Tuesday, September 28, 2010

Shut Down the Fed

I never thought I would ever see Ambrose write a piece like this. After 25yrs of largely supporting the fiat money status-quo Ambrose has had an epiphany and has come out hard against reckless inflation creation and further quantitative easing. Ambrose is welcome in the ABC Bullion store anytime.

By Ambrose Evans-Pritchard:

I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.

My pathetic assumption was that Ben Bernanke would deploy further QE only to stave off DEFLATION, not to create INFLATION. If the Federal Open Market Committee cannot see the difference, God help America.

We now learn from last week’s minutes that the Fed is willing “to provide additional accommodation if needed to … return inflation, over time, to levels consistent with its mandate.”

NO, NO, NO, this cannot possibly be true.

Ben Bernanke has not only refused to abandon his idee fixe of an “inflation target”, a key cause of the global central banking catastrophe of the last twenty years (because it can and did allow asset booms to run amok, and let credit levels reach dangerous extremes).

Worse still, he seems determined to print trillions of emergency stimulus without commensurate emergency justification to test his Princeton theories, which by the way are as old as the hills. Keynes ridiculed the “tyranny of the general price level” in the early 1930s, and quite rightly so. Bernanke is reviving a doctrine that was already shown to be bunk eighty years ago.

So all those hillsmen in Idaho, with their Colt 45s and boxes of krugerrands, who sent furious emails to the Telegraph accusing me of defending a hyperinflating establishment cabal were right all along. The Fed is indeed out of control.

The sophisticates at banking conferences in London, Frankfurt, and New York who aplogized for this primitive monetary creationsim – as I did – are the ones who lost the plot.

My apologies. Mercy, for I have sinned against sound money, and therefore against sound politics.

I stick to my view that Friedmanite QE ‘a l’outrance‘ is legitimate to prevent a collapse of the M3 broad money supply, and to prevent outright deflation in economies with total debt levels near or above 300pc of GDP. Not in any circumstances, but where necessary, and where conducted properly by purchasing bonds outside the banking system (not the same as Bernanke “creditism”).

The dangers of tipping into a debt compound trap – as described by Irving Fisher in Debt-Deflation Theory of Great Depresssions in 1933 – outweigh the risk of an expanded money stock catching fire and setting off an inflation surge later. Debt deflation is a toxic process that can and does destroy societies as well as economies. You do not trifle with it.

But deliberately creating inflation “consistent” with the Fed’s mandate – implicitly to erode debt – is another matter. Nor can this be justified at this particular juncture. M3 has been leveling out. M2 has begun to rise briskly. The velocity of money has picked up. The M1 monetary mulitplier has jumped.

We have a very odd world. The IMF has doubled its global growth forecast to 4.5pc this year, and authorities everywhere have ruled out a serious risk of a double dip recession.

Yet at the same time the Bank of Japan has embarked on unsterilised currency intervention, which amounts to stimulus, and both the Fed and the Bank of England are signalling fresh QE.

You can’t have it both ways. If the US is not in deep trouble, the Fed should not be thinking of extra QE. It should step back and let the economy heal itself, if necessary enduring several years of poor growth to purge excess leverage.

Yes, U6 unemployment is 16.7pc. But as dissenters at the Minneapolis Fed remind us, you cannot solve a structural unemployment crisis with loose money.

Fed is trying to conjure away the hangover from the last binge (which Greenspan/Bernanke caused, let us not forget), as if to vindicate its prior claim that you can always clean up painlessly after asset bubbles.

Are the Chinese right? Are the Americans and the British now so decadent that they will refuse to take their punishment, opting to default on their debts by stealth?

Sooner or later we may learn what the Fed’s hawkish bloc of Fisher, Lacker, Plosser, Hoenig, Warsh, and Kocherlakota really think about this latest lurch into monetary la la land, with all that it implies for moral hazard and debt contracts.

If I have written harsh words about these heroic resisters, I apologise for that too.

Exploding China

As a followup to an earlier post on Vacant China we now have Exploding China. It seems it is not enough just to stimulate the economy by building apartments no one wants the Chinese are now leveling perfectly good buildings and roads only to replace them. Seems the Communist Govt. is paranoid of growth falling below the mythical 8% rate where the people might revolt and eat the rich.

From China Hush:

China’s bizarre phenomena: buildings die unnaturally September 24th, 2010 by Annie Lee

As one of the most architectural productive country, China aggregates 2 billion m2 of new building area every year, consuming about 40% of the world’s concrete and steel. However, on the flip side of the new building fever, there lie the rubbles and remains of other “older” buildings: people tear down four-star hotels to build five-star ones and bulldoze newly developed construction sites before they are even finished. Lots of young strong buildings are down, fulfilling their unnatural destiny in the roaring noise of blasting. (Source from ifeng.com and people.com.cn)

1. Vienna Wood Community in Hefei City(合肥维也纳森林花园小区), died before born on Dec. 10th, 2005. The community covered about 20,000 m2 construction area with the main structure raised to 58.5 m high. The tens of millions yuan worth building was blasted as a whole when its 16th floor was still under progress. According to local government, the community punctuated the central divide of Hefei City, blocking the scenery between Huangshan Road and Dashushan Mountain. They couldn’t straighten Huangshan Road unless the community was out of the way.

2. The Bund Community in Wuhan(武汉外滩花园小区), 4 years old, blasted on March 30th, 2002. “I give you the Yangtze River” the slogan of the community captured many people’s hearts, so did its view over the magnificent Yangtze River and Wuhan’s historic spot Yellow Crane Tower. It took only 4 years to build the community that was documented and verified by relative departments. Then it also took only 4 years for the once legitimate community to be identified as illegitimate buildings that violate the country’s flood protection regulations. Force demolition soon took place, resulting in over 200 million yuan direct economic losses, not to mention the costs that were times of its original investment government had to cover for the demolition and restoration of bund environment.

3. Yuxi Exhibition Center(瑜西会展中心), 5 years old, down on Aug. 20th, 2005. The landmark building in Yongchuan City, Chongqing Municipality cost 40 million yuan to build, and 250 kg dynamite and about 5000 detonators to blow up. Besides holding exhibition, the center was also used as administrative reception center due to its convenient location and sound facility. However, the mine boss who bought the center for 30 million yuan decided it was an even better idea for the center to become the city’s first five-star hotel instead of holding some stupid exhibitions. Thus down with the landmark exhibition center and here was 250 million yuan to build the glorious five star hotel. To welcome the city’s first five-star hotel, vice mayor of Yongchuang City came down to the site in person and helped monitor the blasting process.

4. Zhongyin Building in Wenzhou City(温州中银大厦), 6 years old, life ended on May 18th, 2004. Situated at the city’s golden area since 1997, the 93 m high building was never put into use as it was identified as unsafe building and soon brought out the city’s biggest financial crime ever, involving 43 suspects and over 30 million yuan corruption. And for that reason, it was also remembered as corruption building. Solving all of the building’s safety problems would demand more than the cost of building a new one, the authority then blow it up.

Read more

Gold is the final refuge against universal currency debasement

By Ambrose Evans-Pritchard (UK Telegraph):

States accounting for two-thirds of the global economy are either holding down their exchange rates by direct intervention or steering currencies lower in an attempt to shift problems on to somebody else, each with their own plausible justification. Nothing like this has been seen since the 1930s.

“We live in an amazing world. Everybody has big budget deficits and big easy money but somehow the world as a whole cannot fully employ itself,” said former Fed chair Paul Volcker in Chris Whalen’s new book Inflated: How Money and Debt Built the American Dream.

“It is a serious question. We are no longer talking about a single country having a big depression but the entire world.”

The US and Britain are debasing coinage to alleviate the pain of debt-busts, and to revive their export industries: China is debasing to off-load its manufacturing overcapacity on to the rest of the world, though it has a trade surplus with the US of $20bn (£12.6bn) a month.

Premier Wen Jiabao confesses that China’s ability to maintain social order depends on a suppressed currency. A 20pc revaluation would be unbearable. “I can’t imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs,” he said.

Plead he might, but tempers in Washington are rising. Congress will vote next week on the Currency Reform for Fair Trade Act, intended to make it much harder for the Commerce Department to avoid imposing “remedial tariffs” on Chinese goods deemed to be receiving “benefit” from an unduly weak currency.

Japan has intervened to stop the strong yen tipping the country into a deflation death spiral, though it too has a trade surplus. There is suspicion in Tokyo that Beijing’s record purchase of Japanese debt in June, July, and August was not entirely friendly, intended to secure yuan-yen advantage and perhaps to damage Japan’s industry at a time of escalating strategic tensions in the Pacific region.

Brazil dived into the markets on Friday to weaken the real. The Swiss have been doing it for months, accumulating reserves equal to 40pc of GDP in a forlorn attempt to stem capital flight from Euroland. Like the Chinese and Japanese, they too are battling to stop the rest of the world taking away their structural surplus.

The exception is Germany, which protects its surplus ($179bn, or 5.2pc of GDP) by means of an undervalued exchange rate within EMU. The global game of pass the unemployment parcel has to end somewhere. It ends in Greece, Portugal, Spain, Ireland, parts of Eastern Europe, and will end in France and Italy too, at least until their democracies object.

It is no mystery why so many states around the world are trying to steal a march on others by debasement, or to stop debasers stealing a march on them. The three pillars of global demand at the height of the credit bubble in 2007 were – by deficits – the US ($793bn), Spain ($126bn), UK ($87bn). These have shrunk to $431bn, $75bn, and $33bn respectively as we sinners tighten our belts in the aftermath of debt bubbles.. The Brazils and Indias of the world are replacing some of this half trillion lost juice, but not all.

East Asia’s surplus states seem structurally incapable of compensating for austerity in the West, whether because of the Confucian saving ethic, or the habits of mercantilist practice, or in China’s case by the lack of a welfare net. Their export models rely on the willingness of Anglo-PIGS to bankrupt themselves.

So we have an early 1930s world where surplus states are hoarding money, instead of recycling it. A solution of sorts in the Great Depression was for each deficit country to devalue, breaking out of the trap (then enforced by the Gold Standard). This turned the deflation tables on the surplus powers – France and the US from 1929-1931 – forcing them to reflate as well (the US in 1933) or collapse (France in 1936). Contrary to myth, beggar-thy-neighbour policy was the global cure.

A variant of this may now occur. If China continues to hold down its currency, the country will import excess US liquidity, overheat, and lose wage competitiveness. This is the default cure if all else fails, and I believe it is well under way.

The latest Fed minutes are remarkable. They add a new doctrine, that a fresh monetary blitz – or QE2 – will be used to stop inflation falling much below 1.5pc. Surely the Fed has not become so reckless that it really aims to use emergency measures to create inflation, rather preventing deflation? This must be a cover-story. Ben Bernanke’s real purpose – as he aired in his November 2002 speech on deflation – is to weaken the dollar.

If so, he has succeeded. The Swiss franc smashed through parity last week as investors digested the message. But the swissie is an over-rated refuge. The franc cannot go much further without destabilizing Switzerland itself.

Gold has no such limits. It hit $1300 an ounce last week, still well shy of the $2,200-2,400 range reached in the late Medieval era of the 14th and 15th Centuries.

This is not to say that gold has any particular "intrinsic value"’. It is subject to supply and demand like everything else. It crashed after the gold discoveries of Spain’s Conquistadores in the New World, and slid further after finds in Australia and South Africa. It ultimately lost 90pc of its value – hitting rock-bottom a decade ago when central banks succumbed to fiat hubris and began to sell their bullion. Gold hit a millennium-low on the day that Gordon Brown auctioned the first tranche of Britain’s gold. It has risen five-fold since then.

We have a new world order where China and India are buying gold on every dip, where the West faces an ageing crisis, and where the sovereign states of the US, Japan, and most of Western Europe have public debt trajectories near or beyond the point of no return.

The managers of all four reserve currencies are playing fast and loose: the Fed is clipping the dollar; the Bank of England is clipping sterling; the European Central Bank is buying the bonds of EMU debtors to stave off insolvency, something it vowed never to do just months ago; and the Bank of Japan has just carried out two trillion yen of “unsterilized” intervention.

Of course, gold can go higher.

Savers told to stop moaning and start spending

The following is a report from the UK Telegraph. It is amazing that the guys in charge of the Bank of England don't seem to have the faintest idea how Capitalism works. You need Capital to have Capitalism! If people aren't encouraged to save, by greater than inflation returns, then there will be no capital to provide loans to business to manufacture goods and employ people. No wonder many Britons are turning to gold &silver to protect their wealth when people like this are in charge of the money supply.

From the UK Telegraph:

Savers should stop complaining about poor returns and start spending to help the economy, a senior Bank of England official warned today.

Older households could afford to suffer because they had benefited from previous property price rises, Charles Bean, the deputy governor, suggested.

They should "not expect" to live off interest, he added, admitting that low returns were part of a strategy.

His remarks are likely to infuriate savers, who are among the biggest victims of the recession. About five million retired people are thought to rely on the interest earned by their nest-eggs. But almost all savings accounts now pay less than inflation.

The typical savings rate has fallen from more than 2.8 per cent before the financial crisis to 0.23 per cent last month.

Mr Bean said he "fully sympathised". But he continued: "Savers shouldn't necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit."

He added: "Very often older households have actually benefited from the fact that they've seen capital gains on their houses."

In an interview with Channel Four News on Monday night, he said that savers "might be suffering" from the low Bank Rate. But they had done well from higher rates in the past and would do so again.

Mr Bean said that encouraging Britons to spend was one reason why the Bank had cut interest rates. They have been held at 0.5 per cent for 18 months, hitting rates offered on savings accounts.

The strategy had led to Mervyn King, the governor, receiving many letters of complaint.

But it was designed to return the economy to a reasonable level of activity as quickly as possible, he said. "The faster we can achieve that, the sooner interest rates will get back to more normal levels."

Had the Bank not acted, "unemployment would have been higher, wage growth would have been lower," Mr Bean added.

The comments angered groups representing the elderly and those putting money aside. The Daily Telegraph has campaigned for protection for savers.

Ros Altmann, director-general of Saga, said: "Savers are being taken advantage of. They did the right thing and have been let down at the other end of the deal.

"I don't think this is what most people would consider fair."

Dot Gibson, of the National Pensioners Convention, said: "For years we've been told to put money aside for our retirement only to find that interest rates have sunk and now we have to use our savings just to pay the bills."

Jason Riddle, of Save Our Savers, said: "The Bank was aware that there was a lack of saving before the financial crisis, but those who were prudently saving while others spent, are being heavily punished."

Official figures show that savers have lost about £18 billion a year in interest as a result of the Bank's response to the worst recession in a generation.

The amount Britons save has fallen by more than a fifth since the start of the year, a survey showed today.

The average person is saving £102 a month, down from £130 in February, according to Santander.

Silver's Breakout

From The Equedia Network Corporation:

It finally happened. Through months of struggle, silver has finally managed to crack the $20/oz mark.

In past newsletters, we touched on the positive signs of why silver, along with gold, should outperform and continue to see new highs. After months of what many believed to be market manipulation, silver finally took the edge and surpassed the $20 barrier.

Although a few dollars above recent highs may not seem important, there's much more to it than meets the eye. The Gold to Silver Ratio (GSR) has finally broken the technical downside. This not only signals a strong push in silver prices, but it also means an increase in both industrial and investment demand for silver.

For the last five thousand years, the GSR has been somewhere around 16 to 1. This means that one ounce of gold can buy 16 ounces of silver. Coincidentally, that ratio remains relatively constant for the amount of silver versus gold in the world. For every ounce of gold in the ground, there is roughly 17.5 ounces of silver.

In recent years, the average gold and silver price spread has been about 60 to 1. If silver where to catch up with the GSR that has been around for the last five thousand years, silver prices today should be nearing $80/oz. Of course, this isn't going to happen anytime soon. However, silver is now trading even better than gold. Shorts and sell-offs are increasingly shallow and silver is now managing to close higher when gold has been lower.

That's because silver is not just a safe haven play. Unlike gold, which goes up during times of great political, economic, and social strife, silver is also an industrial metal that can climb with a growing economy - not to mention the possibility of price manipulation.

The Debt Debacle

We already know that US and worldwide government debts are climbing. This should mean an increase in the price of both gold and silver. But that's where silver has its advantage. As economies around the world recover and grow in the next year, demand for industrial use silver will, too. This means when market environments appear safer, silver will continue to climb - but gold may fall.

The Double-Edged Metal

Silver is one of the most-versatile metals, with new silver patents exceeding those for any other metal, leading to new industrial uses every year, and ever-increasing demand. Even the monitor of your computer screen or that new HD flatscreen you were just watching, has a few ounces of silver in them.

Meanwhile this same industrial demand is strengthened by the biggest surge in investor demand for silver in several decades.

The trace-uses of silver result in vast quantities of silver being "consumed" every year, permanently reducing the amount of available silver in the world - unlike gold, where all quantities ever mined are available or recoverable......read on

Charting New Space

By Warren Bevan:

Resistance is futile. Gold is charting into new frontiers. We're now on the road towards $1,500 Gold and $30 silver. Both targets should be reached with this move which should last until perhaps spring.

There will be consolidations and corrections along the way, but it really doesn't get much better than this. Let's get right into the fantastic looking charts this week.

Metals Review

Gold rose nicely, by 1.73% on the week and butted up against the psychological resistance at $1,300 early Friday before falling due to profit taking the rest of the day.

The $1,300 level may take a bit of time to clear, but then again maybe not. When something is in all-time high territory there is no telling what can happen and when. What I can say is that I'm very, very impressed with Golds move so far.

It's moved up slowly and steadily, backing and filling and testing and holding support levels along the way. It's textbook, and very pleasing to see.

If anyone tells you this is a bubble or parabolic blowoff their crazy! This is a sustainable move. Many stocks I was trading last week moved up well above 3% in a single day while Gold was up under 2% on the whole week.

The GLD ETF saw good fairly strong volume on the week with very strong showings a couple of days. All in all the volume tells me we should continue to move slowly, steadily higher.

Silver rose a strong 3.42% for the week and it is right at bull to date highs dating back to March 2008. To find a silver price any higher you'd have to go all the way back to the 1980 era.

If silver moves up even a few cents it could spark the move to $30. It could happen quite quickly. Silver has certainly moved up rather quickly but who's to argue with it?

All you can do now is enjoy the ride until it ends......read on

Gold’s Historic Rally Continues

By Brady Willett:

Gold broke above $1300 an ounce on Friday and silver ended at a new 30-year high. Whether these gains are sustainable over the near term is impossible to comment on. What can be said is that gold is likely to remain in a long-term uptrend so long as the central banks continue to try and manipulate currency and asset prices, and/or the outlook for fiscal deficits remains worrisome. In other words, gold and silver today serve as both a hedge against the downfall of fiat money and the threat of major sovereign default(s).

The Demand Drivers

There used to be a time when the COT data was important; when the investor looking to buy or sell gold could study the data to glean excellent points of entry/exit. To say that the COT statistics have become completely irrelevant may be an overstatement. However, the recent data is definitely of little utility to the average investor. In the case of last week (as of September 21), commercial short interest as a percentage of open interest declined for the third week in a row and net small spec long interest barely moved higher even as the price of gold launched by more than $25 an ounce. If the small specs are not chasing rallies and the commercials are not looking to short the heck out of any large move higher, why bother to even look at the COT data? Quite frankly, the expectation of a commercial triggered wipeout in the price of gold (and silver for that matter) has all but vanished. This is not to say that forces will not pile on to try and trigger stops and/or manipulate prices when a pause in buying arrives, only that it is impossible to forecast such an event beforehand.....read on