt it's called "a default." Currency speculators figured out how to accurately predict when a country would default. Two well-known economists - Alan Greenspan and Pablo Guidotti - published the secret formula in a 1999 academic paper. That's why the formula is called the Greenspan-Guidotti rule.

The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world's largest money management firm, PIMCO, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."

The principle behind the rule is simple. If you can't pay off all of your foreign debts in the next 12 months, you're a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default.

The U.S. holds gold, oil, and foreign currency in reserve. The U.S. has 8,133.5 metric tonnes of gold (it is the world's largest holder). That's 16,267,000 pounds. At current dollar values, it's worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether... that's around $500 billion of reserves. Our short-term foreign debts are far bigger."

Porter Stansberry, The bankruptcy of the United States is now certain

Davidowitz: What Recovery? The US Consumer Is Struggling

Howard Davidowitz is our favorite retail analyst.

Appearance versus Reality is the theme in the Enron Nation.



And Winners of the Retail Apocalypse: Amazon, Walmart, Kohls and Dollar Tree.
Personally I like Costco, Amazon, and Lowes, because even thought they may not have the very lowest price, they provide exceptional value and a little something 'extra.'

David is probably right, because She-Who-Shops says he is, and is a hands-on expert.

Gold, the Comex and Exchange For Physical

This report below comes from John Cheney of Service Analytics.

We would not conclude that you cannot get gold from the Comex in the exercise of your futures contract. "Cash settled" is nothing new, and we ourselves have done this in the past. But we have been speaking with other traders and funds, and some are spotting a trend.

Comex is putting forward the offer of paper in the form of money or ETF positions aggressively, and it is the much easier alternative. Delivery of physical gold from the Comex is no longer as straightforward or even as semi-convenient as it had been in the past. In fact, it is difficult, and one must be persistent and wait long periods of time. At least, this is what we hear.

We would like to know if there has been a recent independent audit of the Comex stores, with a clean sheet of bar numbers and the status of same. From what we hear it is a mess, as bad or worse as the recent scandal in Canada and the 'missing bullion.'

"Some months ago a chap described changes in the comex rules for futures contract deliveries. Therein it was described that the EFP, exchange for physical, rules were amended to allow for delivery of GLD shares in lieu of bullion.

Well take a look at something new, at least for me, in Monday’s comex preliminary volume and open interest report. On page 3 of the attachment, notice that in addition to futures contracts listed under the EFP category, a new category is listed: “Delivery Cash Settled” = 2866 december gold contracts. Just so happens 2866 was exactly the number of delivery notices issued on FND as reported in the Nov 27 vol and op int report.

Conclusion: guess you can no longer get bullion via using comex contracts. This apparently is the next step in the evolution of gold trading."

The conclusion we reach for now is that if one is counting on the ability to receive delivery of physical gold from the Comex for whatever purposes, then don’t. You will wait and fight and stand in queue to obtain the goods from the Enron nation.

But one principle we have learned over the years is never to attribute to bad intents what can be attributed to human error and mismanagement.

Morgan Stanley Fears UK Default in 2010

As you may recall we are bears on sterling, and view the UK as the Iceland of the G20.

The monetary policies of the Bank of England were as bad as those of the Greenspan - Bernanke Fed. The difference is that the UK does not hold the world's reserve currency as a captive source of revenues.

As an aside, we see that Bank of England advisor and economic franc-tireur Willem Buiter has decided to seek greener pastures as chief economist with Citi in the States. Timely exit. Bravo, Willem.

It is sad to see a great people brought low by irresponsible leadership and economic recklessness. Perhaps there will be a movement to bring in a reform government. Hint, ask for details first, as the Yanks are finding out to their dismay as they experience continuity they can hardly believe.

UK Telegraph
Morgan Stanley fears UK sovereign debt crisis in 2010
By Ambrose Evans-Pritchard
4:09PM GMT 30 Nov 2009

Britain risks becoming the first country in the G10 bloc of major economies to risk capital flight and a full-blown debt crisis over coming months, according to a client note by Morgan Stanley.

The US investment bank said there is a danger Britain’s toxic mix of problems will come to a head as soon as next year, triggered by fears that Westminster may prove unable to restore fiscal credibility.

“Growing fears over a hung parliament would likely weigh on both the currency and gilt yields as it would represent something of a leap into the unknown, and would increase the probability that some of the rating agencies remove the UK's AAA status,” said the report, written by the bank’s European investment team of Ronan Carr, Teun Draaisma, and Graham Secker.

In an extreme situation a fiscal crisis could lead to some domestic capital flight, severe pound weakness and a sell-off in UK government bonds. The Bank of England may feel forced to hike rates to shore up confidence in monetary policy and stabilize the currency, threatening the fragile economic recovery,” they said.

Morgan Stanley said that such a chain of events could drive up yields on 10-year UK gilts by 150 basis points. This would raise borrowing costs to well over 5pc - the sort of level now confronting Greece, and far higher than costs for Italy, Mexico, or Brazil.

High-grade debt from companies such as BP, GSK, or Tesco might command a lower risk premium than UK sovereign debt, once an unthinkable state of affairs.

A spike in bond yields would greatly complicate the task of funding Britain’s budget deficit, expected to be the worst of the OECD group next year at 13.3pc of GDP.

Investors have been fretting privately for some time that the Bank might have to raise rates before it is ready -- risking a double-dip recession, and an incipient compound-debt spiral – but this the first time a major global investment house has issued such a stark warning.

No G10 country has seen its ability to provide emergency stimulus seriously constrained by outside forces since the credit crisis began. It is unclear how markets would respond if they began to question the efficacy of state power.

Morgan Stanley said sterling may fall a further 10pc in trade-weighted terms. This would complete the steepest slide in the pound since the industrial revolution, exceeding the 30pc drop from peak to trough after Britain was driven off the Gold Standard in cataclysmic circumstances in 1931.

UK equities would perform reasonably well. Some 65pc of earnings from FTSE companies come from overseas, so they would enjoy a currency windfall gain.

While the report – “Tougher Times in 2010” – is not linked to the Dubai debacle, it is a reminder that countries merely bought time during the crisis by resorting to fiscal stimulus and shunting private losses onto public books. The rescues – though necessary – have not resolved the underlying debt problem. They have storied up a second set of difficulties by degrading sovereign debt across much of the world...