Wednesday, March 16, 2011

Japanese aftershocks to rock the world economy

Brilliant article from Arabian Money:

Just as observers initially underestimated the impact of the 9.0 earthquake that struck Japan last week, they are probably also now underestimating the aftershocks of this event for the global economy, and wrongly see this as solely a domestic matter for Japan.

Indeed, while Japanese stocks rebounded from their third worst crash in history yesterday, it is still far from certain what the fall-out from the earthquake will be. Chinese and French nationals have been the first to evacuate from Tokyo.

Mass panic

What will the panic be like if a city of 20 million decides to runaway from radiation clouds? And the probability of that happening is now very high. Radiation levels in Tokyo are rising and the wisest folk got on a plane yesterday. Workers have just abandoned the failed nuclear reactors ‘temporarily’.

Goldman Sachs admitted it got the earthquake wrong last week, and said that if the blackouts last to the end of June, GDP will shrink at an annual two per cent rate in the second quarter and if this continues for the year the economy will carry on on

Down the rabbit hole - David Morgan & Mike Maloney from April 2010

David & Mike have long been visionaries in the precious metals arena. David is always very cautious and conservative in his public views, in this talk he gives his estimate for silver's appreciation in 2010 as 30% higher than gold, in US$ terms.

Was he right? No, silver didn't appreciate 30% more than gold it 2010, it appreciated 53% more than gold, for a total yearly appreciation of 83%!!

Note this talk was most likely recorded in late April 2010, a few months out from silver's stellar rise. In August the mainstream media started reporting on silver, there was the odd vague reference to the CFTC hearings and industrial demand picking up. Even I was interviewed for the national nightly TV news in Australia in the 3rd quarter of 2010 in regards to silver hitting 30 year highs. Although being a mainstream news program they spun the 30 year highs story as a time to bail out of silver and sell any silverware you might have before the "silver bubble" bursts.

Of course since that news show was aired silver has appreciated another 45% in AU$ terms ~ Tears of the Moon.

The takeaway quote from David Morgan:
"When everyone is thinking the same, no one is thinking very much"

David Morgan & Mike Maloney - Silver Manipulation Day of Reckoning

Radiation fears spark Tokyo alarm

From: AlJazeeraEnglish | Mar 15, 2011

Fears about the possible spread of radiation has caused unease in Tokyo, Japan's capital and a usually bustling metrolpolis.

Several companies are evacuating staff, and many citizens are leaving the city, despite assurances from the government that they are safe.

Those who choose to remain in Tokyo are stocking up on supplies including canned goods, batteries, bottled water, face masks and petrol.

Wall Street Conspirators Driving Spike in Silver

Three month state of emergency declared in Bahrain

From Arabian Money:

With Manama a virtual ghost town and the city divided up by warring gangs of youths, Bahrain today bowed to the inevitable and declared a state of emergency to last three months. Hundreds are reported injured and at least two dead in clashes over the past few days.

However, the reason for the arrival of Saudi and UAE forces remained unclear as the island state has an army of 10,000 men, quite sufficient to impose martial law.

So far the Saudi troops have remained barraked around the royal compound. But protestors were due to march to the Saudi embassy this afternoon to voice their objection to the arrival of their forces, which might trigger some on

Congressman John Campbell's Moment Of Epiphany - Realizes US Is One Big Ponzi

From Tyler Durden:

Zero Hedge first observed the duration mismatch in US Treasury holdings back in November 2009, when we highlighted the concerning amount of debt that the government has to roll every year courtesy of about 30-40% in outstanding paper that is of very short duration (under 2 years or so). We have also been pretty adamant that by now the US economic system is nothing but a ponzi scheme pure and simple. Today, we observe how this epiphany manifests itself when it occurs to a congressman, in this case John Campbell (California). The punchline: "I understand that the Fed and the Treasury are trying to keep interest rates low and improve the economy and the deficit. But, when coupled with the huge deficits, these moves look a bit like a Ponzi scheme that will soon unravel." Amen brother.

From John Campbell's website:

Treasury Bonds:

I learned something last week. I learned that fully 40% of the over $9 trillion in Treasury debt currently outstanding to the public has a maturity of 3 years or less. Put another way, it means that we are rapidly approaching $4 trillion in U.S. debt that matures by 2014 or sooner. As I write this, the yield (interest rate paid) on a 2-year Treasury note is 0.645% or about 2/3 of one percent. The yield, at the same time, on a 10 year Treasury note is 3.4%, and on a 30 year is 4.55%. In bond parlance, this is called a "steep yield curve" where interest rates get much higher as you go farther out in time.

It's pretty clear why the Treasury is doing this. By issuing mostly short-term notes, the Treasury is paying less interest, thereby keeping interest costs and, consequently, the deficit down. In addition, the Federal Reserve is in the middle of its "quantitative easing #2" (QE2) under which it is buying $600 billion of our own Treasury debt over about a 6 month period. The Fed is not buying the short-term notes, but is buying 10 year maturities and longer in order to hold those rates down. And, since the Fed is earning the interest thereon (paid by the U.S. Treasury), it is improving its yield. We are currently running a deficit of about $130 billion per month, so the Fed is basically buying all of the new bond issuance from the deficit for almost 5 months.

What does this all mean? I understand that the Fed and the Treasury are trying to keep interest rates low and improve the economy and the deficit. But, when coupled with the huge deficits, these moves look a bit like a Ponzi scheme that will soon unravel.

We are printing money ($600 billion) to buy our own debt so that the full effects of the deficit are not felt. We are buying long-term bonds to artificially hold down the rates on those bonds since home mortgages and many other things are based on those rates. We are selling the short-term bonds at cheaper rates to hold down costs now, but are leaving ourselves open to huge cost increases when interest rates go up. And, we are at historic lows on these short-term bond rates. If they were to rise by 3 points (which would put them where they were at as recently as 2008), our deficit would increase by another $150 billion per year, even if the long-term rates stay the same. And, once the Fed ends QE2, even if it doesn't reverse it, the markets will then have to absorb a new influx of long-term bonds at a time when our ability to pay them is in question. The Fed can cure a bunch of this simply by printing a lot more money. That, however, will result in an inflationary period with major wealth destruction and economic malaise.

In the period between 2005-2007, we were sowing the seeds of the 2008 financial crisis through too much leverage in the private sector. But, very few people could see it coming. Today, we are sowing the seeds of another crisis with too much leverage in the public sector. This time, though, it's easy to see it coming.

Are gold and silver warning us of a new stage in the financial crisis?

By Dominic Frisby:

The earth's crust contains something like 0.08ppm (parts per million) silver. There is, on the other hand, just 0.004ppm gold. In other words silver is about 20 times more abundant in the earth's crust than gold.

The historical monetary ratios between the two metals pretty much reflected this. It varies according to time and place, but on average it seems roughly 16-18 silver coins were exchangeable for a gold coin of the same weight wherever - or whenever - you were.

In 2009, about 80 million ounces of gold were produced and, according to the Silver Institute, 709 million ounces of silver - about nine times more.

But gold is not nine times more expensive than silver. Nor is it 16, 18 or 20 times more expensive than silver. It is 40 times more expensive.

That seems rather a lot, especially when you consider that most of the gold that has ever been mined remains in the world, yet much of the silver has been consumed by industry.

Is that ratio normal? Or is it some kind of anomaly? Let's have a look...

Silver looks expensive - but only by recent standards

If we look back at the last 35 years, that 40 level for the gold:silver ratio is not only not normal, it's in fact extreme: silver is unusually expensive relative to gold, at least by the standards of recent history.

But this hasn't always been the case. Let's look first at historical chart of the ratio over the last 300 years. My thanks, as always, go to Nick Laird of Sharelynx. When the ratio is low, silver is expensive relative to gold; when it is high, silver is cheap.

Gold/silver ratio chart 1720-2011

As you can see, since the early 18th century, not long after the formation of the Bank of England, that ratio was fairly constant just around the 17:1 area. Then, in the mid-1870s, it began to climb. The old 17:1 ratio would not be seen for a generation.

The ratio became extremely volatile and, in the early 20th century, hit highs at around the 42 to 43:1 area. But, thanks to World War I, by 1920 it had come all the way back to 17:1.

This didn't last. By the 1930s, the ratio had climbed to 85, before capitulating briefly to the 45 area. Then, when WWII was in mid-flight, the ratio went above 100.

But 25 or so years later, come the late '60s, and the ratio fell back at 17, its historical 'norm'. It spiked back to that 40-45 level in the 1970s, before falling below 20 in the notorious spike of 1980 when silver went to $50.

Silver is more expensive relative to gold than in nearly 30 years

Since 1984 that ratio has never fallen below 45.

Until last week, that is. When it dropped to 39.

Gold/silver ratio chart 2000-2011Why is that important?

Because you can see that, from the above charts, the 40-45 area has been a pivotal technical level. There are periods or cycles in history when the gold:silver ratio trades above it: 1932 to 1960 and 1984 till now. And there are periods when it has traded below, such as around 1963 to 1984, and pre-1930.

So I was terribly excited to see that $40 level breached. I thought we might be re-entering a cycle at the end of which silver's 'true value' would once again be recognised. If we were entering such a period, it might be that within a few years we would see that ratio below 20, once again, finally reflecting the amount of silver there actually is in the world relative to gold. Were that ratio to do that and head back to 17, and the gold price to remain unchanged at around $1,400, we'd be looking at $80 silver. Nice work if you can get it.

Is this the beginning of the next phase of the financial crisis?

But, as I have said many times, silver has a nasty habit of disappointing. On breaching that 40 level on the ratio, silver has hit a wall. Yesterday it was down about 2%. And, it wasn't just silver. Gold was down, the FTSE too, the Dow, commodities - you name it. The junior resource sector has been absolutely annihilated this past week.

It could be that this turn down is the beginning of the next phase of the financial crisis. It wouldn't surprise me. It's long-overdue and there are bearish signals all over the place. Senior gold stocks have been in a downtrend since late last year, even although gold has been rising. Emerging stock markets have been falling, although their Western counterparts have been rising. And a spike down in the gold:silver ratio often marks a major market turn.

Or it could be that this is just a temporary stumbling block on the inevitable road back to that magical 17:1 ratio.

For my own part, I think the ratio is heading a lot lower - eventually. The key is that last word, 'eventually'. Look at the run silver has had since August. Look at that last spike down in the gold:silver ratio. I would venture that much of that needs to be retraced, just as it was in early 1998 and 2004, when the gold:silver ratio had similar runs to now. (They're worth studying in the chart above).

Stocks, Commodities Fall on Japan Disaster

(Bloomberg) -- Global stocks fell, following a plunge in Asia that sent the Nikkei 225 index to its biggest two-day drop since 1987, amid concern a nuclear accident outside of Tokyo may cripple the global economy. Commodities slid, while the Standard & Poor's 500 Index pared its loss almost by half.

The MSCI World Index fell 2.5 percent at 1:54 p.m. in New York after the Nikkei sank 10.6 percent to the lowest since April 2009. The Standard & Poor's 500 Index tumbled 1.6 percent after losing as much as 2.7 percent. Ten-year Treasury yields slid seven basis points to 3.28 percent. The Swiss franc rose against all 16 major peers, climbing to a record against the dollar. Oil lost 2.7 percent to $98.44 a barrel.

Credit-default swaps insuring Japanese debt climbed to a record earlier as Tokyo Electric Power Co.'s damaged nuclear power plant was rocked by two explosions today as workers struggled to avert a meltdown in the wake of last week's earthquake. Equities also dropped as Saudi Arabian troops moved into Bahrain with a regional force in the first cross-border intervention since uprisings swept through parts of the region.

"It's effectively a retreat from risk assets after a long period of running towards risk," said Michael Vogelzang, who helps manage $1.7 billion as president and chief investment officer at Boston Advisors in Boston. "The situation in Japan has clearly deteriorated and the economic and financial impact is unknown, and that's why the market is selling off. We don't know what the lack of investor confidence in Japan means for the U.S. and the world."
Biggest Drop

The Nikkei 225's one-day drop was the biggest since October 2008 and extended its two-day slide to 16 percent. South Korea's Kospi Index sank 2.4 percent, the most in four months, while Taiwan's Taiex Index retreated 3.4 percent, the most since February 2010.

Credit-default swaps on Japan's government debt soared 23 basis points to 118.5 after reaching a record 122.3, according to CMA, and Tokyo Electric's jumped 224.2 basis points to 373.5, up from 40.5 on March 11.

Trading in a U.S. exchange-traded fund linked to Japanese stocks shows investors expect shares in the world's third- largest economy to rebound when trading there resumes. The iShares MSCI Japan Index Fund tracking 323 securities fell 2 percent to $9.85 after earlier reaching $9.24, its lowest intraday level since July. That compares with the 9.1 percent plunge in the MSCI Japan Index earlier, data compiled by Bloomberg on

Japan nuclear update