Bernanke delivers blunt warning on U.S. debt

With uncharacteristic bluntness, Federal Reserve Chairman Ben S. Bernanke warned Congress on Wednesday that the United States could soon face a debt crisis like the one in Greece, and declared that the central bank will not help legislators by printing money to pay for the ballooning federal debt.

The growing speculation is that Federal Reserve has been participating in the bond auctions through anonymous, direct bidding. The Fed's reputation for opaqueness, coined as Greenspeak, will do little to alter this speculation despite the blunt talk.

Source: washingtontimes.com

Reading the equity tape

The money flow setups in the dollar index, S&P 500, gold and silver continue to suggest another wave of devaluation is coming. This implies a lower dollar, higher gold and silver, and likely higher stock prices as illustrated by the Weimar Republic.

COT Money Flow Table:


Nevertheless, the equity tape has showing signs of weakness since the October breakout. The following chart illustrates this point.

SP 500 ETF (SPY)


The October breakout has been twice tested on significant increases in volume. Increases in volume at critical support suggests increasing downside force. This condition often implies a future retest of this zone. The most recent test in February came on nearly 500 million shares. This was a significant jump in volume from the breakout gap and first retest in October.

Also the February breakdown gap (yellow) was closed on a big contraction of volume. This implies a false breakout. The decreasing force as price finds overhead gap resistance (white) only reinforces it.

In general, the equity tape has shown greater force on the downside than upside. A classic illustration of a weak upside tape.

Buffett Says Housing Woes to Ease Next Year, Barring Explosions

“Within a year or so, residential housing problems should largely be behind us,” Buffett wrote yesterday in his annual letter to the shareholders of his Berkshire Hathaway Inc. “Prices will remain far below ‘bubble’ levels, of course, but for every seller or lender hurt by this there will be a buyer who benefits.”

Buffett, highly leveraged to the housing market, is careful with his words. His words, like many of the market masters, reflect an understanding of the cycles in place. It's what he doesn't say and very well knows that I consider important. The end of the housing "woes" on paper, despite citation of supply and demand - economic factors, will come largely from currency devaluation. The down trend in the "real" or gold adjusted home sale price since 2001 reflects this dynamic. In other words, what is left unsaid is that gold, relative to housing will continue to outperform until at least 1:1 ratio is achieved. For example, if the median home sale price in 2012 falls between $225,000-$250,000, a price range that would be considered as easing of the woes from $203,000 in 2010, implies a gold price of $2,500-$2,700.

U.S. Median Home Price (MHP) to Gold:


Since this cycle was far more severe in terms of credit deterioration and home ownership penetration, I would not be surprised to see it extended in terms of time and price.

Source: bloomberg.com

Ipso facto - US long bond review

Treasuries advanced for the first time in three weeks as weaker-than-forecast economic reports and the threat of credit-rating downgrades for Greece spurred demand for the safety of U.S. government debt.

Ipso facto directly translated as "by the fact itself," which means that a certain effect is a direct consequence of the action in question. For example, rising treasury prices (effect) is a direct consequence of the actions of weak economic data - unexpected tumbles in home sales and consumer confidence (action). This is how many investors view the world. A world that ecnourages many to chase their investment tails.

The reality is that the bond market was setup in advance of the realization that the actions of "unexpected this or unexpected that" caused the effects of higher bond prices. This is the basis of spin or MOPE.

US TBd (20 Years +) and the Commercial Traders COT Futures and Options Stochastic Weighted Average of Net Long As A % of Open Interest:


Source: bloomberg.com

Fannie Taps Treasury for $15.3 Billion More After a 10th Loss

Fannie Mae will seek $15.3 billion in U.S. aid, bringing the total owed under a government lifeline to $76.2 billion, after its 10th consecutive quarterly loss.

Remember that any time you read that an end of the stimulus is near.

Sourec: bloomberg.com

Wall Street set for slightly higher open after GDP data

"The GDP numbers are not different enough to change the view on the fourth quarter," said Subodh Kumar, an investment strategist based in Toronto. "Now the market is wondering how steady the growth will be after the bounce back."

Very little change from the first report. The US economy remains extremely dependent on consumption for growth. Please review the GDP breakdown (advanced report) for an illustration of unbalanced nature of economic growth. How long can consumption support the economy in the face of mounting job losses and restricted access to credit? Despite opinions to the contrary, the government's capacity to absorb the decline in personal consumption is not infinite.

Source: reuters.com

AIG posts $8.9 billion loss

AIG, in a regulatory filing, warned that it may need additional U.S. government support, as it did last fall. But it also said it will have adequate liquidity to "finance and operate AIG's businesses and continue as a going concern for at least the next twelve months."

- May need additional U.S. government support. AIG continues to illustrate why it will be difficult to turn off the printing press.

Source: reuters.com

European Economy Risks Decoupling From Global Growth Recovery

Europe’s economy may be coming unstuck from the global recovery as governments to the south of the region struggle to reverse budget deficits and consumers in the north pull back spending.

If that was the case, the US recovery would be coming unstuck from the global recovery as well. Today’s massive budget deficit, in excess of -10% of GDP, is only exceeded by the deficits produced after the United States entrance into World War II. File this news under tactical release to support the Euro assault.

Source: bloomberg.com

China To Purchase Half of IMF's Gold

Wait, the world gold council said two days ago, let me get the quote directly,

China, the world’s biggest gold producer, isn’t a “realistic candidate” to buy bullion from the International Monetary Fund, the World Gold Council said.

Pravada, russian source, reports the following:

China has confirmed the intention to purchase 191.3 tons of gold from the International Monetary Fund at an open auction, Finmarket news agency said.

Source: english.pravda.ru

7-Year Auction Results

Boring, repetitive, but very often the devil is in the details. Bid to cover looks good, but maybe that's was the problem. The bid to cover ratio has improved as direct bidder participation rates have increased. Coincidence?, wink-wink, - maybe.



Source: treasurydirect.gov

Information vs Entertainment

As I read today's newswires, I cannot help think of the quote from Gladiator (2000). After Maximus quickly dispatches another gladiator, he turns to the crowd...

Are you not entertained? Are you not entertained? Is this not why you are here? Crowd: Spaniard, Spaniard, Spaniard...

Real information, depending on your perspective - the truth, is rarely served on a silver platter. Headline grabbers such as "The Dollar is a safe haven", "Gold is a risky asset", "Depressions are always deflationary", "Stocks are historically cheap." It's only entertaining if you understand enough to put the pieces together yourself. Propaganda, economic spin, or MOPE is effective because most cannot.

Gold Drops to Two-Week Low in New York as Dollar Saps Demand

“Investor money looking for safe assets should be the factor” driving gold lower, said Tetsuya Yoshii, vice president for derivative products with Mizuho Corporate Bank Ltd. in Tokyo.

I always try to be respectful, but this commentary, disinformation really, only fuels the fear of holding gold. If the US dollar is truly safe haven asset, the price of gold in US dollars (any fiat currency) would have been declining since the start of the third great depression in 2000. Clearly, this is not the case.

As the top layers of debt implode, the financial system falls towards the point of gold - the true safe haven.

Inverted Financial Pyramid:


Source: bloomberg.com

Jobless Claims in U.S. Increased 22,000 Last Week to 496,000

The number of Americans filing first-time claims for unemployment insurance unexpectedly increased last week, a sign that the economic recovery will be uneven as the labor market struggles to rebound.

Ignore the noise and focus on the underlying trend and cycles.

Average Weekly Initial Claims State Unemployment (AWIC) And YOY Change:


Source: bloomberg.com

How long can the U.S. dollar defy gravity?

Very good read.

Source: reuters.com

Rising Rates, Dollar and Gold

As long bond rates have risen, many have called for the end of the bull market in gold and commodities. The logic is that rising rates will support the dollar. A stronger dollar will, in turn, end the gold and commodity bull. The link below provides a classic example of that discussion. I can only caution you to be wary of easy, spoon-feed conclusions. This is an old discussion and tactic. Demand for dollars is not entire a function of interest rates and interest rate spreads.

Rising long bonds yields and rising gold are not mutually exclusive. The 60's and 70's clearly show how rising gold prices (falling dollar) and rising yields can coexist. Any claims or analysis that suggests rising yields will or must support a stronger dollar and weaker gold has ignored the lessons from history.

30-Year and Gold:


30-Year and CRBSPOT:


Source: cnbc.com

Concerns grow over China's sale of US bonds

It's hard to know exactly what China, or any central bank, is doing. They speak of transparency, but tend to become opaque over important issues such as data, money flows, and transactions. If China was a marginal seller, they are certainly shrewd enough to keep their intentions secret. Tipping one's hand only serves to damage the value of what's left on the balance sheet.

Still, the increased speculation and chatter about the TIC flows cannot be completely dismissed. As rumors of Chinese selling spread, the percentage of competitive bids from direct bidders (anonymous bidders) during treasury auctions has moved higher across the yield curve since onset of the crisis.

Since very few coincidences exist in the financial markets, these observation lead many to conclude that "where there is smoke, there's bound to be fire."

A front-page story in the state’s China Information News said the record $34bn sale of US bonds in December was a "commendable" move. The article was republished by the National Bureau of Statistics, giving it a stronger imprimatur.

Source: telegraph.co.uk

Freddie Mac losses mount, warns of foreclosures

Freddie Mac, which has lost a total of almost $80 billion since the housing crisis started in 2007, is bracing for more pain. The McLean, Va.-based company said a record 4 percent of its borrowers are at least three months behind on their payments and facing foreclosure.

Source: finance.yahoo.com

5 Year Auction Results

The percentage of competitive tenders coming from direct bidders continues to rise not only in the 5-year but also across the yield curve. This only raise the question of who and why now? It would be naive to think that credit problems are limited to Greece and the EU.



Source: treasurydirect.gov

New home sales hit record low in January

The Commerce Department reported Wednesday that new home sales dropped 11.2 percent last month to a seasonally adjusted annual sales pace of 309,000 units, the lowest level on records going back nearly a half century. The big drop was a surprise to economists who had expected sales would rise about 5 percent over December's pace.

The housing market remains weak. The break down of the power up trend line in lumber after the bearish setup is not encouraging.

Lumber Futures Continuous Contract and the Commercial Traders COT Futures and Options Stochastic Weighted Average of Net Long As A % of Open Interest:


Source: finance.yahoo.com

US Long Bonds

The dark glove's increased long positions, marked on double inverse TBT chart below, hits the price rally like brick wall. This is standard operating procedure (SOP) for many of today's markets. Despite this setback, 1/12 overhead gap was filled on increasing volume. This is a sign that the upside force is increasing and suggests that the overhead resistance will be counter-attacked once the selling ebbs.

As long as upside energy continues to increase, the dark glove has two options in the bond market. Either lay down more paper to protect critical support (neckline of large head and shoulders formation), increase the number of cannons on the battlefield, or execute a defensive retreat to fight at a lower price.

These options sounds quite familiar to those that follow the money flows in the gold market. As it should. The bond, dollar, gold markets are intertwined.

US Long Bonds Double Inverse ETF (TBT)

NYSE Composite

About this time last week I suggested that the upside force of the tape was weakening. Today, the up trend line broke. What cannot go up with force will reverse and attempt to go down with force. The 2/16 gap is pulling hard. A sharp increase or decrease in volume during test of support will be bearish or bullish, respectively.

The retest of the 10/28 low on 2/05 occurred on shrinking volume. This suggests decreasing downside force. If the 10/28 and 2/05 swing low is tested again on decreasing volume, it will generate another bullish setup that should coincide with another slide in the dollar and rise in gold.

It's basically a watch and wait now.

NYSE Composite ETF and NYSE Volume:

Greenspan: U.S. recovery "extremely unbalanced"

Small businesses and the jobless are still suffering from the aftermath of a credit crunch that was "by far the greatest financial crisis, globally, ever" -- including the 1930s Great Depression, said Greenspan in an address to a Credit Union National Association conference.

Greenspan, the great money printer, is no fool. He's fully aware of the magnitude of this crisis. This financial crisis, the greatest of our history, will be labelled as America's Great great depression in time.

In the movie Crimson Tide, 1995 Capt. Ramsey said about Lipizzaner stallions -

Some of the things they do, uh, defy belief. Their training program is simplicity itself. You just stick a cattle prod up their ass and you can get a horse to deal cards. Simple matter of voltage.

Infinite quantitative easing (QE) is the voltage, and fiat money is the Lipizzaner stallions. It is expected the public watch, but not necessarily understand, the show.

Source: finance.yahoo.com

Stocks retreat after disappointing consumer report

The stock market pulled back Tuesday after a surprising drop in consumer confidence reminded investors of the fragility of the economic recovery.

The Dow Jones industrials were off about 70 points. Interest rates also fell as investors moved money out of stocks and into the safety of Treasurys.

This could have been rewritten as stocks stocks tank, again, during treasury auction week. Coincidence? Beat the grass to startle the snakes.

We need to save more, but doing so causes current consumption to drop. Any drop in consumption is a big deal when it accounts for more than 70% of GDP. Maybe we can save and consume more simultaneously, thereby, proving that pesky little economic axiom -"there is no such thing as a free lunch" wrong.

Source: finance.yahoo.com

China Isn’t a ‘Realistic Candidate’ for IMF Gold, Council Says

Classic stuff.

China, the world’s biggest gold producer, isn’t a “realistic candidate” to buy bullion from the International Monetary Fund, the World Gold Council said.

“There has been some ill-informed comment that this move tarnished the notion that governments are adding to reserves,” Milling-Stanley said. “There are a lot of central banks out there that are buying local production in local currency. The IMF would have no interest in that local currency. The IMF is looking for dollars.”

(1) Either gold cannot pass from west to east,
(2) Gold is either not available or available in a form China wants, i.e. paper rather than bullion.
(3) The gold counsil is a mouthpiece for the bullion banks.

Source: businessweek.com

States had to borrow $31B for jobless pay

South Carolina and other cash-strapped states borrowed a total of about $31 billion from the federal government over the last two years to provide their unemployed workers with benefit checks, and now as the country climbs out of recession the states must find a way to pay it back.

"First, even discussing this possibility of federal debt forgiveness is yet another indication of the severity of the problem we've talked about for a year and a half now -- a mismanaged agency in the ESC that lacks real accountability, that has run up a near billion-dollar deficit in the Unemployment Trust Fund," Fox said.

States, like Greece, are in trouble. Unlike Greece, that states have access to the printing press. Whether they can pay them back is questionable. As the article states towards the bottom, "there's no free money, not in government." There is no free money anywhere. If the perception that free money exists through debt forgiveness or other government programs, the market will take notice and exploit confidence. This means the dark pools of money will attack for profit, as they are doing in Europe right now.

Source: postandcourier.com

Wall St. Helped to Mask Debt Fueling Europe’s Crisis

As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.

Source: nytimes.com

Treasurys mixed amid record debt sale

What's moving the market: The government is offering $8 billion worth of Treasury Inflation Protected Securities, or TIPS, Monday. On Tuesday, the U.S. is scheduled to auction $44 billion in 2-year notes. It will offer $42.0 billion of 5-year notes on Wednesday and $32 billion in 7-year notes on Thursday.

Every time we turn around there's another round of government offerings.

Source: finance.yahoo.com

Financial stocks underperform

The United States primary export is debt and paper. The financials remain the primary conduit of that export. If the economic recovery is robust enough to withdrawal stimulus, why are the financial stocks lagging so badly during the equity rally?

Financials to S&P 500 Ratio:


Financials to Gold Ratio:


The big contraction of volume through gap resistance represents another nonconfirmation of price. The significant under performance of financials suggests that market views the stimulus withdrawal plan as more talk than action.

ishares Financials ETF (IYF):

BusinessU.S. Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion

Embedded within the humor are elements of the truth only found at the Onion.

As news of the nation's collectively held delusion spread, the economy ground to a halt, with dumbfounded citizens everywhere walking out on their jobs as they contemplated the little green drawings of buildings and dead white men they once used to measure their adequacy and importance as human beings.

The realization that money is nothing more than an elaborate head game seems to have penetrated the entire country: In Wilmington, DE, for instance, a collection agent reportedly broke down in joyful sobs when he informed a woman on the other end of the phone that he had absolutely no reason to harass her anymore, as her Discover Card debt was no longer comprehensible.

Good stuff.

Source: theonion.com

Decaying Apartments Result Of Housing Crisis

As landlords find themselves owing more than their properties are worth, some have simply walked away, leaving garbage to pile up. Others have disappeared into bankruptcy, with unpaid utility bills. Some have tried to reduce their losses by neglecting basic maintenance.

"Where am I going to go? Stay in the river?" Davis said, gesturing toward the waterway outside the building. "I don't have money ... I pay rent before I buy food because I know I've got to have a place to stay."

In order to maintain the status quo you must learn to placate the mob. This lesson from history was not missed by the Roman emperors.

Not only did the size of the games increase with time, their frequency did as well. During the Republic they were only held around the time of the winter solstice, for ten to twelve days each year, correlated to the Saturnalia. Augustus then permitted them also around the summer solstice, and later emperors held them whenever they wanted or needed to placate the mob.

Withdrawing stimulus when the people cannot afford a (safe) place to live or eat will only organize the fury of mob. The newswires, the "media", is often nothing more than a conduit for perception management.

Source: kctv5.com
Source: everything2.com

Yen Falls Against Euro as Stock Gains Damp Demand for Refuge

The yen fell against the euro as rising stocks damped demand for the refuge of the Japanese currency.

Newswire reports often imply zigging when one should have been zagging. The contraction of volume during the break of the gap implies a false breakdown that should be reversed in time.

Yen ETF (FXY):


The uptick in net longs from commercial traders as price declines points to another bullish setup in the Yen. The bullish setup could come as early as this week.

Yen and the Commercial Traders COT Futures and Options Stochastic Weighted Average of Net Long As A % of Open Interest:


Source: bloomberg.com

Federal Budget: A study of history

As a student of history, I will say that those exposed and leveraged to the U.S. dollar, most of the public, it is and will continue to be far rougher than officially advertised. It's difficult to appreciate what "rougher" means without a historical reference, so let me give you a glimpse.

Real, gold adjusted or constant currency federal revenues and outlays continue to shrink and expand, respectively.

Real Federal Revenues:


Real Federal Outlays:


This dynamic is punching a hole in the federal budget, "the formula", the size of which has not been seen since America's entrance into World War II during the second great depression.

US Federal Budget (Surplus or Deficit As A % of GDP, 12 Month Moving Average) and Gold London P.M. Fixed:


Except today nowhere close to the debt liquidation of 1941 or the individual savings rate necessary to provide the foundation for the next great economic expansion.

Devaluation remains the only option.

Source: fms.treas.gov

U.S. Dollar COT Diffusion Index

The U.S. Dollar's Diffusion Index (DI), like Gold's DI, suggests we are very close to a turn in the dollar.

Setup, talk up, then take it down (or up).

Patience will be rewarded.

U.S. Dollar Index and the Commercial Traders COT Futures and Options U.S. Dollar Diffusion Index (DI):

Setup, Talk up, and Take Down

If I had to write a novel about the recent dollar rally I would suggest the following outline:

1. The Dark Side receives information of an impending increase in the Discount Rate.
2. The MOPE for year-end is the economic recovery
3. Since the Dark Side put on the Greek OTC derivative swap they have this proprietary knowledge.
4. The Dark Side turns on the Greeks in the media commentary.
5. The easily painted CDS OTC derivative market screams Greek debt failure.
6. The Dark Side downgrades Greek debt.
7. A sharp rally occurs in the euro that shocks the Dark Side as the euro climbs more than 100 points on an assumption Greece will be bailed out, which they will be.
8. The Dark Side having seen that euro rally bails out of their short euro position on the event of the Discount Rate being raised to 0.75%.
9. The Dark Side pockets 2.3 billion profit on their 9.9 billion dollar outrageously leveraged short euro position.

Jim describes a classic example of setup, talk up, and take down. Well done.

Euro and the Commercial Traders COT Futures Options Stochastic Weighted Average of Net Long As A % of Open Interest:


Source: jsmineset.com

U.S. Long Bonds and the Dark Glove

In economics, the invisible hand, also known as the invisible hand of the market, the term economists use to describe the self-regulating nature of the marketplace,[1] is a metaphor first coined by the economist Adam Smith in The Theory of Moral Sentiments. For Smith, the invisible hand was created by the conjunction of the forces of self-interest, competition, and supply and demand, which he noted as being capable of allocating resources in society.[2] This is the founding justification for the laissez-faire economic philosophy.[3]

As supply and demand, competition and self-interests are trumped by the brute force of paper backed by the printing press, the invisible hand has become quite visible in many markets. There is not better example of this than the US long bond futures and options market. Today's "invisible hand," more like dark glove, is visibly pushing back to maintain support despite the deteriorating fundamentals (rising prices and declining economic activity).

Are you interested in the real statistics and the real story? Here they are. There are nowhere else. I am totally serious.

Commentary No. 280: January CPI, PPI, Housing Starts, Production

- Annual Inflation 2.6% (CPI-U), 3.3% (CPI-W), 9.8% (SGS)
- Quarterly Inflation Shifted from Fourth- to Second-Quarter 2009
- Economy Keeps Bottom-Bouncing as Intensified Contraction Nears

"No. 280: January CPI, PPI, Housing Starts, Production "

THE DARK GLOVE:
US TBd (20 Years +) and the Commercial Traders COT Futures and Options Stochastic Weighted Average of Net Long As A % of Open Interest


Source: en.wikipedia.org
Source: jsmineset.com
Source: shadowstats.com

Mailbox

Dear Eric,

How are you? Just wanted to share the following with you regarding gold; i am amazed at the current strength, given the strong $, IMF sale announcement and yesterday 's Fed rate increase. A few years ago, gold would have collapsed 10% on such events.

It looks like Europeans are getting worried about the possibility (very unlikely to me) of a breakup.

Have a nice weekend,

Constantin

Good. Thanks for asking.

This is the net result of gold's ascendency to a dominant global currency. While gold still gets pushed around by fiat, it has the ability to push back with force. This is characteristic of phase two of the great bull market.

The Fed decision is nothing more than a cosmetic, this-will-be-bullish bump for the U.S. dollar. Market rates, specifically the spreads, and gold are still saying to the Fed that they are way too loose.

Devaluation, the revaluation of the gold across the global, is the tool. When Europeans as well as Americans eventually realize it, the focus will shift way from preservation of the Union (either EU or US) to individual net worth.

Regards,

Eric

US bank lending falls at fastest rate in history

Mr Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. "The shrinking in banking sector balance sheets renders any talk of an exit strategy premature," he said.

"It is absurdly premature to think of withdrawing stimulus while bank credit is still sliding. To have allowed this monetary collapse to occur a full 18 months after the financial cataclysm is extreme incompetence. They seem to have forgotten that the lesson of the 1930s was the falling quantity of money," he said.

Do not fall victim of the perception hype. Follow the money! I have been saying this for some time, as long as bank credit continues to contract, now at an alarming rate almost across the spectrum of credit, there will be no exit strategy.

Table Breakdown of Total Bank Credit:


Figure Breakdown of Total Bank Credit:

Source: telegraph.co.uk

South Carolina Lawmaker Seeks to Ban Federal Currency

South Carolina Rep. Mike Pitts has introduced legislation that would mandate that gold and silver coins replace federal currency as legal tender in his state.

While the public tends to struggle with the concept monetary inflation and its effect on purchasing power, they do sense that something is wrong. A long-term foundation for economic growth cannot be based on currency debasement.

Source: cbsnews.com

Fed Policy, Gold, and Bonds

Asian stocks and U.S. equity futures fell, while the dollar rose as an increase in the Federal Reserve’s discount rate spurred concern the economic rebound will slow as stimulus programs are unwound.

Fed policy, despite claims to the contrary, follows market rates. The positive spread between the 2-year note and fed funds rate suggest loose monetary policy. The greater the spread, the more the market is telling the Fed to tighten up.

2-Year Note less Fed Funds Rate:


The last Fed tightening cycle began on June 2004 and ended on June 2006. While gold will likely experience the knee-jerk, "this is bullish for the dollar" F-TV commentary, it is nothing more than another illusion. The reality is that gold had a massive run from $396 to $613 between June 2004 and June 2006.

As the Fed speaks loudly and carries a very small stick. The action in the bond market continues to illustrate lower prices with a strong tape. The 1/12 overhead gap on the double inverse ETF (TBT) was filled with an aggressive expansion of volume. This is bullish an implies building upside force on the double inverse ETF. This implies building downside side force in US long bonds.

Long Bonds Double Inverse ETF (TBT)


Source: bloomberg.com
Source: ny.frb.org

Stiglitz: Washington Should Stop Worrying, U.S. Has "No Problem" Paying Off Its Debts

If (and this might be a big 'if') the U.S. uses the debt to make smart investments in education, technology and infrastructure, Stiglitz says "the long run national debt will be lower." According to his calculations, a simple 5%-6% return on these investments will easily pay for themselves and increase our competitive advantage in the future.

If the U.S. uses the debt to make smart investments - agreed. Unfortunately, encouraging savings and investment at the expense of current consumption would put an immediate drag on national income (GDP). This is an unacceptable outcome for political system that tends to win or lose elections based on the economy.

Also, encouraging investment is one thing. When investment is directed from the public, notoriously inefficient, rather than the private sector, a simple 5-6% is a very big assumption. Without the political will and the means to carry it out, the easier solution of devaluation as means of reducing the size of the debt burden will always be selected.



Source: finance.yahoo.com

Change we can believe in ... not

BETWEEN THE negligible interest they pay us and the bonanza bonuses they pay themselves, we have reason to hate big banks.

Here's one more: One of them may be shorting you on the free coin-counting service it offers.

Better spend or count those change jars first!

Funny how short-changing a coin count can bring the wrath, but the far more insidious and damaging devaluation of the currency that people work hard to obtain and carry in the pocket does not. This largely explains why the official policy playbook on how to manage a depression is what it is.

Source: philly.com

Long Bonds & COT

The action in the long bond, double inverse ETF, continues to favor the bulls. In other words, it reflects lower bond prices. The 1/15 gap was challenged on nearly a 20% increase in volume. This volume surge, or tape, confirms the up move. The fade into the gap with volume contraction implied support. TBT stands ready to challenge the overhead gap/magnets. The pull of the large magnet is increasing.

Expect the managers to start leaning hard on price as MOVB moves into overbought territory. The value of the COT setups is not only when they precede but also fail to precede price moves. Any disconnect or loss of influence by key players in market such as U.S. Government Long Bonds, which ultimately reflects the U.S. dollar, will likely be revealed by price acting contrary to influential money flow setups.

Double Inv Long Bonds ETF (TBT):

Yen ETF

The fill of the 2/4 gap on nearly half the volume reflects decreasing downside energy of the tape. The COT flows, despite the delay, will setup the turn.

Yen ETF (FXY):

Mailbox

Dear friends;

After the pit session trade had already closed for the day in New York, news came out that the IMF was planning on selling the remainder of 403.3 tons of gold, 191.3 to be exact, on the open market. Gold was immediately taken down hard in the thin trading conditions, dropping more than $14 on the day.

There are several things about this that should be noted. First is the timing – it comes on the heels of a resumption of the uptrend in gold with many technical indicators having moved into the buy mode. It also coincides with another brand new all time high in the price of Gold priced in Euro terms at the London PM Fix.

Those of us who have been around the gold market long enough know full well that the timing of this announcement is therefore no coincidence but was timed to attempt to derail the returning bullish sentiment in the yellow metal. Why announce the sale publicly which is guaranteed to receive a lower price for the metal than if the IMF had just quietly sold the metal into the market. This is reminiscent of then Prime Minister Gordon Brown’s announcement that England intended to sell its hoard of gold. That guaranteed that Britain would receive the lowest price possible.

Secondly, China was one-upped by India’s purchase of some 200 tons of gold late last year and got caught flat footed. The spin on this gold sale is that the IMF announcing that they would sell the gold into the open market means that Central Bank demand for gold is not as vibrant as the market was led to believe. That is an interesting tall tale. The simple truth is that Central Banks do not generally buy gold and announce their intentions to do so beforehand. Neither do they tend to buy when prices are moving higher as the momentum based hedge funds do. Time and time again we have seen that the CB’s, buy gold during episodes of price weakness. Once news hit the wire last year that India had bought 200 tons of gold, the price never looked back and shot straight to $1220+. Any Asian Central Bank that missed buying the gold as a result is certainly not going to panic and rush into the market to obtain it. They are waiting for lower prices where they will acquire the metal. To state therefore that Central Bank demand for gold must not be as robust as originally thought is quite shallow analysis.

My view is that this announcement means nothing in the longer term scheme but was rather a cheap trick to take the market lower. We have already seen this week how some noted elites were pooh-poohing gold and trash talking the metal all the while they were acquiring a position in it. Nothing ever changes in this gold market. It is still one of the least transparent markets on the planet and perhaps the most prone to official sector interference.

Do not be disturbed by the news. It is probably going to be a one or two day wonder and then that will be it. Gold will then go back to trading the currencies taking its cues from the action in the Dollar.

Incidentally, this sale is supposedly going to be phased in over an extended period of time. Rest assured, the IMF would love nothing better than to sell the whole 191 tons in one lump sum to another Asian Central Bank.

Respectfully,
Trader Dan


My dear extended family:

I agree fully with Trader Dan's assessment of the IMF statement.
This is a duplicate of the IMF action in the 1970s.
It turned out to be the most positive event as each time the IMG held an auction of their gold they facilitate large investors entry at singular price at net dollars.
It will be no different this time around.
gold will rise because of the IMF selling as it did in the 1970s.

I assure you that history will repeat itself on the same circumstances.

Respectfully,
Jim

U.S. to open investigation of Toyota Corolla; CEO won't go to hearing

The Transportation Department plans to open a formal investigation into the 2009-2010 Toyota Corolla because of potential problems with the car's power steering, a department official said Wednesday.

The preliminary investigation is expected to be opened on Thursday and will involve an estimated 500,000 vehicles. The official spoke on condition of anonymity because the department had not yet notified Toyota of the probe.

The American car business, basically bankrupt, seem less like a debacle when the mistakes of the leader receives constant media attention. Contrary to logic, maybe it's Japan turn in the hot seat since they have replaced China has the biggest holder (lender) of US Treasuries. Strange, indeed.

Source: usatoday.com

Federal deficit at $430.69 billion through January

The federal deficit through the first four months of the budget year is running at a record-breaking pace even though the deficit in January was slightly smaller than expected.

The massive tide of red ink reflects the continued fallout from a deep recession and a severe financial crisis. It highlights the formidable challenges President Barack Obama will face in trying to get the deficit down to more manageable levels.

Ho hum market response to truly shocking numbers.

Source: finance.yahoo.com

Biden: US got 'money's worth' from stimulus act

Vice President Joe Biden asserted in an interview Wednesday that taxpayers have "gotten their money's worth" out of the $787 billion stimulus program that Congress passed during the depths of the recession.

Another classic case of Damned if you do, damned if you don't. Whether or not taxpayers have gotten money's worth is certainly debatable.

What is clear is that most taxpayer supported stimulus has followed the law of diminishing returns since 1953. In other words, they are not getting as much income (bang) for the debt based stimulus (buck) as in the past. This trend towards shrinking income rewards from debt based stimulus must end before the next long-term recovery can occur. If this point is not realized, there will a time when no amount of debt creation (stimulus) will create growth. The recent and continued exodus of the political base might be a indirect acknowledgement of this possibility.

Annual Income Growth per Debt Creation:


Source: finance.yahoo.com

Soros Doubles Down on Gold

George Soros's hedge fund more than doubled its bet on the price of gold during the fourth quarter, as the firm reported total U.S.-listed equity holdings of $8.8 billion at the end of 2009, Reuters reported

Remember Soros's Davos interview that got everyone's knickers in a twist?

In comments delivered on the fringe of the World Economic Forum, Mr Soros said: "When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold."

Talking one's book is standard operating procedure (SOP) in the trading world. The Chinese do it. To the dismay of many (now), Soros obviously does it. Yet, the line to dump gold during the Davos pow-wow was long and fashionable.

Source: finance.yahoo.com

NYSE Composite

The equity rally, setup and driven by the brute force of money flows, created some shock and awe yesterday. A closer inspection of the tape, however, revealed weakness. The 2/4 NYSE breakdown gap was filled on -25% contraction of total exchange volume. This large contraction in exchange volume warns of weakening upside force. What cannot break resistance with force, will eventually reverse and attempt to break support with force. This is only something to watch for nominal (U.S. dollar focused) investors/traders.

Generally, the above is nothing more than noise within a dominant negative REAL trend. The Weimar Republic history lesson reminds us that stocks can trade higher despite dire economic conditions. That is why real, not nominal, prices must be the yardstick of the true trend.

NYSE Composite Index with NYSE Volume:

TIC - Major Foreign Holder of U.S. Treasury Securities

China reduced its stake and lost the position it's held for more than a year as the largest foreign holder of Treasury debt. Japan retook the top spot as it boosted its Treasury holdings.

China's withdrawal from number first to second largest holder of U.S. Treasury securities is troubling. Perhaps China is buying through the United Kingdom. Perhaps, not.

The activities of overseas branches of US commercial banks are considered to be foreign transactions. The jump in the United (Kingdom) purchases could be reflect that. Since London, also Zurich, are clearing-houses for nominee accounts and anonymous trusts, it is impossible to know who's really doing the buying. It could very well be the Fed.

Major Foreign Holders of U.S. Treasury Securities:


Source: nytimes.com

Disillusioned Bayh advocates electoral “shock” to broken system

In an interview on MSNBC this morning, newly retiring Sen. Evan Bayh declared the American political system "dysfunctional," riddled with "brain-dead partisanship" and permanent campaigning. Flatly denying any possibility that he'd seek the presidency or any other higher office, Bayh argued that the American people needed to deliver a "shock" to Congress by voting incumbents out in mass and replacing them with people interested in reforming the process and governing for the good of the people, rather than deep-pocketed special-interest groups.

The people, individuals, drive change, not governments. The exodus of incumbants signals not only worry but also the building forces of change.

Source: news.yahoo.com

Housing Shortage Coming In 2011

The focus of the U.S. real estate market lately has been the number of foreclosures and people trying to purchase cheap housing. But Brian Wesbury, chief economist at First Trust Advisors, says that if Americans don’t start focusing on building new houses, the market will have a much bigger problem on its hands.

"We need one and a half million houses per year just to keep up with population growth," Wesbury said in an interview with Steve Forbes.

Call me a stickler for focusing on the forest through the trees, but supply (months supply) and demand (restricted by access to easy credit) neither reflect a impending shortage or sustainable bottom in housing. Previous housing cycles suggest weakness until at least 2015, possibly much longer.

Months Supply And Change YOY:


U.S. Median Home Price (MHP) to Gold:


Source: forbes.com

U.S. Treasury Long Bonds

The war between illusion and economic reality continues to rage in the U.S. treasury long bond market. The battle is fierce and the long-term trendline is being challenged. As market participants wait for confirmation - recognizable top in the US Treasury market, the U.S. corporate bond market foreshadows the outcome.

Long-Term U.S. Corporate Bonds Total Return Index (LTCBTRI):


Five Golden Pillars:


Source: jsmineset.com

Kiss That V-Shaped Recovery Good-Bye - Not so fast

Kiss That V-Shaped Recovery Good-Bye: The U.S. "Worse Than Greece," Says Economist.

Pento is negative on America's near term economic prospects for three main reasons: too little bank lending, too few jobs and too much public and private debt.

These points have been discussed in detail here and jsmineset.com.

• Too little lending & few jobs
• Too much public and private debt

The idea of tee-pee recovery, in which we have already seen the peak in the fourth quarter, assumes that the stock market is being driven by real economic demand. Look no further than the Weimar Republic as an example of how devaluation supports vertical, V-shaped rises. Is the V-shaped recovery, or devaluation of the U.S. dollar over? If the above assertion that U.S. is worse than Greece, there's no way infinite quantitative easing (QE) ends here and now. Falling dollar supports higher nominal, but not real, stock prices.

Source: finance.yahoo.com

Geece Ahead of Stability Plan Targets, Papaconstantinou Says

The soap opera continues

“There’s is no actual need for” a bailout he said, after a meeting of finance ministers in Brussels to review Greece’s plan to trim the EU’s biggest budget shortfall.

“Greece has not asked for a bailout.”

Just because they haven't asked for money doesn't mean they don't need it. Bailouts don't have to be public or officially recognized.

As a result of the today's "good" news, the risk trade - stronger gold, Euro, Kiwi, etc., and weaker dollar is back on. Nothing, other than the daily rhetoric, has changed in the EU or US Union.

Source: bloomberg.com

COT Notes

The inflows into equities is interesting when considering the direction of flows (setups) in gold, silver, Euro and U.S. dollar index.

S&P 500:


COT Table:

Dow 10,000 is meaningless

Arthur Cashinof UBS Financial Services, wears his Dow 10,000 hat on the floor of the New York Stock Exchange, Tuesday Oct. 14, 2008.

From a balcony at the New York Stock Exchange, Richard Grassothe exchange’s then-chairman, New York City Mayor Rudolph Giuliani gaveled the session closed and tossed commemorative blue hats emblazoned with “Dow 10,000″ into crowds of eager traders at the closing bell.

U.S. stocks are denominated in dollars per share. As the dollar continues to devalue, Dow 10,000 today will no longer be comparable. Comparing price levels denominated in debasing (devaluing) currency is like measuring distance from a yardstick that has a quarter inch removed each year. A yard measured today will be two and half inches shorter than one measured ten years ago.

Using similar logic, Dow 10,000 today is no longer comparable to Dow 10,000 of March 1999, because the dollar (yardstick) is not constant over time.

Dow Industrial Average (DJIA) 1897-present:


This relatively simple concept reveals the illusion of growth from currency debasement. A concept that is so easily missed by the public that debasement has been apart of the official/unofficial policy handbook for thousands of years.

Historical stock price comparison require a stable yardstick or currency. Does Dow 10,000 today compare with that of 1999? The Dow Jones Industrial Average to Gold ratio, or Dow priced in ounces of gold says absolutely not!

Dow Jones Industrial Average (DJIA) to Gold Ratio:


Source: blogs.wsj.com

Trade deficit jumps sharply in December

The Commerce Department said the December deficit was 10.4 percent higher than the November imbalance. It was much larger than the $36 billion deficit that economists had expected with much of the increase coming from a big jump in oil imports.

"Trade may support the U.S. recovery going forward but only marginally now that domestic demand is once again pulling in imports," Sal Guatieri, senior economist at BMO Capital Markets, said in a research note.

A bit of old news.

Increased trade, often viewed as a solution to, is also a source of our economic woes. A country the consumes more than it produces must settle its transactions with the issuance of debt obligations (paper) that pulls from future consumption. Since debt issuance is finite - limited by a country's finite ability to service and repay the debt, production (exports) must rise or consumption must decline to ease the growing imbalance.

Imports to Exports Ratio (Census Basis):


What caught my attention was the year-over-year change in import prices - 8%. Granted, a good chunk of that was due to rising price of oil. Persistent, multi-month increases in import prices, however, will not be limited to oil imports. Made outside the USA will carry a higher price tag as well. Retailers will let their margins compress for only so long before raising prices.

Import and Export Price Change YOY:

Source: finance.yahoo.com

Greek Probe Uncovers ‘Long-Term Damage’ From Swaps Agreements

The government turned to Goldman Sachs Group Inc. in 2002 to obtain $1 billion through a swap agreement, Christoforos Sardelis, head of Greece’s Public Debt Management Agency between 1999 and 2004, said in an interview last week.

“While swaps should be strictly limited to those that lead to a permanent reduction in interest spending, some of these agreements have been made to move interest from the present year to the future, with long-term damage to the Greek state,” the Finance Ministry report said. The 106-page dossier is now being examined by lawmakers.

Lehman, AIG, Fannie Mae, Greece, California, New York, and so on.

Source: bloomberg.com

US debt will keep growing even with recovery

It's bad enough that Greece's debt problems have rattled global financial markets. In the world's largest economic and military power, there's a far more serious debt dilemma.

The government already has made so many promises to so many expanding "mandatory" programs. Just keeping these commitments, without major changes in taxing and spending, will lead to deficits that cannot be sustained.

How long have we been saying this?

The total debt pile has been growing faster than income for decades. A look at total credit market debt relative to income (GDP), which ignores many off the balance sheet liabilities, illustrates the addiction of US growth (economy) to debt issuance since 1981. Credit market debt as a percentage of GDP had reached 327% during the final gasp of the primary drop of the second great depression in the fourth quarter of 1932. As we approach 375% of GDP in 2010, we must ask ourselves how much is too much this time around? Be certain that the dollar's negative trend already reflects a daily response to that question.

Source: finance.yahoo.com

Mailbox

BlackRock sees the seriousness of the Greek bankruptcy situation when they compare it to the Lehman collapse. It was the flushing of Lehman that was the accelerating event of the Western World's banks (OTC Derivative) melt away, not down. If the Dark Side can break Greece, using Germany, propaganda & the rating agencies as the tools, it will be open season on six of the weakest countries debt next. - Jim Sinclair

Bullseye!

The EU, playing good cop/bad cop through the media, can debate their policy response behind closed doors until the cows come home (a long time), but nothing they can say or do will change the chain of events caused by the implosion of Lehman. The indirect news leakage that the Chinese have begun to withdrawal from anything non US government guaranteed could be impeccable coincide or an indication that infinite quantitative easing (QE), the vacuum cleaner of bad debt, is ready to ramp-up again. Recall the Fed's highly touted plan for pulling stimulus this past week? As I said earlier, there's a big difference between talk of and actual withdrawal.

Source: zerohedge.com

Gold Stocks

Excellent analysis as always Eric. Gold/Silver going parabolic means the mining/exploration/royalty shares are going to be experiencing some serious leverage indeed.

Have you done any studies to determine what the approximate leverage is for the various share categories to the PM they mine? That would be an interesting way to determine a possible target for share prices with Gold/Silver at these levels.

The shares with the right management, financing, location (geographical and political), currency to distribute earnings and dividends, and marketing will indeed explode. How high? I believe the following chart encapsulates most of my research.

S&P Gold (Formerly Precious Metals Mining)*
*S&P Gold from 1945, Barron's Gold Stock Index from 1939-1945, 1922-1939 Homestake Mining:

Greek slump threatens debt plan, EU aid elusive

A European Union government source said meetings of the region's finance ministers next week were unlikely to put together an aid package for Greece, suggesting governments were still unable to decide how to prevent the crisis from hurting financial markets' faith in the euro zone

Classic example of damned if you do, damned if you don't.

The bailout of Greece, when it happens, either transparent or opaque, inevitably means the bailouts of other weak EU members. The market is smart enough to anticipate which ones. In other words, the market participants will sense fresh meat - trading opportunities for organized pools of money at the expense of the taxpayer-sponsored printing press.

Of course, the disaster in Greece, compares with that of California, New York, and so on, but bias prevents anything more than token and cursory comparison. Rest assured that organized money will always circle fresh meat. Watch for similar beat downs in California, New York, Illinois, that will ratchet up the calls for bailouts within the U.S. Union. If the above is deemed bad for the Euro, the realization that the U.S. Union and EU share a common leg within a three-legged race, it won't be long before the same logic applies to the U.S. dollar.

U.S. Union and EU share a common leg:


Source: finance.yahoo.com

Revenge of the Nerds: The New Masters of the Wall Street Universe

Using sophisticated algorithms and computers, quants like Ken Griffin, Jim Simons and Peter Muller set up what would become wildly successful hedge funds.

While pendulum swung in favor of geeks (algorithms), it will have swung back to the guts traders after this is over. Follow the money. The large specs, domain of the algorithms, are increasingly shred to pieces in markets such as gold, silver, and major currencies. See for yourself - follow the money. The algorithms better adapt or their coffers will be emptied.

Source: finance.yahoo.com

Gold price will surge to $5,000 in two years

Jim,

I agree too.

Gold will have to go parabolic (higher order function) to accomplish it by 2012. Since the rebirth of fiat, parabolic moves during the devaluation steps are not uncommon.

Gold:


Let's not forget silver. It's certain a game in comparison, but the upside exists.

Silver:



Source: commodityonline.com
Source: jsmineset.com

Consumer Sentiment Index in U.S. Declined in February (Update1)

Confidence among U.S. consumers unexpectedly fell in February from a two-year high, signaling Americans may not be convinced the job market is turning around.

The relationship between consumer confidence/expectations, stocks, and gold continues to be the same.

Previous posted consumer confidence comments

The consumer expectations and gold commentary indicates that contrary to expectations that rising confidence will setup the next advance (gold).

The only uncertainty is whether or not unexpectedly preceeds the word fell or rise in the newswire. In this case, the unexpected decline suggests that another wave of quantitative easing (QE) has or will start soon. In other words, the rise in consumer expectations since 2008 will provide the fuel for the next advance in gold. During the a depression, or the great recession that never seems to end, consumer confidence will ebb and flow with economic spin. When reality begins to reveal the economic spin as an illusion, confidence - consumer expectations falls and QE immediately ramps up. It is this ramp-up, or devaluation, that pushes the price of gold higher.

Source: bloomberg.com

Long Bonds ETF

A review of close reveals the strength of yesterday's tape. My comments, long bond midday action, still apply.

The previous swing high and overhead gap were exceeded in increasing volume. This implies increasing force. The second overhead gap is pulling hard now.

Long Bond Double Inverse ETF (TBT):

Fannie, Freddie Loan Purchases May Spur ‘Wad of Cash’

“This is going to be a wad of cash coming into the fixed- income markets and it’s not immediately clear where it’s going to be reinvested,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee.

Here come another wave of QE regardless of the Fed's window dressing plan to restrict stimulus. Weimar taught us that infinite QE is a misnomer. Those familiar with the second law of thermodyanmics know that entropy within a close system never decreases. Money is clearly an isolated system that history has repeatedly shown the tendency to move from order to disorder. Push the accelerator pedal too long and order will most certainly turn to choas - both social and economic.

Thomas Jefferson was quite clear on this subject for a reason.

"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered." Thomas Jefferson, Letter 1802 to Secretary of the Treasury, Albert Gallatin

Source: bloomberg.com

30 Yr Auction Results

Over 15% of the competitive bids were direct bids. This is up from 6.9% in Feb. These percentages follow a similar trend revealed in yesterday's 10-year auction results.

The reaction in the bond market and chatter around the trading desks hints of debt monetization. The lack of transparency with direct bids serves only to fuel the speculation.

Source: treasurydirect.gov

Long Bonds Midday Action

Today's midday action warrants a brief comment.

This leveraged ETF is starting show aggressive buying or selling of the long end of the yield curve. A real effort was made to reverse the neckline the past few trading weeks, but it has held.

That which cannot break support with force, will reverse and attempt to break resistance with force. A short-term swing high and overhead gap have already been attacked on very good midday volume. We'll have to wait and see how this closes, but strong tape indicates force behind the move. The tape could be providing a preview of the action yet to come when more significant resistance is tested in the not too distant future.

Long Bonds Double Inverse ETF (TBT)