Bank Of New York Mellon To Pay Negative Interest Rate for Very Large Cash Deposits

The Bank of New York Mellon will begin paying negative interest rates on very large cash savings deposits, over $50 million, this week.

As an aside, we wonder why the Fed does not similarly reduce the interest they pay on bank reserve deposits with them to zero from the current .25 percent? 

It should be noted that Bank of New York Mellon has a current dividend yield of 2.06%. Are those dividends taxable? Will depositors be able to claim a lost on the negative interest they pay to BNY Mellon?

Not a sign of deflation if you understand it, although I am sure some will tease that conclusion out of this. Negative real interest rates are the hallmark of quantitative easing, which are artificially low interest rates and the creation of non-organic money, printing paper if you will. It is just they are nominally positive on the longer end of the curve. When they go nominally negative on the short end for a sustained period, you know we are not in Kansas anymore, Toto.  

This is a clear sign of a topsy turvy financial system, of dysfunctional markets, of predatory banking, distorted risks and returns, and a broken economy with negative real interest rates that are likely to become...more negative.  The US can get by with this because of who they are, and what the dollar represents to world trade.

There is a major bear raid on gold today, capping the earlier flight to safety. I think this is more indicative of extremes at the short term in the trends of stocks, bonds and dollars. But the Non Farm Payrolls are tomorrow, and the market is watching them and the situation in Europe rather nervously.

Remember this story the next time someone says that the problem with gold bullion is that it pays no interest, and there are costs to store it.

If the Fed can create it, they can also confiscate it, and transfer it to their friends, creating winners and losers, and sometimes almost at will.  And that is the problem with fiat money and the banking cartel that surrounds it.

WSJ
BNY Mellon to Charge for Some Deposits Above $50 Million
BY LIZ RAPPAPORT

Bank of New York Mellon Corp. is preparing to charge some large depositors to hold their cash, in the latest sign of the worries roiling global markets.

The biggest U.S. custodial bank said this week in a note to clients that it will begin slapping a fee next week on customers that have vastly increased their deposit balances over the past month.

The bank cited the massive dollar deposits it has received over recent weeks, as investors and corporations retreat from financial markets amid Europe's debt crisis and the recent debate over U.S. government ...

Gold Daily and Silver Weekly Charts - La Douleur du Monde - Eurodollars

Gold was romping today until it was smacked lower in the thinly traded late day market. Silver was up sharply.

I posted some thoughts intraday on gold and silver which you might wish to scroll down to review if you have not yet seen them.

I think silver, if it can break up through 50 and hold it, can run to 80 to 100 in a shorter period of time than most might imagine. However, if the equity markets fall out of bed, silver will get beaten and badly. So it is a volatile bet, higher reward with higher risk. And yet it has been one of my best long term trades.

There are troubles ahead. Dark times and great times are coming.

Gold is being bought by the developing world's central banks. This will continue to put a bid under it until the world's reserve currency issues are resolved. And don't hold your breath for that one, as the Anglo-American banking cartel are fighting and delaying the most widely desired solution, a broader basket of currencies including gold and silver, tooth and nail.

The Anglo-American banking cartel is hanging on to their positional strength with some vigor. They are supplying the world's banking system cheap dollars in the hopes of getting them further hooked, and dependent on the buck.

This is why I think M3 was discontinued, and why it is so hard to estimate now. Benny is flooding the world with eurodollars. And like domestic bank reserves, it really is not showing up in the more immediate money supply figures, but is being held off shore in vaults.

SP 500 and NDX Futures Daily Charts

The Non Farm Payrolls number will give the US markets direction.

Relative Performance of Gold and Silver for the Past Three Months - Perceptions Shape the Trade

In response to the Asset Performance piece from earlier this week that showed Silver to be outperforming most other stores of wealth this year to date, despite the big correction off the parabolic high, someone asked me why "silver is underperforming gold recently."

So I looked at their relative performance AFTER the big spike higher and smackdown. By the way, I think that was utterly contrived to help the shorts get off the hook.  I don't think it worked.  They ran silver up, and then in conjunction with the CME margin increases smacked it down hard.   This provides lots of opportunity for conventional wisdom to come in and shake up the bulls.  A twenty percent decline is NOT necessarily a new bear market if it is a short term correction from a recent short term rally.  A standard fibonacci retracement is on the order of 30 to 50 percent.  But it sounds good.

The run up to a short term high, overbought and unsustainable condition was obvious, and a number of people remarked it was time to sell for the short term, including myself.  And I did so with my trading positions.

A few like myself noted when we got back in after the smackdown with the usual cautions. That is the real art in trading, not just picking a place to sell in a bull market, but when to get back on.

I never touched my long term investment positions in silver, and this is my general stance towards this sort of thing.  Don't try and trade it, because you may get out at a short term top, but then it becomes rather difficult to get back on that horse after the inevitable correction.  I have a good friend who was the original silver bull.  But he sold everything he had at $15.  And he has never had the will to get back in again, becoming permanently negative on it, waiting for the price to drop down below $10.  And he might be waiting a long time.

Here is the relative performance of gold and silver bullion for the last three months, two months, and one month.

So the obvious conclusion is that silver is not under performing gold recently, and that my friend was either suffering from some misinterpretation of the facts, or had read somewhere that silver was lagging gold and didn't bother to check out the data for himself.

"Nothing is so difficult as not deceiving ourselves."

Ludwig Wittgenstein

Perceptions can greatly influence our trade in the market. There are plenty of examples of this. When I was in a high growth company in the tech sector, we were acquired a large Fortune 500 corporation for stock,  and as a consequence some of us were holding quite a few stock options and stock in their shares. I was suggesting to anyone who asked me to sell all their stocks inearly 2000 based on the shape of the tech bubble, showing them charts of the Nasdaq 100 which was then past its peak and starting its long decline, with an uncanny resemblance to an asset bubble.

I had an engineering friend who, when the price was 63 in the late summer, absolutely refused to sell his million dollars in stock until he got his price of 68, which he felt was the right price. It had been as high as 79 in the Spring, and he was mad that he did not sell then and 'lost money.'  I was selling at every opportunity as my stock became free to trade. I was selling everything at that point and buying safe harbor investments.  That proved to be judicious.  But that was what the charts and the fundamentals said to do.

Well, he NEVER got that 68 price, and so he never sold, and he pretty much lost almost the entire one million dollars as the stock dropped all the way to 2 and then went bust. The harder it dropped, the more adamant he became that it should not be dropping, and had a litany of reasons why the price would rally and we would be sorry. And he was very persuasive, and liked to argue, and often got his way in arguments, mostly because people just didn't bother discussing it anymore.

My point is, the market does not care what you think, and does not listen to your impassioned rhetoric. The market will go where it will go, and will tell you what to do if you learn to listen to it.

I own both silver and gold; I see no need to limit myself and take sides in the pointless argument about 'which metal is better,' which is almost as dumb as sitting around waiting for Deflation Fairy to come and rescue your portfolio of paper money. They are different, and have different uses and places in a portfolio.  It is like arguing which is better, a hammer or a pickax. Well, it depends on what you are intending to do.

Silver is much more volatile so I hold much less of it in proportion to the gold in my portfolio, based on my own investment objectives. Gold is the flour, currencies are the butter, and silver is the yeast and water.  Together they make a nice mix.

Please note that this comparison of gold and silver does not include the market action today in which silver is up to 41.81 which is another big move.

And based on the market fundamentals I think the upside in silver could be extraordinary. Silver is highly volatile. And there is something odd going on in the silver market. Volatility cuts both ways.

The Longer End of the US Treasury Curve Looks Over Extended

The longer end of the US Treasury curve (20+) looked quite overextended, at least in the short term, in the first hour's trade this morning. How could I resist for at least a day or so trade?

I still do not like the equity market yet, and would view this as a technical support area, until it proves itself otherwise. And that is probably going to have to wait for the US Non Farm Payrolls.

I am not saying Treasuries are a long term short just yet. I would have to see some real appearance of inflation and higher rates before that would be the case, and so far nothing. There is also sound economic theory that allows for lower interest rates here, and for what could be a protracted period of time.

I have reduced all my short term positions, but as always hold all the long term positions, because this is my 'vacation.' Scraping, cleaning, taping, painting, rewiring and installing new outlets and lights. I do not mind this, preferring to do it myself with help from the boy. It is good to teach him how to do these things. And the jalousie porch is not so naturally efficient as to take care of itself.

Gold Daily and Silver Weekly Charts - Maladie Monétaires

The US has maladie monétaires, a money sickness, and it may spread to the rest of the world. Unless treated properly it is a sickness unto death. The problem as always is those who carry it and spread the infection, the perversion of public policy and economic thought. Western capitalism is slowly destroying itself. This is my diagnosis, and the outlook is not good.

Gold gained $40 to 1660 and silver was up $1.56 to 40.86 as traders fled out of US equities, selling the news of a faux debt deal, and the prospects of a slumping US economy.

Part of the trigger was the decline in consumer spending, but rest of it was a flight to safety, with money going out of stocks and riskier assets, and into gold, silver, the dollar and Treasury bonds.

I think the short term trend may have reached its nadir today, but we probably will not have any clear indication on this until the Non-Farm Payrolls number comes out on Friday. ADP Jobs tomorrow, but its a flaky indicator.

I expect that gold will undergo a consolidation and correction somewhere between now and 1700, and have indicated some rough parameters on the gold chart. It may not, if the crisis deepens. Silver will remain volatile. The silver futures market is an accident waiting to happen, and a scandal of major proportions, in the process of slowly unfolding.

SP 500 and NDX Futures Daily Charts

As much as one can be, I was a little impressed that the NDX reached down to hit the support level I had drawn last Friday, some distance from where it had been. And the SP has also fallen to clear support.

These short term trends are now a bit extended, but the eyes will be on the economic data, especially the NonFarm Payrolls on Friday, and not the buffoonery in Washington with the Tea Party and the bought and paid for politicians.

There really is only one solution, and the prerequisite is political campaign reform. Partisanship is poison. But change cannot occur in times of influence peddling, bribery and corruption. So things must get worse before they get better.

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

Year To Date Performance of a Few Select Stores of Wealth - And the Winner Is .... Silver

Here is the chart of the results for various stores of wealth Year to Date. And a second chart shows the results for the past three years.

As a side note, I do not include currency investments. The Swiss franc has been a spectacular performer, but like the metals it pays little or no interest. The average person loses money in currency arbitrage based on my own observation. They tend to overleverage, and panic at sharp moves. I have been fortunate in it, remarkably so, for which I am grateful. But that appears to be an exception.

The 10 Year Treasury does not include interest obtained for the 1/2 year. TNX was around 3.8 percent in January, so we can tack on about 1.9 percent interest bringing the total return on the Ten Year Treasury to about 5.9 percent.

Notice the variance of risk, that is, the deviation of a return from a steady trendline. This is why trading in and out is only for the professionals, and why some investment returns may be more 'risky' than others.

The swings in silver are particularly notable in the three year chart. It is a 'riskier investment.' Gold has had the steadier and more reliable returns.

So, one obviously should consider their time frames and risk tolerance when crafting their portfolio.

But one can sometimes find a fundamental trend, and if proven valid, then hold fast to it no matter what, until that fundamental trend changes in its character. It is especially effective if one has some specialized knowledge in that area, and some natural affinity to follow it as a complement to their chosen profession or intellectual inclinations.

That is the way to the growth and the preservation of wealth. Charts are useful for testing and validating, a sort of a roadmap that sorts facts from fiction, and for the selection of entry and exit points.

But a trend based on well-reasoned fundamentals is the thing.

Gold Daily and Silver Weekly Charts - Unfolding Almost Exactly as Expected

They'll print money until we run out of trees."

Jimmy Rogers

Gold was hit hard, then rallied, then hit into the end of day again, pretty much in the manner which I had expected it would be.

So what next? I think the metals will continue to be capped and under pressure, since the deficit deal, as bad as it might be, provides a rallying point based on fear of discovery for the paper mongers.

As shown in the Gold/US Debt chart over the weekend, the longer term trend is obvious and understandable. The denials of those who do not wish to see it will become increasingly bizarre as the fundamental trend progresses and the world monetary system evolves.

Change is occurring.  And it does not matter whether you accept it or not. It is unfolding even as we speak.

SP 500 and NDX Futures Daily Charts - VIX - Daytrader's Delight

A big swing in the stock markets today, as they opened much higher, and then plummeted on the ISM report, and more jitters about the deficit faux deal.

NonFarm Payrolls at the end of the week. See the comments intraday below.

This Week's US Economic Calendar - July NonFarm Payrolls on Friday

As a reminder, in addition to the Debt Ceiling Fandango, the real economy continues to chug along.

The market was shocked a bit by the miss in the ISM number this morning.

There are a few more important numbers being reported this week that have the potential to influence the markets, especially the Non-Farm Payrolls.

The July Non-Farm Payrolls report is interesting because like January it is one of the few monthly reports in which the raw actual number is revised significantly higher using a seasonality factor. This provides a fair amount of leeway in reporting the headline number, which itself is likely to be revised a month or two later.

As a reminder, isolated numbers, rather than the running trend, tend to be an integral part of the Wall Street/Washington magic lantern of perception modification.

I always like to look at the forecast from Briefing.com in addition to the consensus of economist forecasts. They run hot and cold like all individuals including myself, but it is good input nonetheless.

US Debt Limit and Debt Versus Gold in US Dollars

Let's see, when might we expect the price of gold in dollars to stop going higher?

Chart from sharelynx, and a h/t to my brother Steve.

It would be interesting to see this correlated to Debt/GDP or Broad Money Supply/GDP, but this gets the point across.

This is your country on oxycontin. Get used to it. h/t Ilene.

Who Owns US Treasury Debt?

h/t Barry Ritholz

The Great Recession in the US Is Worse Than We Were Previously Told

With all the hoo-hah over the deficit fandango, relatively little attention was paid to the latest GDP number and the prior revisions to growth.

The US needs to get serious about jobs creation and median wage growth. Austerity does not facilitate growth, despite the corporatist spin to the contrary.

The problem with the first stimulus package was that it was too heavily weighted to tax cuts and efforts to promote consumption, and not programs to stimulate domestic jobs growth.

Cutting taxes, including capital gains taxes, does not promote growth. Reducing government in and of itself does not promote growth. These are fallacies that continue to hurt the country.

To accomplish its goals, the US must prioritize its spending away from financial and military adventurism, and let go of the false theories of efficient markets and trickle down growth.

That will be difficult given the current structure of the country's leadership and the embedded nature of its crony capitalism.

Consumer Metrics Institute
Lakewood, Colorado
July 29, 2011

BEA Reports 1Q-2011 and "Great Recession" Far Worse Than We Were Previously Told

Included in the BEA's first ("Advance") estimate of second quarter 2011 GDP were significant downward revisions to previously published data, some of it dating back to 2003. Astonishingly, the BEA even substantially cut their annualized GDP growth rate for the quarter that they "finalized" just 35 days ago -- from an already disappointing 1.92% to only 0.36%, lopping over 81% off of the month-old published growth rate before the ink had completely dried on the "final" in their headline number. And as bad as the reduced 0.36% total annualized GDP growth was, the "Real Final Sales of Domestic Product" for the first quarter of 2011 was even lower, at a microscopic 0.04%.

And the revisions to the worst quarters of the "Great Recession" were even more depressing, with 4Q-2008 pushed down an additional 2.12% to an annualized "growth" rate of -8.90%. The first quarter of 2009 was similarly downgraded, dropping another 1.78% to a devilishly low -6.66% "growth" rate. And the cumulative decline from 4Q-2007 "peak" to 2Q-2009 "trough" in real GDP was revised downward nearly 50 basis points to -5.14%, now officially over halfway to the technical definition of a full fledged depression.

One of the consequences of the above revisions to history is that the BEA headline "Advance" estimate of second quarter GDP annualized growth rate (1.29%) is magically some 0.93% higher than the freshly re-minted growth rate for the first quarter. From a headline perspective, that makes for a far better report than the 0.63% drop from the previously published 1Q-2011 number -- since otherwise the new 2Q-2011 numbers would be showing an ongoing weakening of the economy.

Unfortunately, meaningful quarter-to-quarter comparisons are nearly impossible in light of the moving target provided by the revisions. But among the notable items are:

-- Aggregate consumer expenditures for goods was contracting during the second quarter, with annualized demand for durable goods dropping 4.4% during the quarter -- into the ballpark of the numbers we have measured here at the Consumer Metrics Institute. This decline was enough to shave 0.35% off of the overall GDP (with just automotive goods removing 0.65% from the annualized GDP growth rate).

-- The drag on the GDP from governmental cutbacks purportedly moderated by a full percent, improving to a -0.23% drag from a revised -1.23% impact in the first quarter. This reversal may be the result of either the waning effect of expiring stimuli or overly optimistic BEA "place-holders" while more data gets collected. Many state and local public sector employees would be shocked to learn that real-world governmental downsizing has moderated.

-- Net foreign trade added 0.58% to the GDP growth rate after subtracting 0.34% during 1Q-2011 (a 0.92% positive swing) -- all in spite of oil prices reaching recent peaks at the end of April. Anomalies in imports caused by tsunami suppressed trade with Japan may have been the culprit here, since the growth rate in exports (and their contribution to the overall GDP growth) actually dropped quarter-over-quarter. Imports reportedly pulled overall GDP down by only 0.23%, after subtracting 1.35% from the revised figures for the prior quarter.

-- Commercial Fixed Investments contributed 0.69% (over half) of the reported annualized growth, up over 50 basis points from the revised contribution for the first quarter. Inventory building contributed an additional 0.18% to the growth rate, although that number is only about half of the boost provided in the revised 1Q-2011 data. These are the only two really positive signs for the economy contained in the report.

-- Working backwards from the data, the BEA effectively used an aggregate annualized inflation rate of somewhere near 2.39% to "deflate" their top-line total nominal data into the "real" data used for their headline numbers. This was after raising the aggregate deflater effectively used for the first quarter to somewhere near an annualized 2.72% rate -- indicating that the BEA believes that (for the purposes of their headline number) inflation moderated somewhat during the second quarter. They wrote in their July 29 press release that:

"The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.2 percent in the second quarter, compared with an increase of 4.0 percent in the first. Excluding food and energy prices, the price index for gross domestic purchases increased 2.6 percent in the second quarter, compared with an increase of 2.4 percent in the first."

We understand that the aggregate "deflater" has to use numbers appropriate to the individual line items being deflated, including producer price inflation data and foreign exchange inflation rates (although 2.39% might be modest for most of those as well). But if the unadjusted trailing 12 month price changes in CPI-U (3.6%) recorded by the Bureau of Labor Statistics (the official source of U.S. Government inflation data) is used to "deflate" the nominal data, the actual "real" growth rate for the second quarter drops to 0.011% (slightly over 1 basis point), which the BEA would normally round to zero. It is likely that the entire reported growth rate for the second quarter is actually an artifact of under-recognized systemic inflation.

---

The Numbers (as Revised)

As a quick reminder, the classic definition of the GDP can be summarized with the following equation:



GDP = private consumption + gross private investment + government spending + (exports − imports)

or, as it is commonly expressed in algebraic shorthand:


GDP = C + I + G + (X-M)

For the first quarter of 2011 the values for that equation (total dollars, percentage of the total GDP, and contribution to the final percentage growth number) are as follows:

GDP Components Table

	Total GDP	=	C	+	I	+	G	+	(X-M)
Annual $ (trillions)	$15.0	=	$10.7	+	$1.9	+	$3.0	+	$-0.6
% of GDP	100.0%	=	71.0%	+	12.7%	+	20.2%	+	-3.9%
Contribution to GDP Growth %	1.29%	=	0.07%	+	0.87%	+	-0.23%	+	0.58%

The quarter-to-quarter changes in the contributions that various components make to the overall GDP can be best understood from the table below, which breaks out the component contributions in more detail and over time. In the table we have split the "C" component into goods and services, split the "I" component into fixed investment and inventories, separated exports from imports, added a line for the BEA's "Real Finals Sales of Domestic Product" and listed the quarters in columns with the most current to the left (please note that nearly all of the numbers below for earlier quarters are changed from our previous commentary tables):

Quarterly Changes in % Contributions to GDP

	2Q-2011	1Q-2011	4Q-2010	3Q-2010	2Q-2010	1Q-2010	4Q-2009	3Q-2009	2Q-2009	1Q-2009
Total GDP Growth	1.29%	0.36%	2.36%	2.50%	3.79%	3.94%	3.81%	1.69%	-0.69%	-6.66%
Consumer Goods	-0.33%	1.10%	1.87%	1.09%	0.87%	1.45%	0.12%	1.70%	-0.52%	0.05%
Consumer Services	0.40%	0.36%	0.61%	0.75%	1.18%	0.47%	0.21%	-0.04%	-0.76%	-1.07%
Fixed Investment	0.69%	0.15%	0.88%	0.28%	2.12%	0.15%	-0.42%	0.13%	-2.26%	-5.09%
Inventories	0.18%	0.32%	-1.79%	0.86%	0.79%	3.10%	3.93%	0.21%	-0.58%	-2.66%
Government	-0.23%	-1.23%	-0.58%	0.20%	0.77%	-0.26%	-0.18%	0.28%	1.21%	-0.33%
Exports	0.81%	1.01%	0.98%	1.21%	1.19%	0.86%	2.51%	1.49%	-0.02%	-3.82%
Imports	-0.23%	-1.35%	0.39%	-1.89%	-3.13%	-1.83%	-2.36%	-2.08%	2.24%	6.26%
Real Final Sales	1.11%	0.04%	4.15%	1.64%	3.00%	0.84%	-0.12%	1.48%	-0.11%	-4.00%

---

Summary

For the most part the "Advance" GDP report for the second quarter is positive only in comparison to newly re-worked numbers for the first quarter:

-- The good news is that commercial investment appears to be improving and inventories are no longer growing at the previously unsustainable rate.

-- But the bad news is that consumer spending on durable goods fell substantially during the quarter, dropping quarter-over-quarter by 4.4%.

-- Some of the other favorable data, including foreign trade, are likely the result of one-time anomalies (e.g., tsunami suppressed imports).

-- The "deflater" used to translate the nominal data into "real" data continues to suffer from credibility issues, and it may be the entire source of the reported growth.

The Real Problem

The greatest problems in the report, however, were the massive revisions to past history -- including the very recent past. For both the first quarter of 2011 and the worst quarters of the "Great Recession" those revisions were substantial enough to raise questions about the reliability of any of the recently reported BEA data:

-- Data published as recently as 35 days prior had growth rates slashed by over 80%.

-- The worst quarter of the "Great Recession" was revised downward by over 2%, with the annualized "growth" rate now reported to be a horrific -8.9%. And the "peak" to "trough" decline in real GDP for the "Great Recession" is now recognized to be over 5%, halfway to the clinical definition of a full depression.

We have been concerned for some time about the timeliness of the BEA's data, particularly given how much the nature and dynamics of the economy have changed since Wesley Mitchell initially developed the data collection methodologies in 1937. These past revisions, however, lead us to believe that the problems run far deeper -- as demonstrated by a quarter that is now over 2 years old being just now revised downward by an additional 2%. This begs two simple questions:

-- At what point in time can we trust any of the data contained in these reports?

-- How can any of the current data be used to create meaningful Federal monetary or fiscal decisions?

We wonder what Mr. Bernanke thought when told that 80% of his "relatively slow recovery" during the first quarter had just vaporized ...

Gold Daily and Silver Weekly Charts - Enjoy the Show - Reichstag Fire Or Punch and Judy?

Nothing like a crisis to make the masses more pliable for an offer they think they cannot refuse. Never waste a crisis, and if you don't have one, make one.

The Banks and their posse continued to stand on gold and silver today against the market correlations. Fairly typical post option expiration action if you can call anything typical in these times of national madness. The madness of course is to hand over the management of your life savings and your living standards to such corrupt, self-centered nincompoops.

I think we will see a contrived slither out of this budget impasse, early next week, maybe pre-announced Sunday evening, so the can kicked over to a 'blue ribbon council' that can address the nation's business without directly involving the public or their elected representatives. And the Banks and their delegates may make you an offer you cannot refuse, again.  It smells like TARP in here.

"With only 2% of the money in circulation being in gold and silver, John Law reasoned that financial stability could only be restored if the amount of paper, shares and money, was reduced and the value of [precious metal] coins was increased.

Accordingly, over a period of weeks thousands of livre notes and share certificates were publicly burnt. But confidence in paper had been lost. Every smoldering bonfire sapped the credibility of paper, and the press for coins grew more insistent.”

Janet Gleeson

I especially like the above quote by the way, because it shows that John Law's common sense reasoning held that a dramatic decrease in money supply, a 'monetary deflation' if you will, would increase the value of the currency, even when its underlying value, all the things that make it worthwhile in the eyes of the market, continued to deteriorate at a much greater rate than he could burn them.

It's Midnight. Do You Know Where Your Reserve Currency Is?

National Madness
Gilbert Keith Chesterton

"This slow and awful self-hypnotism of error is a process that can occur not only with individuals, but also with whole societies. It is hard to pick out and prove; that is why it is hard to cure. But this mental degeneration may be brought to one test, which I truly believe to be a real test.

A nation is not going mad when it does extravagant things, so long as it does them in an extravagant spirit. But whenever we see things done wildly, but taken tamely, then the State is growing insane...

I should, in other words, think the world a little mad if the [wild] incident, were received in silence. Now things every bit as wild as this are being received in silence every day.... For madness is a passive as well as an active state: it is a paralysis, a refusal of the nerves to respond to the normal stimuli, as well as an unnatural stimulation. There are commonwealths, plainly to be distinguished here and there in history, which pass from prosperity to squalor or from glory to insignificance, or from freedom to slavery, not only in silence, but with serenity.

The face still smiles while the limbs, literally and loathsomely are dropping from the body. These are peoples that have lost the power of astonishment at their own actions. When they give birth to a fantastic fashion or a foolish law, they do not start or stare at the monster they have brought forth. They have grown used to their own unreason; chaos is their cosmos; and the whirlwind is the breath of their nostrils.

These nations are really in danger of going off their heads en masse; of becoming one vast vision of imbecility, with toppling cities and crazy country-sides, all dotted with industrious lunatics.... "

See you Sunday evening.

SP 500 and NDX Futures Daily Charts - A Whiff of TARP in the Air - VIX

There will be no sustained recovery until the banks are restrained, and the financial system is reformed.

VIX spiked and the traders are edgy, but there remains a widespread belief in a cynical resolution.  I have a suspicion that the US is being brought to a crisis so that the bankers, through their political proxies in Washington, may make the people another offer which they cannot refuse.

In other words, there is 'a whiff of TARP in the air.'

I had to chuckle again a bit as the pampered princes and princesses on Bloomberg were puzzled by the weak GDP number this morning in the light of 22 percent rises in corporate profits.

If something looks too good to be true, guess what. But what else would one expect in a system of lax regulation, crony capitalism, massive corporate tax evasion, corrupt regulators and ratings agencies, and widespread accounting fraud?

"That brings us to the final outcome of this debacle. A radical campaign to reshape popular opinion recognized the seductive potential of the appealing phrase "free markets." Powerful business interests, largely captured regulators and officials, and a lapdog media took up this amorphous, malleable idea and made it a Trojan horse for a three-decade-long campaign to tear down the rules that constrained the finance sector. The result has been a massive transfer of wealth, with its centerpiece the greatest theft from the public purse in history.

This campaign has been far too consistent and calculated to brand it with the traditional label "spin". This manipulation of public perception can only be called propaganda. Only when we, the public, are able to call the underlying realities by their proper names—extortion, looting, capture, propaganda—can we begin to root them out."

Yves Smith, Econned

Gold Daily and Silver Weekly Charts - The Collapse of the US Dollar Against Silver

“I have not sold any gold, I have bought more gold. If gold goes down I'll buy more. The price of gold is going to go much, much higher over the next decade.”

Jimmy Rogers

I suspect that the capping on gold and silver will continue into the month end tomorrow, and quite likely into some resolution of the debt ceiling discussions which will probably occur next week. They might not, and that will indeed be interesting. The Mad Hatter and his Merry Pranksters think that a 'little default' might be a good thing to make the country more malleable to their non-negotiable demands.

On a deal, the first impulse will be for stocks to rally sharply and the metals get beaten, in the usual 'risk on' trade. However, depending on the resolution of the debt ceiling, when people think of it after they have had their jollies in the first reaction, they may realize that absolutely nothing has really been fixed. The US financial system will still be corrupt and broken, and the politicians have openly stopped caring about the voting public and their opinions, in their desire to put on the corporate feedbag.

Speaking of broken systems, I am featuring worthless currencies on the sidebar this week. And one I am highlighting below, the famous US Continental Dollar, and a chart showing how it was devalued in comparison to silver, until it was finally withdrawn in 1781. Roughly two zeros were knocked off it.

I was discussing this with a friend and they said, 'Well of course, but these currency failures are the result of unfunded war debts. It is not the same in the US now.'

It's not? The US debt crisis is directly attributable to unpaid war debts, both class war and military conflicts in the famous global war on terror and on the middle class. They'll never learn.

Bon voyage, Bucky.

SP 500 and NDX Futures Daily Charts

The early gains fall apart, as Wall Street grows increasingly 'nervy' over the House Republicans increasinly awkward looking actions on the debt ceiling. They are bending over backwards to impress a minority element in their Party.

No I am not talking about the Tea Party. I am talking about the big money corporatists, who write the politicians' pay checks. The Tea Party are hapless tools and cannon fodder for these folks, but they just don't realize it yet.

You cannot have a recovery until your reform the financial system. The white collar criminal class does not know how to say 'enough.' Their greed is obsessive - compulsive, not rational.

Gold Daily and Silver Weekly Charts - La Douleur du Monde

I had to chuckle a little today as the corporate spokesmodels on Bloomberg were reviewing the day's trade, and noted the slump in gold with the VIX spiking and stocks slumping, as out of character. 'Duh, what's up with that?' was the most insightful comment of the day.

So, we have had round one of the post option expiry 'gut check' which I had suggested would occur. It was a little more intense than the chart might suggest, because ordinarily gold would have been rallying hard up to the 1650 level on a day like today.  But that was not in the cards as dealt from the bottom of the deck.

So what next? I think gold and silver will consolidate and chop around until the deficit discussion is resolved, one way or the other. And I am still in a very defensive position against a correction because we have come far and fast, and the Wall Street wiseguys just do not have the goods to cover their bets, so they have to continue running their bluffs.

La Douleur back-kissed the key trendline it had just broken, so no strong clue there yet. It still is in a position to rally short term and retake the upper end of the trend. A lot of this depends on short term policy decisions in the States.

But in the long run, paper will deteriorate, because it has nowhere else to go. The end game for the eggheads is a worldwide central bank setting fiscal policy and dictating values under the direction of a few senior pigmen. I don't think they will get it, or at least just yet.

SP 500 and NDX Futures Daily Charts - Life in Times of War

"State-sponsored [financial] terrorism is the systematic use of [economic] violence to create a general climate of fear in a population and thereby to bring about particular political objectives. It is employed by governments, or more often by extremist factions within governments, against that government’s citizens, against factions within the government, or against foreign governments or groups.”

Encyclopaedia Britannica

Wall Street was strapping on its dynamite duds today, preparating to bring a little more pressure to bear on the deficit reduction talks. Give us what we want or we will a) crash the economy b) move our jobs to the Cayman Islands c) stop contributing enormous sums to fund political campaigns d) all of the above.

And the major players are in intense meetings with the principals, from both the financial demimonde (ratings agencies) and the political swamps (congressman on payroll), getting briefed on what will actually happen so they can maximize their returns.

Just another day in the 'hood with the hoods.

What you see is not what you get.

Time to Take the Nuclear Option in the Deficit Discussions? Not Very Likely

In all this excitement, no one seems to remember that the President unilaterally refused to play the Bush tax cut card back in June. At least in public. I suspect strongly that the deals are being made behind the scenes, and much of what passes in public is for show, and political diversions.

The tax cuts expire in 2012. They offered an excellent bargaining chip, and one of the key drivers, along with the two unfunded discretionary wars and the out of control financial sector, of the current financial crisis that took the US from surplus to crisis in roughly ten years. If you were going to use that chip, the time to have done it was now, and not in an election year.  And in a budget crisis not using it looks to be highly ideological if not mildly insane.

Obama is either a well-prepared Manchurian candidate for the monied interests, something I am not dismissing, or playing chess on a multi-dimensional board that I still do not quite understand, something which I am also not willing to dismiss completely just yet, but it does not look very likely.  He could also be a haplessly inept idiot at the mercy of his advisors, but I doubt that very much as well. 

Bush was easy to read, as was Clinton, at least after the few two years. Obama is a bit harder, but perhaps that is by intent. Good or ill, I cannot yet tell. He keeps getting the benefit of the doubt, but as I said on his 100th day in the Presidency, that time is over and done.

No matter the motives, actions speak louder than words, and at the end of the day, he is a disaster, a betrayer to his supporters, a decidedly ineffective and uninspiring leader, a faux reformer, and likely to go down in history as one of the great unrealized moments in greatness.  And that is a shame, because it was entirely avoidable.

But for all those smug "I told you so's"  out there, Obama is still probably better than having the Alaskan reality show star a shaky heartbeat away from the presidency, a truly frightening prospect that most people forget. McCain flamed out and sold out before his moment came, and I suspect it was because he had no other choice in a crony corporatist party that rules its members by threat and decree.  Lack of dissent does not always imply a unanimity of thinking.

The door may be open for a viable third party movement in 2012.  I would even welcome a primary challenger from the Democrats, in the manner of Robert Kennedy and Lyndon Johnson.  But where is there any US politicians of that character, that level of leadership?

You may also wish to read The Weirdness of the Ten Year Deficit Reduction Discussion by James Kwak.

The Baseline Scenario
Two Can Play
By James Kwak
26 July 2011

Quick, what was the greatest conservative accomplishment of the George W. Bush presidency? It wasn’t Medicare Part D: that was a clever way to steal a Democratic issue and pass it in a form that was friendly to the pharmaceutical industry. It wasn’t Roberts and Alito: yes, they are young and conservative, but the majority is still only 5-4. It wasn’t Social Security privatization: that didn’t happen. Iraq? Getting political support to invade Iraq was a major coup, but everything went downhill from there.

The answer is obvious: the tax cuts of 2001 and 2003. Together, they were a wish list of conservative tax policy: a reduction in the top marginal income tax rate from 39.1 percent to 35 percent; a reduction in the top rates for capital gains and dividends to 15 percent; much higher contribution limits for tax-preferred retirement accounts (meaning that if you have enough money to save, you can shield more of it from taxes); and eventual elimination of the estate tax. In total, when fully phased in, the Bush-era tax cuts sliced almost 3 percent of GDP out of federal government revenues.*

And most of that money stayed in the pockets of the wealthy. According to the Tax Policy Center, 65 percent of the dollar value of the tax cuts (in 2010, once the 2001 and 2003 tax cuts were phased in) went to the top income quintile, and a staggering 20 percent — that’s tens of billions of dollars — went to the top 0.1 percent. Even if you look at the impact in percentage terms, the rich still took home more than their share: after-tax income went up by 0.7 percent for the bottom quintile, 2.5-2.6 percent for the middle three quintiles, 4.0 percent for the top quintile, and 8.2 percent for the top 0.1 percent.

Everyone knows all that already. Who cares? The point today is that President Obama can make this epic conservative victory vanish by snapping his fingers. He can say, “I promise to veto any bill that extends any of the tax cuts.” (Or, if he prefers, he can say, “I promise to veto any bill that extends any of the tax cuts, except the income tax rate reductions for the ‘middle class.’”)

Why would he do such a thing? Think about where the debt ceiling negotiations are today. The House Republicans are effectively holding the financial system and the economy hostage, demanding a massive, spending-cuts-only deficit reduction package. What makes this a smart move (where “smart” is defined solely in terms of likelihood of winning, not the risk being taken) is that if they can force Obama to choose between (a) raising the debt ceiling on their terms and (b) not raising it at all, he is going to choose (a). Even if he would be better off politically letting the government default and blaming it on the Republicans, no one thinks he would actually let it happen.**

Well, Obama has a hostage, too, if he wants to use it: the Bush tax cuts. From the Republicans’ position, just thinking about themselves and what they want (not about the country as a whole), are a few trillion in spending cuts over ten years — averaging something like 1.5 percent of GDP — worth giving up the greatest accomplishment of the entire conservative revolution?

Now, I’m not enough of a political strategist to know exactly how this would play out. For Obama to use the threat, he has to be willing to go through with it. That means mutual assured destruction: the Republicans insist on $3 trillion in spending cuts as the price to pay for raising the debt ceiling; Obama agrees in order to prevent default; and then Obama lets $3-4 trillion in tax cuts expire. Politically, it means being willing to argue in 2012 that letting the tax cuts expire was the right thing for the country. But that’s not an impossible case. Back in 2001, every aspect of the tax cuts was unpopular, other than the fact that they were tax cuts. (See Hacker and Pierson, Off Center, pp. 50-51.) Alternatively, Obama could propose a bill that extends just the “middle class” tax cuts on a take-it-or-leave-it basis.

As I said, I can’t tell you what the political percentages are. But it seems to me there has to be some leverage here that Obama can use — if he wants to.

* In the January 2007 Budget and Economic Outlook, the total 2017 cost of extending all the tax cuts, in addition to but not including patching the AMT, was projected to be $616 billion (Table 1-5), or 2.9 percent of GDP. I chose the 2007 projection because (a) it goes out to 2017, which is when some tax cuts were scheduled to expire and (b) it is before 2008, when the tax cuts to stimulate the economy began.

** What makes it a somewhat less smart move is that, with the Senate in the hands of the Democrats, the Republicans have no clear way of forcing Obama to sign or veto their deficit reduction bill. If the two houses can’t agree on a plan, Obama can avoid having to make the choice (and the end of the world will be Congress’s fault).



Obama Gives in to GOP on Bush Tax Cuts, and More
By Thomas Hartmann
Tuesday 28 June 2011

Yesterday – Senator Bernie Sander wrote a letter to President Obama telling him not to give in to Republican demands in the debt limit negotiations – and to fight for “shared sacrifice” by taxing millionaires and billionaires along with any new spending cuts. Unfortunately – the President didn’t get the message and the White House stated yesterday that the President is taking repealing the Bush tax cuts for millionaires and billionaires off the table. Which leaves mostly spending cuts targeting working families still on the table. Looks like America's oligarchs - and the Republican Party they own - win again."

The corporatist strategy has been to give generous tax cuts to the wealthy, spend money like drunken sailors on things that benefit the monied interests, and then declare a budget crisis and take the difference out of the hides of the middle class, the weak, and the elderly. So far Obama is following the same playbook, with a little dusting of compassionate sounding hoo-hah.

SP 500 Intraday - a Brief Apologia of Sorts

Stock futures fell to the familiar key support around 1307. The same principles on this chart still apply. 1295 is very important and below 1290 is an area very near to the edge of the cliff.

I am sitting largely in cash now this morning for the short term. I wanted to distance myself from the market, and provide an opportunity to think more about the current situation. Taking profits seemed like the right thing to do.

If you give people blanks, they sometimes fill them in as they will. And so I was reflecting on some email exchanges of the past several weeks. I do not have a comments section here, because I do not have the time or energy to moderate it. I did that once for a friend and it put me off it forever. But I do have an active email and take comments on it all day long. I moderate the frivolous and ugly with a spam filter lately and it seems to be working well.

Why do I put forward these thoughts? Why don't I charge for it, or take ads? Why don't I do interviews and speak at rallies, and direct a group of followers to promote messages in comments and 'pile on' to those who do not agree with us?

As I recently answered to a fellow blogger, because I do not need the money. So why bind myself to some agenda, even if a little, by taking it? I give out of the excess and abundance given to me. Yes, there are definite sacrifices and self-limitations, and they extend to family. And that is sometimes a cause for unease. But the necessities are covered.

Why do I witness to my beliefs, and alienate some worldly and influential people, and even believers with different viewpoints and prejudices, and incur the consequences of diminished opportunity? It limits the acceptability of my message in many sites and areas. You might be surprised, but it does. And it hurts. And the ability to see the ugliness for which people can be capable is discouraging. But then there are the consolations that seem to come, as they are most needed, from the most unexpected sources, the kind word, the occasional graciousness of the spirit.

This is not some incidental thing, it is what I am, it defines me. I am not my own, to do as I will. I owe a triple allegiance to the truth and what is most human, the very pinnacle of existence, by creation, by redemption, and by continuation. If I do not do good when there is a price to be paid that is in reality very slight as these things go, how could I expect to pay the price when the stakes are high?

What is it that I want? I don't want anything. This is why I shun the spotlight. I want neither money nor followers, nor recognition or fame. I want to be a simple, honorable man. Husband and father. And that is work enough for anyone.

What makes me think I can know the Truth? Why do I sound so much like a leftist lately? By the way, I find that particularly ironic, since I am a life long pragmatic conservative in the tradition of Edmund Burke, with a tinge of the libertarian.  It just shows how far things have shifted from center.

I have a scientific mind, so I do not proceed from the assumption that I know the truth in this world, as truth is a never ending journey, a way of life that one never reaches until the very end of this world. So I start at the bottom and slowly, carefully, work up from there, taking things where they lead me, constantly reviewing the landscape, continuously learning, pursuing an ever-retreating horizon, with the occasional view from the peaks.

If I have any fear, if there is any recurrent theme in my energy and my prayer, it is not to mislead people and myself, even unintentionally. I not only do not seek to promote a point of view with the misuse of facts, I beat my own conclusions bloody, almost every day, looking for any weakness and misapprehension, constantly absorbing new data and ideas. I expose myself to a wide variety of thoughts and opinions, almost to exhaustion.

Forecasting the future here is exceptionally difficult because there are so many exogenous, and yet outcome critical, variables. There are powerful forces promoting certain ends for their own benefit, but there are other forces working against them. It is a conflict, and the fronts are not always easily seen through the fog of war.

And so even at best, I know I am not and cannot always be right, so it is never an easy place to be thinking, wrestling with the uncertain and taking its measure, much less acting upon it. But this is where I am, and must be. Going forward, one step at a time, in fear and trembling at my own weakness and insufficiency.

When my site was improbably recognized as among the ten most influential by some very kind people, links to pieces on my site dropped off a cliff. Those in the blogosphere probably figured that since I was already 'successful' that there was no need to encourage it, since I was no longer a colleague, but the competition. There is only one competition that counts in these times, and that is to stand for goodness and justice in a terrible class and currency war.

And I also continued to strike out on a line of thinking that people in the financial world and the fortunate may not favor. And so it is not popular. If you want to be popular, tell people what they wish to hear, not what they may need to hear. And the greater a person becomes in the favor of the world, the less tolerant they are of contradiction. Good fortune and wealth can be a terrible trap, the most ponderous of burdens, because we are so unwilling to let go of them, even a little, as they drag us down into the abyss.

And so the temptation to change my approach, to post hysterical (and not just hysterically funny) headlines and pieces that are misleading, to fan the flames of passion and prejudice become high. I can understand that. Isolation is no picnic, and the crowd has its allure. Everyone desires to be liked. I am human.

And it is because I seek to be truly human that I cannot be otherwise. People seem to have lost their sense, their voice, of humanity. How can I remain silent, when good and innocent people become prey? Who am I to do this, why me?

I do not seek this. At times I wish to run away, to hide in my library or the kitchen, rather than be taken where I do not wish to go. I came to the study of money for a blessing, but I have found a work. And I cannot leave it, because this is where I am meant to be. And so I am here.

Rosenberg's Seven Point Plan for Recession Investing

Here is something that may be of interest from David Rosenberg of Gluskin Sheff as reported by CNBC.

I lean on this a bit, unwilling and unable as I am to give investment advice on the particulars. And like most general advice, it is certainly not tailored to one's particulars, which is all important.

I should add that this is targeted to a recession. And if you believe we are in for a recession, this may work.  If we experience a more singular, unusual event, something other than recession, with features of a currency collapse, some portions of this portfolio will perform very badly.

Bonds and bond funds in particular tend to get decimated in times of rising interest rates and/or high inflation. Income is of little use unless the principal is protected.

And yet it is also good to remember that Japan lost its AAA rating in 2002, and its bonds continued on as rates fell. Is the US going to go the way of Japan? There are some very important differences, and after all, it is largely a policy choice. Choose deflation and austerity but without the safety nets for the people, and within ten years your house will burn.

It should be pointed out that finding legitimate investments in some of these general categories is no simple trick.

Personally I still like gold, and to a lesser extent silver, for a relatively safe portfolio of my own. At some point mining stocks with low debt and high dividends may be among the best investments. But I also like portfolio theory in its diversification feature. Never bet the ranch on any one thing unless you are uniquely positioned in terms of knowledge.

A more general theme that is not mentioned, but might be implied, is self-sufficiency, to the extent that such a thing is possible in our interconnected world. No man is an island, or can they be.

1) Focusing on yield, particularly on “high-quality corporates” though he allows for the inclusion of what others might call “junk” bonds from companies with “A-type” balance sheets and “BB-like yields.”

2) Stocks that provide reliable dividends including preferred shares.

3) Whether in stocks or bonds, focusing on companies that have low debt-to-equity ratios, high liquid asset ratios and good balance sheets without heavy debt.

4) Hard assets such as oil and gas royalties and real estate investment trusts, with a focus on income stream.

5) Sectors or companies that have “low fixed costs, high variable costs, high barriers to entry/some sort of oligopolistic features, a relatively high level of demand inelasticity” including utilities, consumer staples and health care.

6) Alternative assets that are “not reliant on rising equity markets and where volatility can be used to its advantage.”

7) Precious metals. Specifically, he says gold as compared to mining output, the Fed’s balance sheet and money supply all indicate that it is far from a bubble, and in fact could rise to $3,000 before it becomes overvalued.

Peter Warburton's financial disaster investment portfolio.

The search is on for the perfect hedge

What would be the ideal characteristics of such a numéraire? First, it would be in fixed physical supply. Second, it would be resistant to weather-related influences. Third, its ownership would be diffuse, rendering futile any attempt to restrict supply through a non-competitive structure. Fourth, it must be freely tradable. Fifth, there would be no futures or options markets attached to it.

Finally, I list some of the candidates, in no particular order. Each seems promising, yet none of them seems to me to satisfy fully all five of the requirements above.

Arable land with a dependable climate

Oil-refining capacity

Electricity generating capacity

Water-treatment capacity

Drinking water, bottled or piped

Coastal access, harbours and ports

Palladium/platinum/diamonds

Real estate in long-standing, distinctive locations

Antiques, fine art, stamps and coins

Commodities without futures and options markets

Could these be the winning investments of the early years of the 21st century?

I should add that I think that "Antiques, fine art, stamps and [collectible] coins" are rather awful investments in most times of distress. They do perform well in times of rising inflation without systemic disruption, but can be remarkably illiquid, and are probably the domain for the specialist collector for whom investment is a secondary concern.

For the most part collectibles are not suitable for 95+ percent of the people. Like most investments that can offer some examples with spectacular gains, the risks are commensurately high and heavily weighted to non-insiders. Bullion makes much more sense than collectible coins for a disaster hedge.

If one reads Adam Fergusson's book, When Money Dies, you can see that in the Weimar experience, people traded their antique furniture for turnips. I like liquidity, portability, and wide acceptance. Gold and silver may become the ultimate hedge if their ownership becomes more widespread and therefore more freely traded hand to hand, and they do not become official money standards, with prices and ownership terms set firmly by government.