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Archive for October 16th, 2010

Want a Real View of the Economy? Talk to a CEO

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by Andy Summers
Phoenix Capital Research
Posted October 15, 2010

WELL, WE’VE REACHED THE POINT AT WHICH THE MAINSTREAM MEDIA IS FINALLY BEGINNING to understand that the US recovery of 2009 was actually an accounting fiction and that the “green shoots” were just a stupid metaphor. Indeed, just this morning, Fed Chairman Ben Bernanke all but guaranteed he will introduce a large QE 2 program sometime in the near future… which essentially proves not only that QE 1 failed, but that the US economy is on the ropes (why else would we need more emergency policies?).

Let’s put this in perspective…

The US Fed is already buying between $8-12 billion in US debt per week as courtesy of its QE lite program. Moreover, the Fed has been juicing the market on 12 of the last 13 options expiration weeks. So QE 1, for all intensive purposes, NEVER ended. And now, our illustrious Fed Chairman is talking about introducing even MORE QE? Just how awful have things gotten that we’ve got ONE QE program occurring and they’re already talking about introducing a second LARGER one at the same time? Well, according to US CEOs things are flat out awful… as in May 2009 BAD. According to Bloomberg:

Confidence among chief executive officers in the U.S. sank in October to the lowest level since May 2009, when the world’s largest economy was still in a recession, according to a survey from the Business Council… The group’s gauge of expectations for the economy six months from now fell to 51.7, the lowest since February 2009.

If you’ll recall, February 2009 was when everyone thought the whole world was ending. The US economy was literally falling off a cliff with initial jobless claims clearing 600,000 (a 26 year high) while the S&P 500 was collapsing on its way to the March lows of 666.

And US CEOs’ expectations for the next six months are as BLEAK as they were back then… BEFORE the Fed even introduced QE 1?

Lest you think this is merely idle talk, consider that insiders have been unloading their shares by the truckload in the last few weeks. For the week of October 4th 2010, the insider selling to buying ratio was 2,341 to 1 with insiders DROPPING $400+ million in stock and only buying a measly $170,000. This comes on the heels of September 27’s equally insanely bearish ratio of 1,411 to 1 (which by the way was preceded by weeks with ratios of 250 to 1 and 650 to 1).

In plain terms, corporate insiders, the folks who know their business and its prospects better than anyone are dumping shares as fast as humanly possible. They are literally putting their money where their mouths are when they say the US economy is AWFUL and business prospects are on par with those of February 2009 (before Bernanke even thought up that stupid “green shoots” nonsense).

All of this is going to end horribly when the rest of the world realizes what corporate CEOs have already figured out: that the US economy is a full-scale disaster and nothing the Fed has done has improved the situation. This is very much akin to what happened in 2008 when everyone thought that the “worst was over” and kept banking that the Fed would stave off any collapse (just as it did for the Bear Stearns Crisis)… right up until the entire system imploded in late September.

Sometime, and I cannot tell you when, the financial markets will have a similar “wake up call” as they did in 2008. We’ve already got the same set up in place: US banks are being hit from losses related to garbage mortgage securities, commodities are soaring, and the US Dollar is collapsing with everyone shouting that it’s doomed.

This is almost identical to where we were in the summer of 2008. And we all know how that turned out. In plain terms, you should take this rally for what it is: a gift from the market Gods to cash out some profits and prepare for what’s to come.

$10,000 Gold?

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by Kenneth Rogoff
Posted originally Oct 2, 2010

SAN FRANCISCO – It has never been easy to have a rational conversation about the value of gold. Lately, with gold prices up more than 300% over the last decade, it is harder than ever. Just last December, fellow economists Martin Feldstein and Nouriel Roubini each penned op-eds bravely questioning bullish market sentiment, sensibly pointing out gold’s risks.

Wouldn’t you know it? Since their articles appeared, the price of gold has moved up still further. Gold prices even hit a record-high $1,300 recently. Last December, many gold bugs were arguing that the price was inevitably headed for $2,000. Now, emboldened by continuing appreciation, some are suggesting that gold could be headed even higher than that.

One successful gold investor recently explained to me that stock prices languished for a more than a decade before the Dow Jones index crossed the 1,000 mark in the early 1980’s. Since then, the index has climbed above 10,000. Now that gold has crossed the magic $1,000 barrier, why can’t it increase ten-fold, too?

Admittedly, getting to a much higher price for gold is not quite the leap of imagination that it seems. After adjusting for inflation, today’s price is nowhere near the all-time high of January 1980. Back then, gold hit $850, or well over $2,000 in today’s dollars. But January 1980 was arguably a “freak peak” during a period of heightened geo-political instability. At $1,300, today’s price is probably more than double very long-term, inflation-adjusted, average gold prices. So what could justify another huge increase in gold prices from here?

One answer, of course, is a complete collapse of the US dollar. With soaring deficits, and a rudderless fiscal policy, one does wonder whether a populist administration might recklessly turn to the printing press. And if you are really worried about that, gold might indeed be the most reliable hedge.

Sure, some might argue that inflation-indexed bonds offer a better and more direct inflation hedge than gold. But gold bugs are right to worry about whether the government will honor its commitments under more extreme circumstances. In fact, as Carmen Reinhart and I discuss in our recent book on the history of financial crises, This Time is Different, cash-strapped governments will often forcibly convert indexed debt to non-indexed debt, precisely so that its value might be inflated away. Even the United States abrogated indexation clauses in bond contracts during the Great Depression of the 1930’s. So it can happen anywhere.

Even so, the fact that very high inflation is possible does not make it probable, so one should be cautious in arguing that higher gold prices are being driven by inflation expectations. Some have argued instead that gold’s long upward march has been partly driven by the development of new financial instruments that make it easier to trade and speculate in gold.

There is probably some slight truth – and also a certain degree of irony – to this argument. After all, medieval alchemists engaged in what we now consider an absurd search for ways to transform base metals into gold. Wouldn’t it be paradoxical, then, if financial alchemy could make an ingot of gold worth dramatically more?

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Written by aurick

16/10/2010 at 12:15 am

Another perfect storm brewing for Markets and the Economy

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by Bo Peng
Originally posted October 15, 2010


1. Either QE2 disappointment or death of USD
It’s been a textbook case of “bad news is good news” in the past few weeks, entirely driven by QE2 expectations. The expectations are so high that inflation is finally being priced in (see 30-yr bonds, commodities, and gold), and Bernanke would have to do it even if he had a change of religion tonight, or else. The only question is when and how much. While I don’t know the answer, I’m sure it lies somewhere between a dog and a fire hydrant. If QE2 is not big enough to cause another 10% drop in the dollar index, it’ll snap back 10% along with equities/gold/commodities crashing through a significant correction. If it is big enough to meet the markets’ insane expectations, it will most likely kick the currency war into full speed and start the sequence that leads to the dollar’s death as the international reserve currency.

Of course, theoretically it’s possible to stand a pencil on its point. I just don’t think it’s financially wise to bet on it.

Funny thing is, despite the overwhelming cry for QE2 and the markets’ seeming enthusiasm, few expect it to produce meaningful real growth. In other words, the September rally in equities has been driven by depreciating dollar and expectation of inflation, not necessarily growth. This is truly a nightmare scenario.

2. Currency war
In the race to the bottom of competitive currency devaluation, Japan has been elbowed to the back and Fed has been the hands-down winner, so far. But all major players are close to the edge, even the usually quiet and conformal (well in terms of economic/monetary policy) Brazil. QE2, even if not big enough to kill the dollar by itself, may be the brilliant spark of inspiration in the powder keg. The ensuing currency war, trade war, and all kinds of political circus will surely be comical, to future generations who don’t have to live through it.

3. Foreclosuregate
Mainstream media have taken the foreclousregate with remarkable calm, I’m just not sure whether it’s due to ignorance or willful deceit. But there’ve been many excellent analyses in the blogosphere. I have nothing original to add on this topic, instead would just summarize my readings here:

• Foreclosure sales, which has accounted for 1/3 of housing market in recent months, have slowed to a crawl and may come to a complete stop soon.

• Virtually every mortgage in existence today is subject to the question of title ownership. It doesn’t even matter how thorough a job the original lender did. If it has gone through the mills of securitization, which the homeowner would not know and it would take substantial effort to clarify, the question is there for someone to ask.

• Recent sales of foreclosed as well as regular houses are suddenly subject to unknown kinds of legal risk. Future buyers should be extremely cautious.

• Not only past and future sales of houses and commercial real estates, but all past and future sales of baskets of securitized real estates may be in legal limbo. This is independent of sloppy/missing/forged paperwork. There may be a valid legal question of ownership in set-ups like mortgage CDOs.

What will happen next? How paralyzed will the real estate market be? For how long? Should everybody stop paying mortgages? Will everybody get a free house? Will banks be destroyed, for real, this time? Will Fannie Mae (and by extension tax payers) be the designated bag-holder again? How much will all these affect the dollar? How much ammo/water/canned-food to stock up? Will RPGs be considered excessive force? Nobody knows. Well, at least lawyers in various related fields won’t need to worry about jobs for the next five generations.

Why a rational being would be long equities, especially financials, at this juncture is beyond my limited imagination. Even gold is vulnerable to a correction should QE2 be judged a disappointment by the market. I remain very bullish on gold longer term. But I’ve taken profit on most of my GLD calls recently.

This (Friday) morning’s Bernanke speech should be interesting. He has a hell of a fine line to toe in rhetoric and expectation management, or else he may make history today. We’ll find out soon enough.

But isn’t there something wrong about the system when one person should have such a huge impact on the market? Prior examples of such overwhelming prominance include Hitler, Mao, and Greenspan.