The Problem of Unresolved Debt in the US Financial System

Michael David White has painted some dire pictures of the US housing market, but this one is shocking in its implications.



Chart fromA Blistering Ride Through Hell by Michael David White.

I enjoyed the synopsis of this chart that was done by Automatic Earth in Is It Time to Storm the Bastille Again:

"That is, what Americans' homes are worth, their equity, decreased by $7 trillion -from $20 trillion to $13 trillion, from spring 2006 to spring 2010. In the same period, mortgage debt, what Americans owe on their homes, went down by only $270 billion. Yes, that's right: US homeowners lost more, by a factor of 26, than they "gained" through clearing mortgage debt. Thus, if we estimate that there are 75 million homeowners in America, they all, each and every one of them, lost $93,333."

Nine out of ten Americans will notice that there is a significant gap that must be closed here. What makes it even more chilling is that the gap is continuing to widen as home prices continue to correct to the mean.

This debt must be resolved. There are two major ways to do it: repayment and default.

Repayment is probably a fantasy, if not beating a dead horse. The homeowners do not have the money with which to pay the loans given the current state of employment and wage stagnation, and the mortgages are for the most part on houses whose value is significantly under water compared to the debt, as in ' just mail in the keys.'

Straight up default, writing off the debt even through foreclosure, is also probably out of the question, because it would essentially vaporize the balance sheet of the US banking system which is also insolvent, to a greater degree than most understand, and if they understand it, would admit.

Automatic Earth references an essay which we also had linked here by Eric Sprott called Wither Green Shoots that points out the unfortunate fact that of the 986 bank holding companies in the US, 980 of them lost money last year. The lucky six were the TBTF banks on major government subsidy.

So, where is the government going to liquidate the debt? And what effect will it have on dollar assets when they do it?

The Japanese solution was to ignore their bad debt and insolvent kereitsu, because admitting it would cause significant loss of face, not to mention financial loss, to an elite that does not permit such things to happen. So instead they arranged for their single party LDP system to drag the debt like a ball and chain through what came to be known as 'the lost decade' while they tried to make it go away by export mercantilism and crony monetarism wherein funds were given to the same kereitsu in a remarkably ambitious (and expensively wasteful) series of public works boondoggles.

Do you think the US can follow this path? As if. Japan started from a base as a net exporter with a huge trade surplus and little debt. Scratch that idea.

Someone has to end up 'holding the bag.' And the consumer cannot rise to the occasion, the banks are all insolvent and a sinkhole until they change their business models. So what will be 'the last bubble?' Bernanke has managed to monetize about 1.5 trillion dollars so far. Only 5.5 trillion more to go, if housing prices can stabilize at current levels, and employment return to pre-crash levels quickly.

A few European readers have expressed their relief, and some noticeable pride, that their banking and political system resolved its own debt crisis so quickly and easily. To the extent that their banks are holding dollar denominated financial assets, they have merely stopped the table from shaking for the moment, as their sand castles await the next mega tsunami to come rolling across the Atlantic.

Consider this well, and you will understand what is happening in the economy, and why certain things occur over the next 24 months, despite the fog of wars, currency and otherwise. And bear in mind that the only real limit and effective constraint on the Fed's ability to monetize debt is the value and acceptability of the bond, and the dollar in payment of interest, by foreign debt holders, as domestic debt holders are under legal compulsion by the law of legal tender.

And it was all unnecessary, attributable to the dishonesty and greed of a remarkably small number of men in New York and Washington who managed to rig the markets and the political process, with the acquiescence and support of a public grown complacent and in far too many cases, soft headed and corrupt.

These are the same people, along with their enablers, who are now preaching the virtues of austerity for the many, and free and easy markets for themselves. All gain, no pain. While the game is going it must still be played. Obama has been disappointing, but what comes next may well be worse, much worse.

Bernie Madoff was lying and cheating and taking money until the day he closed his doors.

Perhaps they are in denial, but surely they must hear the footsteps of history approaching. And their bravado is yet another bluff, and hides the rising stink of fear.

Gold Daily Chart, Overhead Resistance, the 50 DMA, and GLD Option Expiry MaxPain

Gold is struggling to overcome some fairly well defended overhead resistance. That much is obvious.

The bullion bears took gold down hard below the 50 Day Moving Average in early July when it was threating to break out through key resistance at 1260, and have been holding it down below that 50 DMA ever since. The price selling is obvious and determined.

Seasonal selling? It does not look anything like selling by motivated investors or actual holders of positions. It does not even look like liquidation under duress.

I think it is more like a trading gambit by the hedge funds, who planned for seasonality in their cross trades with miners and other pairs, and are determined to make it happen. The 50 DMA is a logical place for traders to make their 'goal line stand.'

This could be tied to the option expiration tomorrow in the GLD ETF. This has become a major trading instrument for cross trades in the metal, and is convenient because it has a tenuous relationship to the physical bullion market.

This is important because if it is just hedge funds they are more likely to get stuffed badly and have to scramble to unwind, as compared to a big bullion bank working with the FED, BIS or IMF determined to maintain control of the currency markets.

Gold Spot Daily Chart with 50 DMA



GLD July Options Expiration 'MaxPain'



MaxPain looks like about where it 'should be' going into the expiry.

MaxPain Chart from OptionPain

Why the BIS Gold Swaps Are Important and the Failure to Reform

In his recent commentary, Gold Derivatives Update: BIS Swaps, Reg Howe notes:

"Not surprisingly, revelation of these swaps has generated considerable discussion, comment and analysis by students of the gold market. What appears to have happened is that one or more central banks loaned gold to one or more bullion banks, which then swapped the gold with the BIS for cash, leaving the physical metal in place. Under this arrangement, the accounting conventions promulgated by the International Monetary Fund allow the central bank or banks to continue to count the gold in official reserves while the BIS enjoys a high level of security on the gold side of the swap."

This is how I described the swaps in a July 6 blog entry:

"Some parties have mistakenly asserted that since a swap is not a lease for accounting purposes, which is quite correct, then the gold could not have been sold. That is just a simplistic misconception. A swap transfers the benefits of the assets from one party to another for a period of time in exchange for interest paid, generally on forex received. Its does not sell the property but it transfers the mineral rights for a time, if you will.

The party that then holds that gold asset can just hold it, or they can utilize it in some way, such as leasing it out for a period of time to another party, like a bullion bank, who can subsequently sell it. These types of 'three way deals' were very commonly seen when Lehman and Bear Stearns started to unravel and they needed to be unwound, and were a key component of the whole issue of hidden counter party risks. Remember that?

So on the books of the first party there are in fact no leases or sales shown, just swaps of varying duration and terms. But the swap has delivered an asset, in this case gold, into the hands of a party who may have no qualms about leasing that asset out to a third party to obtain funds, and that third party is likely to sell it. I would of course agree that this does not PROVE anything. How can it when the books of some of the parties are still opaque, and audits rarely conducted to verify ownership. But after what we have just seen over the last three years in these games of asset merry-go-round, how can anyone just blatantly dismiss that can and likely is happening, where there is an easy profit to be made. Especially considering the past history of transactions between the bullion banks and the central banks.

Personally I would view this report as bullish for the price of gold, since it is past history, and almost certainly an indication of concerns about Comex offtake. In other words, shortages are appearing, and fresh sources of bullion are becoming increasingly difficult to find."

Quite a few of the usual suspects and industry bottom feeders have questioned the significance of these swaps, while admitting they do not understand them. So confusing, who would care. Move on, nothing to see here. By the way, strike those nutters off the guest interview lists, and make sure people know that they are persona non grata.

The significance of these swaps seems almost transparently obvious to anyone who is following the commodity markets, but Reg Howe says it quite well, and has been illuminating this smarmy little scheme for several years.

"...an integral part of gold banking in recent years has been the suppression of gold prices, not least by increasing the ratio of paper claims on gold to the underlying amount of available real metal. In this sense, if the new gold swaps disclosed by the BIS are just the latest technique for giving official support to an increasingly shaky gold banking business, they might be viewed as a short-term negative for gold prices. But in a larger sense, the growing reluctance of central banks to part with whatever gold they have left can only be a positive development for committed gold investors."

The point is that some of the central banks, led by the example of the Fed and J.P. Morgan, have been leasing out their gold inventories to the bullion banks at very low rates, without reflecting those leases on their books. Technically this does not violate any prohibitions against selling sovereign assets without the oversight and consent of the people. In the case of Gordon Brown, when you do it, you invoke the secrets act and hide the details as well.

The bullion banks have been selling that bullion into the market, artificially suppressing the price, and occasionally having to be bailed out when there is a short term 'run' on their paper obligations as in the case of the sale of England's gold by Gordon Brown.

The reason, more properly rationale, for this 'arrangement' is the linkage shown in several economic papers, including an important one co-authored by Larry Summers, that leads them to believe that their is a linkage between lower gold prices and lower interest rates on the long end of the curve. I believe they have it wrong and are ultimately mistaken, but they believe it, and that's what counts. And this will be their cover story when they are brought to justice, the Greenspan defense for his own unindicted offenses. I thought I was doing the right thing, but I was mistaken, and I am sorry.

So why should we care? For two reasons. First, this is clearly become a reverse Ponzi scheme, wherein large paper claims exist for a shrinking pool of an available physical resource, ie. central bank and bullion bank gold. The same applies for silver.

The derivatives short positions held by a few banks, like JPM and HSBC, are enormous. If the market ever breaks free of this scheme by the shorts, it is going to leave a crater in the international banking system.

And second, when one has a scheme started from good intentions that gets out of hands and is covered up by official government actions, it festers into corruption. That corruption spreads, and undermines the integrity of the institutions that it involves, namely the Treasuries and Central Banks of many of the developed countries.

"Corruption is a tree, whose branches are
of an immeasurable length: they spread
Everywhere; and the dew that drops from thence
Hath infected some chairs and stools of authority."

Beaumont and Fletcher, The Honest Man's Fortune

Sounds a little crazy huh? The SEC dismissed the whisteblower in the Madoff scandal as a cranks for years.

At least some of the monied interests, the privileged, and their demimonde of enablers have called it such. And yet the evidence keeps coming out and confirming it, little by little. The revelation of the fractional reserve nature of the world's largest bullion exchange was a blockbuster. The Fed resists audits of their dealings in gold, and an independent audit of the gold held by the Treasury and Fed with a full and clear disclosure of any obligations on those inventories has been resisted for years.

Like Enron, the tech bubble, the housing bubble, the Madoff Ponzi scheme, financial deregulation, OTC derivatives, relaxed pension fund rules, and the financial assets bubble, this bullion bank scheme is going to blow up and collapse, and the public is going to be asked to pay the bill, and ignore all the wrongdoing for their own good.

That is why this is important. And there will be hell to pay when the day of reckoning arrives. And that is why there is such moral hazard in the policy of not seeking indictments of key figures in this financial fraud because the perpetrators think they will be able to just keep the scheme going, and then lie and deny if the time of discovery comes, as their fellows have done already.

But it hasn't happened yet. And the pigmen live life on the edge, doing what they will, with a confidence that they can talk their way out of any difficulties that may arise, maybe make a few phone calls, call in some favors from the powerful. They are just that good.

I have known several of that type personally. This is how they think, and their actions follow their beliefs in their own power, and the distance they enjoy from common humanity. This is why deterrence is an even more important factor in intellectual or white collar crimes, because belief in the con is such a pivotal element.

This is what makes Obama's reluctance to take an aggressive stand against fraud, to follow through on the will of the people in their desire for justice, such a fatal flaw. His moral ambiguities and desire to go along respectfully with the desires of the powerful, shown clearly in his appointments and key decisions, makes him a nice guy to pal around with perhaps, but a tragic failure as a leader for reform, and an American president.

And they often have a good run of it. But eventually they have trouble talking their way out of trouble, especially when they are figuratively swinging from a lamp post, or hoist with their own petard.

"Watch therefore and pray always, that you may escape all these things that will come to pass, and be among those standing with the Son of Man.” Luke 21:36

Net Asset Value of Certain Precious Metal Funds and Trusts

Gold Daily Chart and an Elliot Wave Count

This shorter term chart and E-wave from Lannie Cohen of Capitol Commodity Services.

I have provided a short-term chart on gold, which suggests a potential low in place.



In my opinion, even if the low is taken out, it will show positive divergence, which would suggest a buying opportunity, a perfect scenario for the "scale-in" strategy.

Remember, Gold is a currency and is certainly acting as such. The outlook for higher prices into year end remains the same.

"Betting against gold is the same as betting on governments. He who bets on governments and government money, bets against 6,000 years of recorded human history." Charles de Gaulle

SP 500 September Futures Daily Chart

"Niagra Falls. Slowly we turned, step by step, inch by inch..."



As a reminder this is an option expiration week for equities.

The Sprott Physical Silver Trust

Since silver is 'the people's gold' I would expect this trust to be very popular.

This fund has the monthly delivery option as does PHYS for gold.

Presumably the delivery will be in standard silver bars of 1000 troy ounces with a minimum fineness of .999. This is approximately 68.5 pounds avoirdupois. The bar would be worth about $18,280 at today's prices. Presumably there will be some fees involved in delivery. This size is popular with institutions.

This fund could put some stress on the silver bullion market which is already a bit tight by any measure. We assume the prospectus will indicate a negative position on leasing of the fund's silver, and the requirement not to engage in fractional reserve silver bullion.

Of course there need to be explicit auditing standards down to the bullion level to avoid some of the counter party risk appearing in some of the ETFs which deal in subcontracting with passive audits. ETFs are fine for a trade, but if one is buying bullion for insurance against currency risks, then the auditing and allocation issues become rather substantial.

Financial Post
Sprott Has a New Physical Silver Trust
Barry Critchley
Wednesday, Jul. 14, 2010

It has worked for gold plus a number of other metals including molybdenum and uranium -- though it didn't work for copper -- and the hope now for the promoters is that it will work for silver. We are talking about the Sprott Physical Silver Trust, which wants to raise capital via the sale of US $10 units.

As the name suggests, the issuer will use the proceeds to invest in physical silver bullion. "The Trust seeks to provide a secure, convenient and exchange-traded investment alternative for investors interested in holding physical silver bullion without the inconvenience that is typical of a direct investment in physical silver bullion," states the prospectus.

The document offers a number of reasons to invest in physical bullion: It's convenient, all the proceeds will be invested in physical silver; the silver will be stored at the mint and the trust will be able to secure lower transaction costs than investors doing it themselves. But the fund is geared to those who like their income in the form of capital gain; the trust does not intend to pay any dividends.

But one wrinkle is that once a month, unit holders will be able to redeem all or some of their units and receive physical silver. It's not immediately clear why a unit holder would want to do that, other than to provide unit holders with comfort that they can get their hands on the metal...

One reason for the popularity of funds that invest in physical metals is the favourable tax afforded U.S. institutions. The prospectus talks about the capital gains advantages for such buyers: The tax rate is 15% (though it will rise to 20% by year end) on such investments compared with the normal 28% tax rate.

h/t Rodd, aka 'Silverholic'

James K. Galbraith: The Financial System Must Be Reformed

Although I differ considerably from Mr. Galbraith's conclusion that government must take on a larger role financing the reconstruction through the active allocation of capital, I cannot fault his call for a serious reform of the financial system as the sine qua non for a sustainable recovery. Why substitute one version of financial engineering by corrupt politicians for another?

I am pessimistic that this will happen, yet. Although the pigmen feel that they have 'won the war,' and will continue from outrage to greater outrage, until they provoke a reaction, and the people finally rise in their righteous anger.

It has not happened yet, at least successfully. Washington is under siege by an army of lobbyists with cash in hand.

But it is almost a certainty that the pigmen, who think that they have won the war, will go from outrage to outrage, until the people finally rise in their righteous anger. The pigmen cannot restrain, cannot reform themselves even when it is so obviously in their own interests. Such is the instinct of the predator class to insatiable, seemingly obsessive, self-destruction. Enough is never enough.

"Tombé de l'éternel, Satan veut l'infini. Tombé de l'Être, il veut l'Avoir. Mais le problème est insoluble à tout jamais. Car pour avoir et posséder, il faut être, et il n'est plus. Tout ce qu'il s'annexe, il le détruit. Et certes, il pourra tout avoir, puisqu'il est appelé Prince de ce Monde dans l'Évangile - mais il n'aura que ce monde-ci." Denis de Rougemont

"Having fallen from the eternal, the Evil One's desires are endless, insatiable. Having fallen from pure Being, he is driven by the desire to possess, to fill his emptiness. But the problem is insoluble, always. He is compelled to have and to hold, to possess and consume, and nothing else. All he takes, he destroys. Certainly he rules the material, as he is called the Prince of this World in the gospels - but only of the things of this world." And since material things will have an end, he is condemned to a gnawing hunger, and the wages of his pride, oblivion. The is no greater punishment for pure ego. And the knowledge of this is his torment.

"What to do? To restore the rule of law means first a rigorous audit of the banks and of the Federal Reserve. This means investigations. Representative Marcy Kaptur has proposed adding a thousand FBI agents to this task.

It means criminal referrals from the Financial Crisis Inquiry Commission, from the regulators, from Congress, and from the new management of troubled banks as they clean house. It means indictments, prosecutions, convictions, and imprisonments. The model must be the clean-up of the Savings and Loans, less than 20 years ago, when a thousand industry insiders went to prison. Bankers must be made to feel the power of the law in their bones.

How will this help the economy? The first step toward health is realism. We must first stop pretending that bad assets can be made good, that bad loans will someday be repaid, and that bad people can run good banks. Debt crises are resolved when debts are written down and gotten rid of, when the institutions that peddled bad debts are restructured and reformed, and when the people who ran the great scams have been removed. Only then will private credit start to come back, but even then the result of bank reform is more prudent banks, by definition more conservative than what we've had...

The entire host of neglected priorities of the past 30 years should be on the agenda now. That is the way—and the effective path—toward prosperity."

James K. Galbraith, Tremble Banks Tremble

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

Bastille Day 14 Juillet 2010

"The longer we dwell on our misfortunes the greater is their power to harm us."

Voltaire

"Behind every great fortune there is a crime."

Honore de Balzac

"Prejudices are what fools use for reason."

Volaire

Remember, remember...

Gold Daily Chart

This setup resembles the rally off the April low.

If the SP 500 falters at overhead resistance gold will likely remain within its trading range.

SP 500 September Futures Daily Chart

Stocks were rallying today on optimism about earnings based on last night's results from Alcoa and CSX.

After hours tonight Intel announced better than expected earnings and raised its forecasts. This caused the futures to gap open when they resumed trading. Here is what they look like now, after hours.

This has been a wicked rally off the lows. It *might* be getting towards a short term top, possibly tomorrow, but I would not want to get in front of it. Wait and see how the rally progresses.

Net Asset Value of Certain Precious Metal Funds and Trusts

Chris Whalen Calls for Reforms, But Gives Crony Capitalism and the Neo-Liberals a Rewrite

I enjoy Chris Whalen of the Institutional Risk Analyst. His outlook and perspective are generally well-informed and well to the point, fresh and practical.

In his most recent essay titled Building a New American Political Economy, excerpted below, he spends quite a few words in taking Paul Krugman and the stimulus crowd to task, or more accurately, out to the woodshed for what we used to call a 'proper thrashing.'

I like his conclusion, which strikes a similar chord to the tag line which I have been promoting since 2002.

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

There must be a fundamental restructuring of the US economy, a reconsideration of globalization and its scope and impact on domestic policy, and a significant reform of the role of the financial system before there can be any sustained recovery.

The housing bubble was not only noticeable well in advance of its collapse, but it was predictable in my view, because of what Greenspan's policies had been coupled with the fiscal irresponsibility of the government.

What I do not like, at all, is the revisionism that imputes the problems facing the US today to 'the Keynesians,' seemingly alone.

Deficits Don't Matter, Until They Do

Who was it who proved, according to Dick Cheney, that 'deficits don't matter?' Not some wild eyed liberal, but Ronald Reagan. And if Reagan was a Keynesian, then Tim Geithner is Leonardo da Vinci.

The greatest deficit growth in the US came from a belief that cutting taxes for the wealthy, without cutting spending, and even increasing spending by enormous amounts on military projects, even in peacetime, in the pursuit of empire and the New American Century, was viable because this would stimulate growth from the top down, trickle down as it were, and negate the deficits.

It was from the anti-government Republicans and faux Democrat elites like Bill Clinton and his economic advisor Robert Rubin, and the billionaire boys club's think tanks, that the 'efficient markets hypothesis' was spawned, and the crony capitalism, globalization, and deregulation was unleashed. Wall Street led a decade long hundreds of millions of dollars lobbying effort under Sandy Weill to overturn Glass-Steagall, and unleash the bubble economy.

The F Word (Fraud)

Were these men who brought the US economy to financial collapse after a series of increasingly devastating asset bubbles primarily socially minded Keynesians? No, not at all, not in the least. They were white collar criminals at worst, and greedy men who had lost their perspective at best, who engaged in a steady campaign to co-opt the regulators and politicians, and swindle the public, reaping personal fortunes for themselves.

And in our planning for the future we need to understand and remember that the depravity that would turn even the best system to its own eventual destruction is hard wired into some of the participants, and so the system can never be self-regulating.

So let's get on with the reform, but not conveniently rewrite history along the way, and ignore the essential that was played by crony capitalism, ideology, and a steady drumbeat in selling the mass of people on the most ridiculous of economic canards.

"In yesterday's edition, Krugman takes Fed Chairman Ben Bernanke to task for not doing more to combat deflation. Krugman, who is a leading apologist for deficit spending under the tattered rubric of neo-Keynesian economics, thinks that the Fed should do more. And what should the Fed do according to Paul Krugman? Print more money. More quantitative easing via purchases of private debt is the urgent recommendation of this leading American economist...

A political position, like one's view of the economy or the orbiting planets, is very much a matter of perspective. One of the things that troubles us about where the U.S. economy is headed is that opinion leaders such as Krugman cannot seem to accept, much less articulate, the fact that the global economic equation has changed and that U.S. economic assumptions must also be adjusted in response.

We talk about a double dip in the economy, for instance, as though we all are going to miraculously return to "normal" after the latest economic slowdown is past. But these promises of a return to normalcy seem out of line with the economic reality that every American can see before them. As the COO of one of the largest hedge funds in the world asked recently: "Are we in a typical business cycle or does the crisis of 2008 represent a reset for the global economy?" We believe it is the latter. [And obviously so do I, since I have been saying this for at least five years now, that reform and restructuring are the sine qua non for setting the US economy on a sustainable course - Jesse]

To us, the first step on the road to recovery is for Americans to admit that we have serious, long-term problems, issues that are going to prevent the U.S. from regaining economic vitality -- at least so long as we pretend that they do not exist. The U.S. cannot make any real progress toward a stable environment for creating jobs and growing private business so long as leading members of the economics profession such as Paul Krugman continue to pretend that the old model of borrow and spend is sustainable. [Chris singles out Krugman here, but for my money the neo-liberals, who dug the hole we are now in with their fraudulent views on free markets, and who are now preaching austerity for the middle and lower classes and more tax cuts for the wealthy, meaning stealing what they have left in the hands of the many, are repulsive beyond all reason. - Jesse]

Instead of talking about ways to boost national income and create real employment, Krugman and his ilk simply call upon the Fed to print more money to boost short-term demand for goods, many of which are imported. By encouraging consumption without regard to the source of the goods, Krugman and his peers in the world's second oldest profession remain locked into the same mental framework and vocabulary that has governed the mainstream of American fiscal and monetary policy since WWII. This is unacceptable. [I think Chris misses a very key point, the sea change in supply side economics and the rise of the efficient markets hypothesis in the 1980's. One might remind him that as late as 1995 the American economy looked to be getting back on the right track, until the presidency of W. Bush put it back into a nose dive. - Jesse]

Economists such as Krugman do not seem to appreciate that all of the Fed's extraordinary efforts over the past two years to inject liquidity into the U.S. economy have had little impact outside of the financial sector. [Since this is where the Fed and Treasury targeted the relief, to the creditors, it ought not to surprise anyone, and I am not sure I would blame Krugman for this. Bernanke is surely no Keynesian. - Jesse]

The suggestion by Krugman that the Fed do more of the same really is quite irrelevant to our current national predicament. Until we discard the bankrupt thinking about fiscal and trade deficits that have characterized the careers of people like Larry Summers and Paul Krugman (and a whole lot more of the think tank crawling economists who promoted the efficient markets hoax and deregulation and privatization without planning and oversight - Jesse) for the past four decades, Americans will make no progress toward achieving real economic prosperity.

The lack of alignment between the current economic narrative within the U.S. and the underlying reality facing millions of Americans is not only blocking progress toward a true economic recovery, but is making it impossible for the U.S. to communicate much less cooperate with our allies and trading partners. When President Barrack Obama and Secretary of the Treasury Timothy Geithner wander around the globe preaching a gospel that consists of more debt and inflation, you can understand why they get a chilly reception.

Unlike Paul Krugman and Treasury Secretary Geithner, our trading partners around the world understand that competitiveness and fiscal balance are the real basis for national security. Since they cannot print money at will, the leaders of Germany and the UK are compelled to take the pain of addressing fiscal deficits immediately. But as the nations of Europe work through their problems, they will emerge stronger and more unified, and able to better compete in the global economy. [This sounds like the kind of praise that Mussolini and Herr Hitler obtained from Wall Street and the business media in the 1930's - Jesse]

Americans need to build a new economic narrative, one that is based upon creating real jobs in the real economy and not upon subsidies for foreign exporters and mismanaged Wall Street banks. [Amen - J] We need new economic thinkers who are not hobbled by devotion to the failed economic structures of the post-WWII world [Like the 'trickle down' theory and efficient markets fairy tale of predatory crony capitalism - Jesse].

Regaining control of the U.S. economy must start with a frank discussion with our trading partners and foreign creditors about jobs, the value of the dollar and what it will take to bring America's economy back into balance. [And the real 800 pound gorilla, a serious reappraisal of US military spending, and the 700+ bases it maintains around the globe - Jesse]

The first step in this process is to make it clear that the US must reduce its dependence upon imports and refocus investment on domestic industries that supply domestic jobs. We must allow the value of the dollar to fall and/or impose duties on all imports to generate badly needed exports, jobs and federal revenue.

Once leading trading nations such as China understand that America will no longer import their unemployment, we can then have a fair and reasonable discussion about the global economy in the 21st Century. But do we have any economists with the courage to lead such a discussion? Send us your suggestions.

Gold Daily and Weekly Charts

SP 500 September Futures Daily Chart

Flat on light volumes, jammed into short term overhead resistance, ahead of earnings season which starts in the US today.

There has been little or no mention of the China downgrade of US debt on Bloomberg television today, which has been a cheerleading session for equities. Their overall presentation at least during US trading hours is best described as 'frivilous with a dully pendantic corporate flavor.'

China Ratings Agency Downgrades US Debt From Moody's, S&P's, and Fitch's AAA Rating

Currency wars. Well at least a Phony War for now. See, nothing has happened. All is well. Move along. Nothing to see here. Status quo intact.

The US sovereign debt gets a stiff downgrade, cut down from number one in the world, to a distant thirteenth place by China's Dagong Credit Rating Agency.

Governments like China do not take actions like this randomly, and their quasi-state organizations do not march to the beat of their own drummer. It will be interesting to watch this develop, and calculate the strategy, to figure out the next steps.

From a thematic perspective, coming up, competitive devaluations, and a shift in the reserve currency regime that will resemble a seismic shift, most likely pivoting around the SDR composition discussions later this year.

The US battered the euro and has been sitting on gold and silver ahead of the SDR discussions. And now China has slipped a shiv between the ribs of the almighty Dollar. This is just the overture, the prelude to the dance.

And further down the road, trade wars, well, at least trade wars more overt than the ones which have been ongoing since 1980, in which the US based multinationals thought they were pulling the strings, breaking the back of American labor.

And guess who the arms dealers are in this paper chase, selling to all sides? Who are the untouchables, the TBTF, a strategic asset in the financial arsenal of democracy? When these boys roll into town it's time to hide the women, children, livestock and provender.

The US media will downplay this, dismiss it, say it does not matter because China will not/ dare not/ can not/ do anything to change the status quo. And expect the spin to be laced with plenty of condescension. Oh those sly Chinese, just talking up their book, just like us. But who can take those little rapscallions seriously.

They are wrong, and they know it.

Well maybe not the news readers and the spokesmodels, who only know what they are told. But the strategists, the thought leaders, and the smart money most certainly know it. They just do not wish to share that information with you yet, because real knowledge is power. And show enjoy the show.

Watch how people react to this, and how they spin it to you. This will be an indication of either what they know, or the kind of character they have. Then you will know something about them and the kind of player they are. Remember it.

They think that you do not have a need to know anything about this yet, because you are intended to be cannon fodder, grist for the mill. Along with Europe, which is busy scourging its citizens into submission to more willingly serve the Anglo-American banking cartel.

And of course there is the new dictum, 'Extend and pretend. If it bleeds, bury it...'

And so the fog of war rolls in.

Associated Press
Chinese credit firm says US worse risk than China
By Joe Mcdonald
July 11, 2010

BEIJING (AP) --
A Chinese firm that aims to compete with Western rating agencies declared Washington a worse credit risk than Beijing in its first report on government debt Sunday amid efforts by China to boost its influence in global markets.

Dagong International Credit Rating Co.'s verdict was a break with Moody's, Standard & Poors and Fitch, which say U.S. government debt is the world's safest. Dagong said it rated Washington below China and 11 other countries such as Switzerland and Australia due to high debt and slow growth. It warned the U.S. is among countries that might face rising borrowing costs and risks of default.

The report comes amid complaints by Beijing that Western rating agencies fail to give China full credit for its economic strength, boosting borrowing costs -- a criticism echoed by some foreign analysts. At June's G-20 summit in Toronto, President Hu Jintao called for the creation of a more accurate system.

Dagong, founded in 1994 to rate Chinese corporate debt, says it is privately owned and pledges to make its judgments impartially. But in a sign of official support, its announcement Sunday took place at the headquarters of the Xinhua News Agency, the ruling Communist Party's main propaganda outlet.

Dagong's chairman, Guan Jianzhong, said the current Western-led rating system is to blame for the global crisis and Europe's debt woes. He said it "provides the wrong credit-rating information" and fails to reflect changing conditions.

"Dagong wants to make realistic and fair ratings," he said.

Beijing has more than $900 billion invested in U.S. Treasury debt and has appealed to Washington to avoid hurting the value of the dollar or China's holdings as it spends heavily on its stimulus.

Dagong's report covered 50 governments and gave emerging economies such as Indonesia and Brazil better marks than those given by Western agencies, citing high growth. Along with the United States, some other developed nations such as Britain and France also received lower ratings than those of other agencies.

Dagong rated U.S. government debt AA with a negative outlook, below the firm's top AAA rating. It warned that Washington, along with Britain, France and some other countries, might have trouble raising more money if they allow fiscal risks to get out of control.

"The interest rate on debt instruments will run up rapidly and the default risk of these countries will grow even larger," its report said.

Dagong said it hopes to "break the monopoly" of Moody's Investors Service, Standard & Poors and Fitch Ratings. Their reputation suffered after they gave high ratings to mortgage-linked investments that soured when the U.S. housing market collapsed in 2007.

Manoj Kulkarni, head of credit research for SJS Markets in Hong Kong, said that despite the possibility China's government might try to influence Dagong's decisions, there is room in the market for a Chinese agency because Western firms' credibility is badly tarnished.

"As long as there is another opinion and it is backed up, I don't really think a China-based company will have an incentive to rate, say, Indonesia any better than a U.S.-based rating agency," Kulkarni said.

"If it comes to Chinese government-related companies, maybe there might be a conflict of interest, and investors would have to be aware of that fact," he said.

Chinese leaders have appealed repeatedly to Washington to safeguard their country's U.S. holdings and avoid taking steps in response to the global crisis that might weaken the dollar or the value of American assets.

Dagong rated China AA-plus with a stable outlook -- higher than Moody's A1 and S&P's A-plus -- due to rapid growth and relatively low debt.

Ahead of it were seven countries including Switzerland, Australia and Singapore that received the top rating of AAA, the same as those from Western agencies. Canada and the Netherlands also ranked above China...

Bloomberg
China Wins Higher Rating Than U.S. in First Ranking
July 12, 2010

July 12 (Bloomberg) -- A Chinese company gave its own government a higher debt rating than the U.S., U.K. and Japan in the nation’s first sovereign ranking because of widening deficits in the developed world.

Dagong Global Credit Rating Co. rated U.S. government debt AA with a negative outlook, and China AA+ with a stable outlook, the company said in a report covering 50 nations published on its website. The yuan-denominated rating is higher than Japan’s AA- and the same as Germany’s, Beijing-based Dagong said...

Dagong’s rating report gave “markedly” different valuations to 27 countries compared with those of Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, the statement said. The euro has slumped 12 percent this year on concern that Europe’s fiscal crisis may expand beyond Greece and Spain to Germany and France.

“This marks a new beginning for reforming the irrational international rating system,” Chairman Guan Jianzhong said in a statement. “The essential reason for the global financial crisis and the Greek crisis is that the current international rating system cannot truly reflect repayment ability.”...

China Ratings Agency Press Release

Typical snide reaction from the Financial Times I Heart China Says China Rating Agency

Three Interesting Audio Interviews About Precious Metals and the Economy

King World News is a great alternative source to the mainstream media.

Here are three interviews that all appeared on July 10, and are well worth hearing.

1. Ben Davies of Hinde Capital

2. James Turk of Goldmoney

3. Ted Butler On Gold and Silver

Austrian Economics: True Money Supply, Deflation and Inflation

Here is the Austrian theory of money supply and its measures in a nutshell.

"The True Money Supply (TMS) was formulated by Murray Rothbard and represents the amount of money in the economy that is available for immediate use in exchange. It has been referred to in the past as the Austrian Money Supply, the Rothbard Money Supply and the True Money Supply.

The benefits of TMS over conventional measures calculated by the Federal Reserve are that it counts only immediately available money for exchange and does not double count. MMMF shares are excluded from TMS precisely because they represent equity shares in a portfolio of highly liquid, short-term investments which must be sold in exchange for money before such shares can be redeemed.

For a detailed description and explanation of the TMS aggregate, see Salerno (1987) and Shostak (2000).

The TMS consists of the following: Currency Component of M1, Total Checkable Deposits, Savings Deposits, U.S. Government Demand Deposits and Note Balances, Demand Deposits Due to Foreign Commercial Banks, and Demand Deposits Due to Foreign Official Institutions."

True Money Supply, Ludwig Von Mises Institute

Here is some additional reading on the subject. The Austrian Theory of Money by M. Murray Rothbard

The weakness in TMS is the same as in all of the narrower money supply aggregate measures, in that it is very volatile in the short term because of seasonal demand. Ideally one would perform long term trending to get a better idea of the expansion or contraction of the money supply.



As one can see, the trend in money supply growth has been quite strong, almost parabolic.



Why do I present this? Because I thought it would be a good idea for those who aspire to be Austrian economists to know what the Austrian School thinks about money supply and how to measure it.

So when some point to M3, for example, and see an argument for deflation rampant, they should at least understand that they are not being 'true to their school.'

I should disclose here that although I have sympathy for many of the things that the 'Austrian School' says, I am not an 'Austrian' or a member of any economic school of thought for that matter. I think the Austrian school has been influenced to the point of being hijacked by the neo-liberal economists, due in large part to its marginalization in the study of economics and its lack of vigor.

Returning to what the Austrians think, a fairly recent discussion of this deflation issue was penned by Richard M. Ebeling in The Hubris of Central Bankers and the Ghosts of Deflation Past.

"One fact should be pointed out in terms of the current economic crisis. There has been no monetary deflation -- that is, an absolute decrease in the quantity of money and credit in the economy. Just the opposite. Since 2008, the Federal Reserve has increased the total amount of reserves in the banking system by around $1.5 trillion, mostly by buying up many of those "toxic" mortgages that were guaranteed by Fannie Mae and Freddie Mac.

This huge expansion in the potential quantity of money and credit that could flood through the financial markets and generate significant price inflation has been held off the market due to the fact that the Federal Reserve has been paying banks interest to hold those sums as unlent reserves. With key market interest rates being kept artificially low at near zero or one percent through activist Fed policy, banks have found it more profitable earn that positive rate of interest at the Federal Reserve.

But unless the Fed finds some way to drain those "excess reserves" out of the banking system, significant inflationary -- not deflationary -- forces may be at work looking to the next few years ahead."

This could help some people understand why the expected effects of monetary deflation have not been appearing as they planned.

There is certainly an undeniable slump in aggregate demand that it putting pressure on prices, and some sectors, like housing, are experiencing the collapse of asset bubble.

Some point to credit contraction as deflation, but as the Austrian school would point out, credit is not money, only a means of money creation. The Fed owns a printing press, and as most recently seen, can expand its Balance Sheet and True Money Supply almost at will.

Some things I have seen recently from 'Austrians' leads me to think that a portion of that camp has been hijacked by the neo-liberal economists. That would indeed be a shame if it is true, and ti becomes a trend. Stranger things have happened. But I see it clearly in the calls for austerity, and liquidationism, and 'free markets' from some who wear those school colors.

Markets are always and everywhere never naturally free. They require diligent effort and serious work to be maintained free of fraud, corruption, and inefficiencies. But some find it easy to believe in or at least promulgate economic theories based on the natural goodness of man, and assorted fairly tales and urban myths, if it suits their ideology or duplicitous agenda. One can usually spot them by the quantity of invective and rhetoric against the quality and detail of their thought.

As for Ben's printing press, baby, you ain't seen nothing yet.

Jesse's Paradox: Gold Can Perform Well In Both Monetary Inflation and Deflation

The average punter understands the first graph to the right. Gold tends to increase in price in times of monetary inflation, because as an alternative store of wealth it provides a safe haven from central bank debasement of the currency.

By monetary inflation, we do not mean the simple, nominal growth in money supply, and of course the same can be said of a simple decrease and deflation. This is obvious when one considers that money must have a natural relationship to the demand for it relative to population growth, but most importantly to the growth of real GDP.

But notice the second chart, and this is the one which so many speculators and economists miss. Gold tends to perform well when the inflation adjusted returns on the longer end of the curve are low. In other words, when the real returns on bonds are inadequate to the risk. But the risk of what?

Inflation, pure and simple. Deflation is a prelude to inflation, and sometimes a brief hyperinflation, in a fiat currency regime.  And even while the nominal money supply may remain flat or even negative, the decay in the underlying assets that support it may be declining, and sometimes dramatically so. 

The smarter money is not chasing the latest wiggles in the Elliot waves, or the price manipulation shenanigans of the central bankers and their minions at the bullion banks. They have been buying ahead of the increasing likelihood of a monetary event.

The underlying value of the dollars are deteriorating. So even though there might be fewer dollars nominally, in fact there should be much fewer dollars because of the contraction in GDP.

And the quality of the assets underlying those fewer dollars are much lower quality than only a few years ago.

Gold seems to perform less well, underperforming other asset classes, in a healthy economy where the growth of money is related to the organic growth of real production and not to financial engineering. Gold seems to be a hold in 'normal' times.

I would suggest that the extraordinary price in gold now is because for many years the central banks artificially suppressed the price and the means of production for gold by selling their holdings in a conscious attempt to mask their monetization and the unreasonable growth of the financial sector. They wanted things to look 'normal' while they were becoming increasingly out of balance, especially with regard to debt and international trade balances, and so they opted for appearance versus reality.

As Fernando of the Fed would day, "It is better for the economy to look good than to be good, and dahling while we were printing money and selling the public's gold it looked marvelous!"

And what if the Fed starts allowing the 10 year Treasury yield to start rising naturally. Will that be the time to start selling gold? Probably not because the money supply would most likely be artificially increasing again, and that yield increase would be a remedial reaction.  Keep an eye to negative real interest rates if you can find an indicator of inflation that has not been corrupted.

Cargo Cult Economics

People who really do not understand what is happening in a complex system sometimes react in funny ways, and suggest things that would be laughable if there were not in a relative position of power. Anyone who has worked in a large corporation will understand what funny things bosses can be when struggling to deal with complexity that they do not understand. Our duty of course is to help them, for the good of all, but sometimes that is beyond our reach, especially in dealing with Type A bosses who cannot conceive that there might be something beyond their comprehension. Since 'killing the messenger' is their reflexive reaction, their learning curves tend to be quite long, generally resolved in the insolvency of the division or even the entire company.

What I find incredibly amusing are the high priests of the economic cargo cult, dressed up in the ritualistic accoutrement's of academic credentials, sporting the codpieces of monetary policy, carrying the totems of efficient market theory, arrogant and presumptuous even in their frustration and failure. They are just so incredibly and unsuspectingly funny. I am sure history will have a good laugh over it, and for us, well at times we have to grin and bear it.

Much of what Larry Summers is doing now makes me think of Dilbert's boss. If gold is the signal of a problem in the economy, well then, let's just manipulate the price of gold. If slumping stock prices are a sign of economic deterioration, well then, lets just buy the futures and prop them up whenever they slide. See how short term and easy things can be?

This is not always humorous of course. Powerful people who are frustrated and amoral can tend to do increasingly destructive things. And then the response of the people is to try to ignore them. If necessary one must basically tell them to 'stuff it,' and give them the boot. And if they persist and start acting out, well, tyrants eventually get replaced one way or the other, but it is far too early to discuss things like that now.

When Will the Gold Bull Market End

So, the frustrated investor says, when will gold finally start topping?

Gold have topped when the smart money is convinced that the real economy is becoming naturally sustainable, robustly organic in its credit creation and allocation, and healthy in the growth of the median wage to support consumption, without subsidy or interference or new unpayable debt from the Federal Reserve, or the draconian 'taxes' from an outsized financial sector that stifles real growth.

When people are no longer obsessed with what Goldman Sachs and their ilk are doing, or what Bernanke and his merry pranksters have to say that day, then will be the time to be out of gold. I do not see even a move in that direction anywhere on the horizon.  Because of the credibility trap, the impulse to reform is stifled in the corridors of power.

This is no top, and sentiment is unusually bearish. As I have said, I believe this is the base for a new leg up that is going to surprise all but a few. No one knows the future and I could be wrong.

But I do not think that I am, unless there is a new market panic and a general liquidation of all assets. The hedge funds, BIS, and the Fed can play their games, but they cannot hold back the tide of history without being overwhelmed.

Austerity or Stimulus Without Significant Reform Is Madness; Corporatism Is Fascism

The economy will not 'cure itself' through benign neglect and liquidationism, because it did not get this way by itself. It did not suffer an accident, or an act of God. This is an unfortunate application of the principle of human healing after an injury to the economy.

The market was warped and distorted for many, many years by the neo-liberal forces of crony capitalism. It does not have the natural forces and efficiency for self-organization, and certainly not for self-repair. It is a man-made thing, and requires intelligence and hard work.

To say that the economy can somehow heal itself now is nothing more than an extension of the efficient markets hypothesis. The market will repair itself and get back on the road to recovery if only we will leave it alone, get the government out of the way, and allow the natural goodness and efficiency of traders to flourish, while handing out some additional and unnecessary pain to the victims.

To suggest that by subjecting the economy to harsh austerity measures, but without changing the abuses that caused it to become distorted and unstable with a bloated and intrusive financial sector, and then crash in the first place, is merely to hasten the final collapse, and the tearing of the fabric of society, which some wish to see for their own dark purposes.

This is the failure of those who prescribe austerity, or stimulus, but without significant systemic reform. There are those who wish to bring the economy down, and to institute a command and control form of government.

The austerity without reform being promoted is what the Americans call 'a con.' Here is a decent description of it by my friend, Charles Hugh Smith in his essay, The Con of the Decade part II.

Are austerity and stimulus without reform equivalent? No. Austerity is designed to benefit those who have already benefited unjustly and sometimes immensely by the financial frauds. Stimulus can at least mitigate the suffering of those who are being squeezed by the economic dislocation.

However, and I wish to stress this, the core issue is and has been reform, eliminating the ongoing 'con' in the system that is merely serving to transfer wealth from the many to the few in the form of monopolies, fees, and soft taxes, starting with but not limited to the financial sector.

Corporatism is fascism. And the opportunity and impulse to reform has been co opted by the promotion of a stalking horse, a new Emmanuel Goldstein, into the presidency. Obama's tenure may be remembered as Bush' third term.

Judging from the inane and virulent emails that are circulating, most of which cannot survive a few minutes of common sense or the 'Snopes' test, the American people are being prepared for domination by a 'strong leader.'

Why do people forward such easily debunked rubbish? Why do so many older people get angry when the error, the blatant lie, is pointed out to them? Because they have set aside reason, and the burden of freedom, and taken the easier path to fear, blind hate, and serfdom. And in too many cases, it is working. I would again caution those promoting this campaign that madness has no master.

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

Reading for The Weekend

“We are slow to master the great truth that even now Christ is, as it were, walking among us, and by His hand, or eye, or voice, bidding us to follow Him. We do not understand that His call is a thing that takes place now. We think it took place in the Apostles' days, but we do not believe in it; we do not look for it in our own case.

God's presence is not discerned at the time when it is upon us, but afterwards, when we look back upon what is gone and over. The world seems to go on as usual. There is nothing of heaven in the face of society, in the news of the day.

And yet the ever-blessed Spirit of God is there, ten times more glorious, more powerful than when He trod the earth in our flesh.

God beholds you. He calls you by your name. He sees you and understands you as He made you. He knows what is in you, all your peculiar feelings and thoughts, your dispositions and likings, your strengths and your weaknesses. He views you in your day of rejoicing and in your day of sorrow. He sympathizes in your hopes and your temptations. He interests Himself in all your anxieties and remembrances, all the risings and fallings of your spirit.

He encompasses you round and bears you in His arms. He notes your very countenance, whether smiling or in tears. He looks tenderly upon you. He hears your voice, the beating of your heart, and your very breathing. You do not love yourself better than He loves you. You cannot shrink from pain more than He dislikes your bearing it; and if He puts it on you, it is as you would put it on yourself, if you would be wise, for a greater good afterwards.

There is an inward world, which none see but those who belong to it. There is an inward world into which they enter who come to Christ, though to men in general they seem as before. If they drank of Christ's cup it is not with them as in time past. They came for a blessing, and they have found a work.

To their surprise, as time goes on, they find that their lot is changed. They find that in one shape or another adversity happens to them. If they refuse to afflict themselves, God afflicts them.

Why did you taste of His heavenly feast, but that it might work in you—why did you kneel beneath His hand, but that He might leave on you the print of His wounds?

God has created me to do Him some definite service; He has committed some work to me which He has not committed to another. I have my mission -- I may never know it in this life but I shall be told it in the next.

I am a link in a chain, a bond of connection between persons. He has not created me for naught.

I shall do good, I shall do His work. I shall be an angel of peace, a preacher of truth in my own place while not intending it if I do but keep His commandments.

Therefore I will trust Him. Whatever I am, I can never be thrown away. If I am in sickness, my sickness may serve Him; in perplexity, my perplexity may serve Him. If I am in sorrow, my sorrow may serve Him.

He does nothing in vain. He knows what He is about.

He may take away my friends. He may throw me among strangers. He may make me feel desolate, make my spirits sink, hide my future from me -- still He knows what He is about.

Let us feel what we really are--sinners attempting great things. Let us simply obey God's will, whatever may come. He can turn all things to our eternal good. Easter day is preceded by the forty days of Lent, to show us that they only who sow in tears shall reap in joy.

Contemplate then yourself, not as yourself, but as you are in the Eternal God. Fall down in astonishment at the glories which are around you and in you, poured to and fro in such a wonderful way that you are dissolved into the Kingdom of God.

The more we do, the more shall we trust in Christ; and that surely is no morose doctrine, that leads us to soothe our selfish restlessness, and forget our fears, in the vision of the Incarnate Son of God.

May the Lord support us all the day long, till the shades lengthen, and the evening comes, and the busy world is hushed, and the fever of life is over, and our work is done.

Then in His mercy may He give us safe lodging, and a holy rest, and peace at last.”

John Henry Newman

This is a collection of quotatons woven into a whole thought by Le Proprietaire as a young man for a small circle of friends.

Why Does the Economic News Seem To Be So Different From Your Reality?

There are numerous vested interests on Wall Street, in Washington, and in the corporate conglomerates who see nothing wrong in distorting information, 'spinning the news,' and sometimes even outright lying, when it comes to reporting on the economic situation. They are promoting a story, and often an agenda.

They hide behind the safe harbor provisions of the law, and the subjective aspects of economics. They use euphemisms such as 'talking your book' to describe calculated deception.

The financial media accepts it, condones it, and does it themselves. As one financial news anchor, said shortly after the tech stock bubble collapsed in 2002, 'Of course market strategists and analysts lie. Everyone knows that. But no one made people buy those stocks.'

Straight news reporting is less seen in the mainstream media these days, since solid investigative journalism is considered too costly to the corporate management. Much cheaper to allow paid shills to take scripted shots at one another, in the manner of professional wrestling. This is how the voters are informed, and how public policy is shaped. And when it comes to economics, the establishment is firmly in control of the message. The selection of guests is carefully scripted to support a point of view.

Even on the internet, the offers come. The planted stories, the spin, the rumours, ad hominem slanders, whispering campaigns, and cliquish peer pressure to uphold the 'party line.' The rewards are connections to the powerful, invitations to important places and venues, access to names and associations, privileged access, visibility, to be part of the in crowd. This plays on a natural human tendency to 'go along to get along' and them to rationalize it all away.

As someone recently said to me, "What is truth?" Pilate asked the same question, and turned and washed his hands of it. Truth is an elusive objective, given the fallibility of our reason. Less a destination now, and more a struggle, a way of life. But we know when we stray from the path.

Most refuse the temptation, but some take the bait. And so you must be aware of this, and filter what you consume through your own common sense. You need to tread carefully, using the palate which you have, and over time you will become more adept at spotting the establishments serving honest fare and those offering artificial substitutions and false skepticism, the wink and a nod to a deception.

Wall Street Shills

"Further complicating the outlook is a more traditional issue: pronouncements by some economists on Wall Street and financial reporters in the popular media, who act as shills for the needs of Wall Street and political Washington. While there are a number of fine and honest economists and financial reporters in their respective fields, there also are those — often very heavily publicized — who spew Pollyannaish nonsense aimed at affecting public sentiment and/or the financial markets during troubled economic times.

Let me recount two personal experiences. Back in late-1989, I contended that the U.S. economy was in or headed into a deep recession. CNBC had me in to discuss my views along with a senior economist for a large New York bank, who was looking for continued economic growth. Before the show, the bank economist and I shared our views in the Green Room. I outlined my case for a major recession, and, to my shock, his response was, 'I think that pretty much is the consensus.'

We got on the air, I gave my recession pitch, and he proclaimed a booming economy for the year ahead. He was a good economist and knew what was happening, but he had to put out the story mandated by his employer, or he would not have had a job.

More recently, following an interview on a major cable news network (not CNBC), I was advised off-air by the producer that they were operating under a corporate mandate to give the economic news a positive spin, irrespective of how bad it was."

John Williams, Shadow Government Statistics

"Do not conform youself to the common pattern of this world, but be transformed by the renewing of your mind." Romans 12:2

Gold Daily and Weekly Charts

Gold went out on at the $1210 level. If it can extend its gains next week and top the resistance around 1225 it is likely to be heading up again for the fourth test of resistance around 1260.

People have been sending me charts from other fellows, chartists, some who charge subscriptions and make appearances on television, 'just to temper my enthusiasm for gold.'

I try to listen to everyone who has something to offer, to the extent that time permits and experience motivates, But since most analysts and chief strategists are 'talking their books' and biases, their accuracy probably doesn't matter much to them, and this is why what they say so often matters so little to me.



The Gold weekly charts looks like there is a decent probability that a short term bottom is in. Let's see if gold can start its new leg up next week, and take out 1225 which sets up a retest of the big overhead resistance around 1260.

SP 500 September Futures Daily Chart

Thin volumes and a sleepy trading day, signifying little.

Earnings season begins on Monday with Alcoa. Yum Brands on Tuesday, but I suspect most eyes will be on the TBTF banks.

CNBC Europe: Is Gold a Bubble, Or an Outstanding Value, or Both?

My friend Horst from Germany sent this to me.

I think you will find it to be of interest.

The subject discussion revolves around the currencies, paper gold, and bullion.

Ben Davies, CEO of Hinde Capital



I cannot help but note that the level of discussion in CNBC Europe and Bloomberg Asia is much more serious than that of Bloomberg and CNBC USA. I wonder why this is, given the global character of the financial markets.

And then there is Fox Business where T/A does not necessarily have anything to do with technical analysis or charting.

Double Dip Est Arrivé: Institutional Risk Analyst

Chris Whalen of Institutional Risk Analyst has this interesting interview on CNBC, sent to me by a reader.

I have not watched that television channel in some years, finding their shallowness and hypocrisy too much to bear. Of course my refuge, Bloomberg Television, has lowered its standards so much, with spokesmodels and smirking chimps, that it may have achieved parity. Are Cramer, Kudlow and Kernan still kicking? Remarkable.

This is an interesting exposition of the currency wars, and the pandering to the big financial institutions by the Fed over the past fifteen years, ultimately at the expense of the real economy in the distortions and misallocation of capital which the financial engineers have fostered.

Here is the interview with Jim Rickards to which Chris alludes.



Chris Whalen sounds like me. I wonder if he can cook?

US Housing Crash; If It Bleeds, It's Buried; Congress Fiddles While the Economy Burns

Rumours of an economic recovery in the US seem to be greatly exaggerated.

The mainstream media, Wall Street, and Washington have expanded their policy of 'extend and pretend' to 'if it bleeds, it's buried.'







h/t to Michael David White's Housing Story for the charts and the tag line.

BIS and the Gold Swaps: Curiouser and Curiouser

Here is an update on the BIS Gold swap story from The Wall Street Journal via GATA's Chris Powell.

Gold swap mystery deepens as BIS gets correction from Wall Street Journal
Submitted by cpowell on 07:41PM ET Wednesday, July 7, 2010.
Section: Daily Dispatches

10:47p ET Wednesday, July 7, 2010

Dear Friend of GATA and Gold:

The Wall Street Journal this evening updated and corrected its report about the gold swaps undertaken by the Bank for International Settlements, disclosing an e-mailed statement from the BIS stating that the swaps were with commercial banks, not central banks as the newspaper first reported.

The updated story suggests that some puzzlement continues about the swaps:

"The enormous amount of gold involved, nearly tripling what the BIS itself owns, left many market participants wondering about the nature of the deals. The BIS declined to identify the commercial banks involved. ... It isn't clear what prompted the banks to borrow from the BIS instead of their central banks."

Further, without citing authority the paper says "the gold hasn't entered the open market," but "if the banks that loaned the gold are for some reason unable to make good on the loan, the BIS could opt to sell the gold in order to get its money back, which could amount to flooding the market with an unexpected boost to the global supply."

But gold being money that for years has been appreciating against nearly all currencies, as noted for you a few minutes ago here --

http://www.gata.org/node/8798

-- why would any institution want to sell gold "to get its money back?" -- unless, of course, "flooding the market" and suppressing the gold price wasn't the real objective?

Another unanswered question is where the European commercial banks got all that gold, "349 metric tons ... nearly tripling what the BIS itself owns." The European commercial banks aren't known for holding that much metal on their own account. (If you rent a safe-deposit box at a European commercial bank, you might want to check its contents in the morning.)

While the story has changed in an important way, the first principle of journalism hasn't, and journalists here haven't yet demanded information from the primary sources, the BIS and the commercial banks themselves. Nor has there been any change in the conclusion that must be drawn from the story so far. That is, the secrecy and the involvement of the BIS, an admitted gold market rigger, impugn the transaction as part of another gold market rigging scheme.

Gold Daily Chart

SP 500 September Futures Daily Chart

The SP futures completed a 61.8% retracement from the bottom today. Now we will see if this was a bottom and a short term trend change that can go all the way to the top of the big long term trend channel.