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Today's market commentary is included here.
On the news that JP Morgan bankers will be splitting a $10 billion bonus pool, the Robin Hood Tax campaign said it was "outrageous" that JP Morgan Chase's investment bankers are to receive an average payout of $369,651 (£233,000) for 2010. The group, which supports a global tax on banks' financial transactions, said the size of the payments were "a slap in the face to ordinary people".
"If banks can afford to pay billions in bonuses, they can clearly afford to be taxed a great deal more. A £20bn Robin Hood tax in the UK would help avoid the worst of the cuts and show we are all in this together," said David Hillman, spokesman for the Robin Hood Tax campaign.
"While bankers wallow in cash, the general public are suffering unemployment and cuts to public services," Hillman added.
The financial media news are beside themselves with the after hours news that British Petroleum and the Russian state-controlled oil giant Rosneft will be swapping spit and taking long walks in the park, with potential consequences yet to come. BP is nominally a private company, but Her Majesty's government still owns a 'golden share' which it uses to make suggestions to a number of her subjects and especially former children, as do most developed nations. Or so I have been somewhat reliably informed.
After all, the Yanks have called dibs on the Mideast. Someone has to grab the Arctic while it is still melting.
It appears to some like a pre-emptive strategic move by the Brits who have been concerned about rumours of a joint economic deal developing between Germany and Russia involving engineering expertise and energy products such as natural gas.
The couples seem to be pairing off, but the evening is still early, and the band is just warming up.
There was a concerted effort to drive down the price of gold and silver this week, much moreso than any usual price correction or pullback. For those that watch the markets on a daily basis such a market operation is hard to miss, but easy for the monied interest's commentators to rationalize.
Late note: The drop Thursday was due to short selling as the open interest ROSE.
"The CME Final for Thursday confirms that volume was 252,778 lots, 29.2% or 57,000 lots above estimate. Open interest rose 1,449 lots – 4.51 tonnes or 0.24% - to 590,817 contracts. Gold fell $17.05, or 093% basis stock market close. Yet it was obviously not a day dominated by long liquidation – short selling had the edge."
So why did it happen this week? Here are two theories.
The first is that JPM was given a 'green light' by the CFTC this week, which I heard from several sources. Here is a writeup on this by Chris Martenson.
CFTC Caved In to JP Morgan - Martenson
I do not know if the CFTC 'caved' in to JPM or not because I have not had time to consider the matter. I will be disappointed greatly if this is true, and if Brad Chilton was a party to it. But it is a la mode of the Obama Administration.
The second and most probable in my mind is that the US Consumer Price Index (CPI) came in much higher than expected today. The Fed and Treasury are very concerned about managing the perception of inflation, even as they levitate the stock markets on excess liquidity to manage the perception of economic recovery amidst growing foreclosures and jobs losses. I was actually on the lookout for this one since the arrival of adverse economic data is the second greatest cause of a smack down in the metals, the first being key date such as an option expiration.
"There are numbskulls in the financial media — toadies to the Federal Reserve — who would like to think that energy and food inflation do not count. Simply put, the monthly December inflation releases for the CPI-U (annualized 6.2% inflation), CPI-W (annualized 7.8% inflation) and PPI (14.0% annualized inflation) were disasters, with December inflation far from being calm, as touted in one widespread media report. The sharp increases in December energy and food prices were not due to normal price volatility in those areas, instead, they were created directly by Federal Reserve Chairman Bernanke’s ongoing push to debase the U.S. dollar — to destroy the purchasing value of the U.S. currency. As Mr. Bernanke moves to prove his contention that a central bank and central government can create inflation at will, by debasing their currency, the bad news for the Fed remains that the inflation created here reflects monetary policy distortions, not strong economic demand, as naively advertised. Then again, since much of this inflation mostly is food and energy, not yet "core," the problem of rising gasoline prices may not even be a concern for the U.S. central bank. Nonetheless, these problems are serious and are problems specifically of the United States and for the U.S. dollar.
There is little happening here that I have not written about recently (see for example Special Commentary No. 342). Since I am traveling and am heavily under the weather with a seasonal malady, this morning’s comments will be brief, but the inflation issue will be reviewed in the pending update to the Hyperinflation Special Report and supplements to same.
In the economy, it looks like the "advance" fourth-quarter GDP (January 28th) will be positive, given the numbers discussed below. Significantly, though, major negative revisions to data, such as payrolls and production, loom post-GDP reporting. As to retail sales, keep in mind that the December increase was due to higher prices, not to underlying strong demand. There remains no recovery at hand.
Increasingly, global investors will shun the U.S. dollar, as its purchasing power increasingly gets hammered by Mr. Bernanke et al. The regular gold, silver, oil and Swiss franc graphs are shown below. As investors flee from the dollar, the precious metals and stronger major currencies will continue to be the primary beneficiaries in U.S. dollar terms, irrespective of any near-term market volatility, extreme or otherwise. More-prudent economic and fiscal actions taken by major U.S. trading partners will tend to make the U.S. dollar look all the worse on a relative basis."
John Williams - Shadowstats.com
Those who do not think that the Fed and Treasury watch things like the price of gold are greatly mistaken. Much of the current activity of financial engineering these days revolves around the management of perceptions rather than real productive results. Its the modern American way.
"Turn where we may, within, around, the voice of great events is proclaiming to us, 'Reform, that you may preserve!'" Thomas B. Macaulay
Please notice that I have added the possibility of a trading range developing in gold now that the uptrend appears to have been broken, although it will take another week and the January 26 option expiration to tell the whole story on this.
Here is an interesting excerpt from the 2011 economic forecast from Piscataqua Research. Simple registration is required.
I am not sure I agree with their prescription to START with 4% short term rates and fiscal austerity, as I think it would shock the economy into a depression, even worse than the stagflation which seems to be unfolding already with today's CPI print and slack retail sales. A healthy diet and rigorous exercise are good, but not for a patient in critical condition and on life support after twenty years of medical quackery and drug addiction. America needs a twelve step plan with changes starting from the top down.
And as for fear, well, with the resurgence of a US stock bubble, and incessant happy talk in the mainstream media and the nation's thought leaders there does not appear to be any, unless you are poor, old, middle class, without savings, or recently unemployed. The bottom 95%.
I most certainly agree with Piscataqua's assessment of what they call 'debt-onomics' in both of its manifestations as unproductive stimulus spending and more tax cuts for the corporate trusts and the wealthiest few. Quantiative Easing without reform is creating further wealth disparity and another bubble in US financial assets. And this is made possible only by the extravagant privilege of the US holding the world's reserve currency. The new normal is a dangerous illusion; this will not end well.
None of these simple approaches will work because the economy is broken, and badly distorted, with a greatly oversized financial sector and a global monetary regime that is highly imbalanced and unstable.
Until there is reform, significant changes, nothing will work and there will be no sustainable recovery. Trickle down ultimately leads to debilitating and widening social dislocations (homelessness, unemployment, poor health) that are highly unproductive.
Let me emphasize this. Trickle down economics is nothing more than an old rationale for the destructive selfishness of the monied interests and a powerful status quo. And the theory of efficient self-regulating markets is sheer non-sensical propaganda.
The obsessive tendency of greed and corruption to its own ultimate destruction has been this Cafe's forecast since 2005, and so far nothing has fundamentally changed. The collapse of the US is starting to take on the character of the breakup of the former Soviet Union.
Piscataqua Research
Economic Projections Summary
January 3, 2011
In our January 2010 summary, we said: “For the third year in a row, our 2010 guesses are easy to reach… what looks to Ivy League economists like a recovering economy looks to us like a pre-bankruptcy debt ramp.”
Our guesses for 2010 were: real consumption would decline without further direct government support; real residential investment should bounce along the bottom; an unusual inflation/deflation should push commodity prices higher and consumer product margins lower; government budget and pension problems and federal debts should continue to mount; and mortgage rates should set more new lows.
We also suggested gold and oil would average much higher prices in 2010 than in 2009 and national home prices would be stable or higher! We did very well in 2010! In July with oil at $75, we wrote: “We will not be surprised if oil prices exceed $100 (or $150!) per barrel by next spring!” We are getting closer!
Our guesses for 2011 are also easy to reach. The cash flow model shows a high probability of major U.S. economic difficulties starting in early 2011. Our guesses are:
• Residential investment could approach 1933 as a percent of GDP;
• Commodity price volatility should rise significantly;
• The trade deficit should rise and possibly reach a new high;
• Mortgage rates should reach a long-term bottom in 2011; and
• Government budgets will be more challenged in 12 months than they are now.
On the optimistic side: 2011 should not bring deflation; higher mortgage rates; or lower home prices. Why do the fearmongers get so much press? Low 4% mortgage rates gone forever? Housing prices down another 20%? A Federal debt limit slowdown “catastrophic”? A big bear market? Uncontrolled inflation?
We do not fear interest rate increases crashing the economy; a Federal debt slowdown; a crashing dollar; or market crashes. Since there are no “bond vigilantes”, it can happen if the Fed lets or makes it happen.
It was no surprise to see the Debt Commission support a higher 2011 deficit while “fixing” the 2050 deficit! Their recommendation is pure debt-onomics - raise the debt flow to keep asset prices higher!
The reality is simple: the Federal Reserve has messed up the economy with low interest rates. Since 2005, economic investment has closely followed the 1927 to 1933 path. 2011 is the year that 1933 arrives. The path after 2011 should show the underlying mathematical structure of debt-onomics.
There are two main problems with debt-onomics: 1) it is a choice to consume now and not save later; and 2) it causes booms and busts by accelerating economic investment. Deb-tonomics creates high profits and high unemployment and concentrates income and wealth. It looks like capitalism, but it is not.
Our model points to 2011 as the meeting point of many difficult monetary and economic problems. This intersection should bind governmental and personal budgets in a vice as QE2 and tax cut stimulated inflation drives costs head first into a stone wall of limited tax revenue and personal income.
We wrote in January, 2010: “America has reached the point where there are only two paths. The first path is Bernanke’s and Obama’s: more debt and higher deficits…” The tax bill added about $900B to the deficit and took the path of “Obama’s higher deficits.” The bill also took the path of “Bernanke’s more debt.” In 5 years as Chair, federal debt increased by about $6 trillion and will increase by almost $8 trillion after 6 years.
There is now ONLY ONE WAY to fix the economy. The STARTING point is 4% short interest rates and balanced budgets. We forgot to mention: “and getting past the fear.” Those first steps are hard, but they start the journey! Budget surpluses and higher rates would work even faster! The math is easy.
In our model, 2011 is a true mess! Could we be right about mortgage rates again?! We will see!
As Al Jolson said, "Brother, you ain't seen nothing yet."
Welcome to Zombieland.
And yet there is hope, always.
"Time advances: facts accumulate; doubts arise. Faint glimpses of truth begin to appear, and shine more and more unto the perfect day. The highest intellects, like the tops of mountains, are the first to catch and to reflect the dawn. They are bright, while the plain below is still in darkness...The sound opinion, held for a time by the bold speculator, becomes the opinion of a small minority, then a strong minority, and finally a majority of mankind. Thus, the great work of progress goes on."
Thomas B. Macaulay
