April 30, 2013

Advocates for Monetary Central Planning Grow More Confused by the Day

The great economic experiment of 2013: Ben Bernanke vs. austerity ... We rarely get to see a major, nationwide economic experiment at work, but so far 2013 has been one of those experiments ... – Washington Post

Dominant Social Theme: The Federal Reserve and the US government have to work hand-in-hand to resolve this mess.

Free-Market Analysis: Here's an interesting article in the Washington Post explaining how US fiscal austerity needs to be offset by Federal Reserve pump priming.

We would argue, not to put too fine a point on it, that it is a confused mess. The logic is lacking and the facts are in doubt. Unfortunately, it seems to make perfect sense to the author, who works for the Roosevelt Institute. As its name might suggest, the Roosevelt Institute is entirely comfortable with governmental activism on the economic front – even the nonsensical kind.

So here is a question: If activist economic management works so well, why is the world doing so poorly?

When one takes a look around at the devastated economies of Europe, Japan and the US, one would have to question whether monetary and fiscal activism really does provide the kind of miracles that are claimed for it.

The kind of solution being proposed in this article is not just confusing; it is also naïve.

First of all, the author doesn't really define what "austerity" is. And actually, austerity, as it has been initiated, is not merely government cost-cutting. It also often includes MORE taxes and more regulation; its privatization is often of the monopoly kind that makes the privatized conglomerate no more efficient than under government control.

Having simply (apparently) asserted that austerity is cost-cutting, the author moves on to proposing that the Fed needs to print lots of money to make up for the government's austere "fiscal policy."
How exactly money printing of paper-debt instruments makes up for government cost cutting on the economic front is never made clear. Nor is it made clear why government cost cutting – would that it were actually happening – needs to be offset to begin with.

We could go on. But see for yourself. Here's more from the article:

... The biggest threats to a full recovery are both early fiscal and monetary contraction. The Evans Rule is the right rule to communicate to the markets the Federal Reserve's stance, which is properly a balance between price stability and full employment. The Federal Reserve was, in fact, sitting on its hands, and it is no longer doing that.

Second, there is still more the Federal Reserve could do to try and balance out austerity in 2013, but those moves would require a big change from current policy. Minor tweaking is unlikely to help. Joseph Gagnon of the Peterson Institute for International Economics suggests that, instead of committing to mortgage purchases, the Fed could target the mortgage rate for a time. Other economists, such as Brad DeLong, suggest that an explicit higher inflation target would be important. Still others, ranging from Christina Romer to market monetarists, think the Fed should explicitly target a nominal GDP.

Given that the Fed appears to be having trouble getting these new policies to move inflation expectations or interest rates, a dramatic change may be harder than originally thought. And if even subtle statements by the FOMC can break expectations of policy, as many are worried about, monetary policy at the zero lower bound will be far too fragile to carry us to recovery. However, the status quo of a low inflation target teamed with "break out unconventional policy in case of emergency" doesn't appear robust enough to handle future recessions.

But the most important lesson to draw is that fiscal policy is incredibly important at this moment. In normal times, the broader effect of government spending, or the fiscal multiplier, is low because the central bank can offset it. But these are not normal times. It's not clear why the Federal Reserve's actions haven't balanced out fiscal austerity. But since they haven't, we should be even more confident that, as the IMF put it, "fiscal multipliers are currently high in many advanced economies."

These multipliers work in both directions. As spending benefits the whole economy more in these times, austerity is also much more vicious than it would normally be. Using fiscal policy also avoids the expectations problems that plague monetary policy. When President Obama signs a law promising spending, the public believes the government will spend. That's not so with the Federal Reserve, where a random statement from a Federal Reserve governor can cause markets to doubt the Fed's long-term commitment.

Meanwhile, the idea that there exists a debt "danger zone" that should cause us to embrace austerity has recently collapsed due to questionable data and methodology. The question is, will we now move to stimulus to complement the Fed's efforts to get to full employment, or will we continue to sabotage the recovery?

So let's try to sum up. As the US government is cutting costs, the Federal Reserve ought to print more money to offset government contraction.

But presumably this money – much of it – flows THROUGH the government, so the article is basically proposing that while the government is cutting costs it also ought to be embarking on various forms of pump priming.

How can the government do both? Either the government is cutting costs or it is not. And even if we accept this illogical perspective, we still have to grapple with the issue of the efficiency of government spending in the first place. The author seems sure it will realize the proper results. Has he been sleeping in a cave these past decades?

We would suggest this argument places a good deal too much faith in government power and policies. The real solution to the current economic crisis lies in the free market's Third Way. Get government officials and monopoly money printing bankers out of the business of managing the economy.

Let the market itself – as much as possible – provide the solutions via Adam Smith's Invisible Hand of Competition. What this article is proposing, if we understand it adequately, will only compound the problem.

Conclusion: Why is it that would-be policymakers so often avoid the real-life solutions provided by the competitive marketplace? It's very strange. It's almost as if they want more chaos and currency devaluation. And why would that be ...


April 29, 2013

The More Illegal Immigrants That Go On Food Stamps The More Money JP Morgan Makes

Recently uncovered documents prove that the Obama administration has been working with the Mexican government to increase the number of illegal immigrants on food stamps, and when more illegal immigrants go on food stamps JP Morgan makes more money.  As you will read about below, JP Morgan has made at least 560 million dollars processing Electronic Benefits Transfer cards.  Each month, JP Morgan makes between $.31 and $2.30 for every single person on food stamps (and that does not even include things like ATM fees, etc).  So JP Morgan has a vested interest in seeing poverty grow and the number of people on food stamps increase.  Meanwhile, the Obama administration has been aggressively seeking to expand participation in the food stamp program.  Under Obama, the number of people on food stamps has grown from 32 million to more than 47 million.  And even though poverty in America is absolutely exploding, that apparently is not good enough for the Obama administration.  It has now come out that the U.S. Department of Agriculture has provided the Mexican government with literature that actively encourages illegal immigrants to enroll in food stamps.  One flyer contains the following statement in Spanish: "You need not divulge information regarding your immigration status in seeking this benefit for your children."  The bold and the underlining are in the original document in case you were wondering.  Overall, federal spending on food stamps increased from 18 billion dollars in 2000 to 85 billion dollars in 2012, and at this point one out of every five U.S. households in now enrolled in the food stamp program. 

When people illegally or fraudulently enroll in the food stamp program, it makes it harder for those that desperately need the help to be able to get it.

It is certainly a good thing to help fellow Americans that are suffering.  It is a crying shame that more than a million public school students in America are homeless.  That should not be happening in the "wealthiest nation on earth".

But today we have a system that has turned poverty into big business.  According to an article posted on Breitbart.com, JP Morgan has made at least 560 million dollars (and probably much more) processing EBT cards...
A new report by the Government Accountability Institute finds that JP Morgan has made at least $560,492,596 since 2004 processing the Electronic Benefits Transfer (EBT) cards of 18 of the 24 states it has under contract for the food stamp program.
A Daily Beast article provided some more specifics about the monster profits that JP Morgan is making...
Just how lucrative JP Morgan’s EBT state contracts are is hard to say, because total national data on EBT contracts are not reported. But thanks to a combination of public-records requests and contracts that are available online, here’s what we do know: 18 of the 24 states JP Morgan handles have been contracted to pay the bank up to $560,492,596.02 since 2004. Since 2007, Florida has been contracted to pay JP Morgan $90,351,202.22. Pennsylvania’s seven-year contract totaled $112,541,823.27. New York’s seven-year contract totaled $126,394,917. 
These contracts are transactional contracts, meaning they are amendable based on changes in program participation. Each month, the three companies that administer EBT receive a small fee that can range from $.31 to $2.30 (or higher depending upon the number of welfare services on an EBT card and state contractual requirements) for each SNAP recipient.
So the more people that are out of work and that need to turn to the government for food, the bigger profits that JP Morgan makes.

What makes all of this even more insulting is that many of the jobs that JP Morgan could be providing to Americans to help alleviate this poverty are being shipped overseas instead.  As I noted in a previous article, many EBT card customer service calls are being routed to call centers in India by JP Morgan.

So why doesn't anyone do anything about this?

Well, it turns out that JP Morgan has the politicians that oversee the food stamp program in their back pocket.  The following is from a recent Money Morning article...
And the bank has taken steps to make sure the SNAP program remains a growing source of revenue. JPMorgan's political donations to the members of House and Senate agricultural committees, the ones with legislative responsibility for the program, soared from just over $82,000 in 2002 to nearly $333,000 as of 2010.
What a wonderful system we have, eh?

And surely JP Morgan just loves the fact that the Obama administration is actively encouraging illegal immigrants to apply for food stamps.

What you are about to read should absolutely shock you.  At a time when the U.S. government is absolutely drowning in debt, the Obama administration is making it abundantly clear to illegal immigrants that their immigration status will not be checked when they apply for food stamps.  The following is from a recent Judicial Watch press release...
Judicial Watch today released documents detailing how the U.S. Department of Agriculture (USDA) is working with the Mexican government to promote participation by illegal aliens in the U.S. food stamp program. 
The promotion of the food stamp program, now known as “SNAP” (Supplemental Nutrition Assistance Program), includes a Spanish-language flyer provided to the Mexican Embassy by the USDA with a statement advising Mexicans in the U.S. that they do not need to declare their immigration status in order to receive financial assistance.  Emphasized in bold and underlined, the statement reads, “You need not divulge information regarding your immigration status in seeking this benefit for your children.” 
The documents came in response to a Freedom of Information Act (FOIA) request made to USDA on July 20, 2012.  The FOIA request sought: “Any and all records of communication relating to the Supplemental Nutrition Assistance Program (SNAP) to Mexican Americans, Mexican nationals, and migrant communities, including but not limited to, communications with the Mexican government.” 
The documents obtained by Judicial Watch show that USDA officials are working closely with their counterparts at the Mexican Embassy to widely broaden the SNAP program in the Mexican immigrant community, with no effort to restrict aid to, identify, or apprehend illegal immigrants who may be on the food stamp rolls.
You can see a copy of the flyer right here.

So who pays for all of this?

You do of course.

The Obama administration is doing all that it can to promote illegal immigration, and big banks such as JP Morgan just make bigger profits the more illegal immigration that we see, but it is you and I that end up with the bill.  This was put beautifully in a recent article by Mike Adams of NaturalNews.com...
Nearly $75 billion of taxpayer money is spent each year on federal food stamps, and it turns out some of that is alarmingly being handed out to illegal immigrants -- people who contribute nothing to the federal tax base in America but who seem to be experts on collecting social welfare benefits of all kinds. If you are working for a living, you are buying food for illegals who are being actively recruited by Obama and the democratic party so that they will vote more democrats into office.
When we reward illegal immigration, what happens?

That's right - we are just going to get even more illegal immigration.

According to WND, we have already started seeing a huge increase in illegal immigrants coming across the border since Congress began debating the amnesty bill...
Illegal border crossings have doubled, and possibly even tripled, since the latest congressional push began toward comprehensive immigration reform. 
In reporting first published by Townhall.com’s Katie Pavlich, border patrol agents in the Tucson/Nogales sector claim illegals are coming here in much higher numbers in just the past few months. 
“We’ve seen the number of illegal aliens double, maybe even triple since amnesty talk started happening,” an unnamed border agent said to Townhall. The data from Customs and Border Protection cited in the report shows 504 illegals were detected crossing in that sector between Feb. 5 and March 1. Only 189 were caught on camera, and just 174 of the 504 were apprehended. Of those spotted on camera, 32 were carrying huge packs believed to contain drugs and several were heavily armed.
If that bill is passed, it is being projected that it will bring 33 million more people into this country...
The pending Senate immigration bill would bring a minimum of 33 million people into the country during its first decade of operation, according to an analysis by NumbersUSA, a group that wants to slow the current immigration rate. 
By 2024, the inflow would include an estimated 9.2 million illegal immigrants, plus 2.5 million illegals who arrived as children — dubbed ‘Dreamers’ — plus roughly 3.4 million company-sponsored employees with university degrees, said the unreleased analysis. 
The majority of the inflow, or roughly 17 million people, would consist of family members of illegals, recent immigrants and of company-sponsored workers, according to the NumbersUSA analysis provided to The Daily Caller.
We have made legal immigration a complete and total nightmare while leaving the back door completely wide open at the same time.

We greatly punish those who are trying to do things legally while at the same time we are greatly rewarding those that are cheating the system.

What kind of sense does that make?

Shouldn't we insist that everyone come in through the front door?

Those that are coming over our borders illegally know what the score is...
Linda Vickers, who owns a ranch in Brooks County, which is Ground Zero for the immigration debate, pins the blame directly on talk of 'amnesty' and a 'path to citizenship' for people who entered the U.S. illegally. 
She recalls one man being arrested on her ranch not long ago. 
"The Border Patrol agent was loading one man up, and he told the officer in Spanish, 'Obama's gonna let me go'." 
Border Patrol agents report that immigrants are crossing the border, and in some cases surrendering while asking, “Where do I go for my amnesty?”
We are already becoming a poverty-stricken nation.  We simply can't afford to feed millions upon millions of illegal immigrants as well.

As I write this, the U.S. national debt is $16,758,107,082,298.63.

We now have a debt to GDP ratio of about 105 percent.

In the United States today, the amount of money that is deposited in our banks is about 9.3 trillion dollars.  If we took every penny of that and used it to pay off the national debt, we would still owe more than 7 trillion dollars.

We are stealing more than 100 million dollars from future generations of Americans every single hour of every single day to pay our bills, and yet everyone seems to think that this is "normal" somehow.

The truth is that what we are doing is absolutely criminal, and we should all be ashamed.
For much more on our exploding national debt, please see the following article: "55 Facts About The Debt And U.S. Government Finances That Every American Voter Should Know".

In the end, it should be apparent to everyone that our system is failing.  Our government is corrupt, our big banks are consumed with greed and most average Americans are so addicted to entertainment that they have absolutely no idea what is going on.

What would those that bled and died for this country think about what we have become today?


April 26, 2013

Monopoly Central Banking Is Weaker Than You Think

Everything you 'know' about the Fed is wrong ... 5 misconceptions about the effects of QE and monetary policy ... Few would still argue against the assertion that the Federal Reserve has been central to the financial stabilization and economic recovery from the 2008 crisis. It fixed the plumbing and are now trying to incentivize animal spirits to pump water through the pipes. The debate has now migrated to exit strategies and whether the accumulating side effects of exceptional monetary accommodation outweigh incremental benefits. Read Minyanville's "The Givers and Takers of the Boston Bombings." Nonetheless, it is the Fed, so views are heated, and many mis-perceptions persist. The concept of money-printing resonates strongly and intuitively with almost everyone, but most of the intuitive reactions to the Fed's quantitative easing are turning out to have been wrong. Here are some of the major myths that linger. – MarketWatch

Dominant Social Theme: Central banking is no big deal.

Free-Market Analysis: Central banking is fundamental to the current crippled economic model of the West. It is a new model, always expanding, always changing.

Basically, central bankers fix the value and volume of money, doing so in ways that distort the larger economy and cause first booms and then busts. The globalists at the center of this ruinous system value it above all other resources and will do anything to defend it.

The ability to print money at will with all the attendant benefits is the fulfillment of an ancient human dream and no doubt will be defended by some to the last breath. In the meantime, those who benefit directly or indirectly will launch broadside after broadside defending monopoly central banking and its fiat-paper products.

This article posted over at MarketWatch is one more example of this sort of defense. Its authors, Mark Dow and Michael Sedacca, choose to maintain that central banking is not so powerful as supposed. Here are their points, along with our responses.

Money printing increases the money supply ...

The Fed does not control the money supply, only the base money (or inside money). Of course, such money is called super money for a reason. And this analysis does not deal with short interest rates that the Fed also controls. The idea that the ability to print up to US$16 trillion in short-term loans (apparently never repaid) is an incidental sort of power strikes us as, well ... ridiculous.

QE is 'pumping cash into the stock market' ...

Little of this money finds its way into the stock market, we are told (though how this statement can be made with such certainty is puzzling to us). Anyway, the idea is that about 82 percent of the money the Fed has injected since QE started has been re-deposited with the Fed as excess reserves.

Only about 18 percent has circulated. But excess reserves can circulate over time, thus turning into both monetary inflation and price inflation. And some of the money the Fed has printed goes to non-bank holders of targeted instruments.

The article maintains that equities have gone up so much in response to QE not because of actual money being injected into the market as a result of QE but because of perceptions – "psychology and misconception."

By taking an aggressive stand, the Fed signaled a positive message to markets: "I've got this." The confidence that the Fed would do everything it could to protect our economic downside stabilized animal spirits. Then it slowly but surely enabled risk-taking to re-engage. The fact that so many people believe that the Fed would be "pumping money into the stock market," and because so many buy into the "don't fight the Fed" aphorism (notwithstanding September 2007 to March 2009), the effect of the Fed's message was that much more powerful.

Our response: This seems a kind of contradiction in terms. Either central banking is a powerful instrument or it is not. Claiming it is not but then making the case that the Fed can move markets simply because so many refuse to "fight the Fed" is a curious kind of argumentation.

QE will create runaway inflation ...

Of course QE is going to create massive inflation. Inflation is the printing of money. And money has been printed. Price inflation has occurred as well, but as the US government refuses to acknowledge it, articles like this can make the argument that it has not occurred. But it has. Perhaps up to 10 percent a year, according to monetary critics like Peter Schiff.

The article goes on to make this astounding point: "But, there really has been no inflation, even with rounds of QE and interest rates stuck at zero. What we have learned in this crisis has driven home the points that the lending and borrowing that drive the money supply are more sensitive to risk appetite than they are to the price of money."

Huh? No inflation? Maybe these authors don't shop for themselves?

QE is the reason we have high oil/gasoline prices ...

We won't comment on this point much except to say that printing money is generally debasing and affects most every product and service in a given economy. Why should oil and gasoline be exempt?
QE has debased the dollar ...

"This is an excellent example of repeating a falsehood until it becomes accepted as true," we are told. Again, we find this a startling statement. Apparently, these authors have not seen the generally available charts showing dollar debasement from the formation of the Fed in 1913. The line goes straight up (or down) showing the dollar has lost up 99 percent of its value, if not more, depending on which statistics one chooses to use.

Bottom line: Anyone alleging debasement is working from hearsay and priors, not the scorecard. And there are some pretty high-profile people still throwing around the 'debasement' word.

We may not be high profile, but we're willing to "throw the word around." Debasement. Debasement. Debasement.

Conclusion: Money printing is debasement and the ability to print money-from-nothing gives a tiny group of people a godlike power. Denying it doesn't lessen the reality.


April 24, 2013

Germany Out of the Euro or the Great Synthesis Has Begun?

German 'Alternative': Parallel Currency Idea Carries Great Risks ... A new German protest party is proposing the gradual re-introduction of the national currencies of highly indebted euro-zone countries. While the party's spokesman insists the idea solves everyone's problems, it has one major drawback: Economists agree it won't work. – Der Spiegel

Dominant Social Theme: This is a great new party for Germany and marks the emergence of the anti-euro faction.

Free-Market Analysis: We would like to be able to write otherwise, but we don't believe much that comes out of Western political systems these days. That's not to say every particular evolution is noxious. In the United States, the Tea Party has contributed to a change in the freedom debate and Senator Rand Paul has lifted up a quasi-libertarian flag, from a rhetorical standpoint anyway.
But as we've pointed out many times, globalists are a particularly shifty lot and it doesn't take a lot of insight to guess that much of what goes on politically is being manipulated to ensure that the current cozy mercantilism enjoyed by Money Power remains firmly in place.

In Italy, rising star politician Beppe Grillo is not perhaps what he seems. We've written about that here:

Italy's Top Pol Beppe Grillo Being Groomed for Disruption by Soros?

The idea, when it comes to Grillo and those like him, is to create alternatives that form a Hegelian conversation ... Thesis, antitheses and then synthesis. If you are clever, the synthesis you create can be moved in any direction you like. By creating an "opposition," you develop a controllable conversation.

Grillo seems involved in this sort of strategy; we would tend to believe that Bernd Lucke, spokesman of the newly established Alternative for Germany Party, offers the powers-that-be a similar strategy. When we looked up his background we found he was an alumnus of the World Bank.

Let's be clear. This does not mean Lucke is some sort of political "double agent" ... only that he moves in the same circles as those whose views he is criticizing. It means that he is a member of the same establishment he's tipped his cap against. The apple, in other words, may not fall so far from the tree.

Here's more from the Der Spiegel article:

Lucke and his flock of supporters believe that the euro crisis can be solved if the Southern European countries leave the monetary union -- not with a big bang, but slowly and quietly. The professor wants to see these countries ejected from the monetary union in a civilized way, so that their withdrawal occurs as gently and harmoniously as a person's withdrawal from a school glee club.
And what is Lucke's miracle cure for a crash without side effects? He proposes that the Southern European countries introduce parallel currencies -- that is, bring back the drachma, the peseta, the escudo and the lira alongside the euro. The countries' national central banks would then tie these currencies to the euro at fixed rates. The professor essentially wants to combine the best of both worlds, allowing Greece, Spain, Portugal and Italy to remain connected to the euro zone and yet receive their own currencies. This would allow them to devalue their currencies and still have a calculable form of payment at their disposal. At the same time, argues Lucke, this will reduce the cost of their goods in world markets without assets losing their value overnight.

It is a patent remedy with which the professor and party spokesman wants to avoid the horror scenario that most economists associate with a sudden breakup of the euro zone: bank failures, financial collapses and mass layoffs. In other words, a financial and economic crisis that many believe could easily surpass the catastrophic consequences of the Lehman Brothers bankruptcy. But if parallel currencies are introduced, Lucke suggests, the risks could be reduced. Withdrawal from the euro would take place "in an orderly and certainly cautious manner," and could possibly be reversed after a few years through a complete return to the monetary union.

The plan that Lucke advocates is certainly appealing, but it has one drawback: It doesn't work. "A parallel currency is the worst conceivable way to solve the euro crisis," says Peter Bofinger, a member of the German Council of Economic Experts, which advises the government. And Clemens Fuest, head of the Center for European Economic Research (ZEW), sees "considerable disadvantages" in the concept. ...

This is also borne out by historical experiences. Parallel currencies have indeed become established in many countries in the past. The deutsche mark was a common currency in the Balkans in the 1990s, and the US dollar is popular in several Latin American countries today. El Salvador even declared the greenback as its official currency in 2001.

Whether it was dollars or deutsche marks, the strong currency has always prevailed over its weak counterpart ... Even Lucke probably senses that his proposal doesn't really solve the current problems. When it comes to the side effects of his recipe, he issues a typical caveat: "It goes without saying," he writes, "that the transition to a second national currency entails a number of technical problems."

We can see from this Der Spiegel article that Lucke's proposals are brought up only to be promptly dispatched. This is the beauty of having a formal opposition operating within the ambit of the approved political process. Without such an organized opposition a formal conversation is difficult to maintain let alone create.

We don't have any insight into what will come out of the debate that is now taking shape. But it is our suspicion that even though Lucke's new party is portrayed as an unwelcome development by Germany's euro-gatekeepers, it is a necessary one that has been tacitly encouraged by the same forces that cultivated Italy's Grillo.

Are the arrivals of Lucke, like Grillo in Italy, a political coincidence? FDR famously said there were no coincidences in politics, and we would tend to agree. These occurrences seem to indicate to us that something bigger may be in the works.

The globalists that put the EU together, and now the euro, seem to be realizing, finally, that the current gridlock could result in a massive destabilization that could shake not only the euro but the EU itself.

Yes ... reading the proverbial tea leaves, it seems those responsible for the formation of the EU and the implementation of the euro intend to be more proactive about a solution.

Conclusion: That has import not only for the EU itself but also those involved in it from a financial and investment perspective.


April 23, 2013

Corporate America’s Excuses Rise as Earnings and Revenues Fall

Some of the crown jewels of corporate America have reported declining revenues and earnings, and have lowered their forecasts, and in doing so, have unleashed a flood of obfuscation and excuses – from Easter falling on the wrong date to lazy sales reps. So when Caterpillar reported on Monday, it was almost refreshing in its unvarnished ugliness.

Sales plunged 17.7%, profits 44.6%. “A challenging first quarter,” Corporate Controller Mike DeWalt called it. Dealer sales had been less than expected, inventories had piled up on their lots, and they’d cut back their orders to bring down their inventories. End-user demand was down, along with sales of aftermarket parts. Everything was down. But manufacturing costs jumped, and profits sagged. The rest of 2013 would be tough, and revenue guidance was lowered by a chunk. Not a single excuse.

Then there’s IBM. Because it’s the world’s largest supplier of information technology, its earnings report is a harbinger of things to come… namely excuses. A technique it had picked up from Oracle last month. Oracle’s earnings call was a mess. Revenue dropped 1%, instead of being up. Revenues from new software licenses and cloud subscriptions dropped 2%, after the company had forecast an increase of 3% to 13%. Hardware sales were a disaster. Who did they blame? First, the government – the quarter “ended on the same day as the sequester deadline,” explained President and CFO Safra Catz – then the sales reps. Oracle had just hired 4,000 new reps around the world; that was the problem Catz and President Mark Hurd said in unison. They hadn’t been trained yet. It was just “sales execution.” Nothing else. Certainly not the economy, Catz pointed out.

“What we really saw was the lack of urgency we sometimes see in the sales force as Q3 deals fall into Q4,” Catz said. Those “new reps,” she said, “ran out of runway in Q3.” They just couldn’t close their deals. “The issue for us is simply conversion,” Hurd added. “Clearly we have work to do in training new reps on managing the sales processes,” Catz chimed in. What about the old reps? Where they all on vacation? They didn’t say. Not a good omen.

Thursday evening, it was IBM’s turn to report a first-quarter earnings shortfall and revenues that, instead of growing, had skidded 5% from a year ago. To get back on track, IBM would swing the axe, at a cost of $1 billion in the second quarter – “workforce rebalancing” was its newfangled term, “to better align our resources to opportunity.” There’d be a lot of “rebalancing.” The term was used 14 times during the call. And it would dump some businesses.

Why the drop in revenues? “We had a shortfall in sales execution in our software and mainframe businesses,” explained Mark Loughridge, Senior VP and CFO. These sales reps just hadn’t been able to close the deals in time, which then rolled over into the next quarter. The same disease that had afflicted Oracle reps. He blamed Easter, which fell into March, at the end of the quarter. He said most of those rollovers were in Europe and the US, countries impacted by Easter.

A few moments later he added that revenues in the Americas were down 3%, with steep declines in the US and Canada “mitigated by double-digit growth in Latin America.” Wait a minute. Easter – in fact the entire Holy Week – is a huge event in Latin America; yet Latin America had “double-digit growth?” Despite Easter? While rollovers due to Easter destroyed sales in the US where Easter isn’t that big?

Revenues were down in other places: Europe, the Middle East, and Africa saw a 4% tumble – most of the countries were down, but Spain “returned to modest growth,” he said, though Spain is precisely where the Holy Week and Easter are huge. In Asia-Pacific, revenue was down 1%, with white-hot China posting “modest declines” and with depressed Japan growing 3%.

At any rate, there’d be a good list of unfinished deals, the “rollover transactions,” that would kick-start the current quarter, and revenues should be up, right? Um, no. “I did not mean to indicate that all else would also be on the original performance track,” he said. “So, in fact, I still believe there are parts of our business that are in transition or have been underperforming that also were disappointing….”

What a tangle of obfuscation. Blaming sales reps, Easter, and whatnot to disguise what pulled the rug out from under IBM. It’s the same problem that other gauges of the global economy, such as Caterpillar and Oracle, have: declining demand in the US, Europe, and China, combined with tough competition.

A scary thought that the three largest markets in the world could weaken simultaneously – despite the prodigious amounts of money that central banks have printed and handed out. That phenomenon must be hidden under layers of lazy sales reps, sequester deadlines, and badly timed holidays. Yet, at the very end, something did slip out: “We are clearly not immune from changes in the global economy,” Loughridge said during his wrap-up, the most revealing sentence of the entire earnings call.


April 22, 2013

Monsanto announces huge profits despite worldwide backlash

Amid widespread protests against the ‘Monsanto Protection Act’, the biotech giant has reported a 22 percent increase in net profits – an announcement that may spark further outrage about the provision that protects the company from financial damage.

Monsanto on Wednesday reported that its net income rose 22 percent to $1.48 billion, or $2.74 a share, in a one-year period. The profit increase, which occurred in the three-month period through February, marked a new record for the lucrative biotech company. Revenue rose 15 percent to $5.47 billion, much of which came from the sales of genetically modified corn seeds, particularly those sold in emerging markets like Brazil, Argentina, and other Latin American countries.

Monsanto’s seed business, particularly its genetically engineered corn, cotton and soybeans, increased by more than 10 percent in the second quarter. The seeds repel bugs and are resistant to weed-killers, making them popular among farmers trying to yield more produce.

The profit spike exceeded expectations and Wall Street predictions and may have widened the gap between Monsanto and other seed businesses. The company’s shares also rose 89 cents, closing at $104.51 on Wednesday. Over the past years, the shares have risen by about 10 percent.

“So our bottom line business outlook today means the momentum that we anticipated in our first quarter has clearly carried through into even stronger business results for the second quarter,” said CEO Hugh Grant, on a call with analysts, as reported by the Associated Press.

And the company only predicts to be making more money this year: Monsanto expects $2 billion in free cash flow in 2013 and will become “more aggressive” in returning cash to shareholders through dividends and “opportunistic” share purchases,” Chief Financial Officer Pierre Courduroux said during the call with analysts.

But it’s not just the corporation’s seeds that are spiking revenue: the company also sells crop chemicals, which saw a 37 percent increase in sales. The herbicide Roundup, a popular weed killer, jumped by 73 percent to $371 million.

News of the company’s financial success comes just days after US President Barack Obama signed a bill into law that protects the billion-dollar corporation from any sort of litigation. Known by critics as the ‘Monsanto Protection Act’, section 734 of the Agricultural Appropriations Bill gives biotech companies immunity in regards to the production and sale of genetically modified seeds. The company would therefore have free reign to sell genetically engineered products the long-term effects of which remain unknown, without the prospect of facing a lawsuit for it.

Nationwide, Americans from the far right and the far left have united in their condemnation of the provision that benefits Monsanto, and a petition against the provision generated more than 250,000 signatures. Critics claim the legislation allows the company to bypass the court system and continue to dominate the US seed industry.


April 19, 2013

‘Carbon bubble’ leading to another financial crisis, economists warn

The world could be heading for a major economic crisis as stock markets inflate an investment bubble in fossil fuels to the tune of trillions of dollars, according to leading economists.
“The financial crisis has shown what happens when risks accumulate unnoticed,” said Lord (Nicholas) Stern, a professor at the London School of Economics. He said the risk was “very big indeed” and that almost all investors and regulators were failing to address it.

The so-called “carbon bubble” is the result of an over-valuation of oil, coal and gas reserves held by fossil fuel companies. According to a report published on Friday, at least two-thirds of these reserves will have to remain underground if the world is to meet existing internationally agreed targets to avoid the threshold for “dangerous” climate change. If the agreements hold, these reserves will be in effect unburnable and so worthless – leading to massive market losses. But the stock markets are betting on countries’ inaction on climate change.
The stark report is by Stern and Carbon Tracker, a thinktank supported by organisations including HSBC, Citi, Standard and Poor’s and the International Energy Agency. The Bank of England has also recognised that a collapse in the value of oil, gas and coal assets as nations tackle global warming is a potential systemic risk to the economy, with London being particularly at risk owing to its huge listings of coal.

Stern said that far from reducing efforts to develop fossil fuels, the top 200 companies spent $674bn (£441bn) in 2012 to find and exploit even more new resources, a sum equivalent to 1% of global GDP, which could end up as “stranded” or valueless assets. Stern’s landmark 2006 report on the economic impact of climate change – commissioned by the then chancellor, Gordon Brown – concluded that spending 1% of GDP would pay for a transition to a clean and sustainable economy.
The world’s governments have agreed to restrict the global temperature rise to 2C, beyond which the impacts become severe and unpredictable. But Stern said the investors clearly did not believe action to curb climate change was going to be taken. “They can’t believe that and also believe that the markets are sensibly valued now.”

“They only believe environmental regulation when they see it,” said James Leaton, from Carbon Tracker and a former PwC consultant. He said short-termism in financial markets was the other major reason for the carbon bubble. “Analysts say you should ride the train until just before it goes off the cliff. Each thinks they are smart enough to get off in time, but not everyone can get out of the door at the same time. That is why you get bubbles and crashes.”

Paul Spedding, an oil and gas analyst at HSBC, said: “The scale of ‘listed’ unburnable carbon revealed in this report is astonishing. This report makes it clear that ‘business as usual’ is not a viable option for the fossil fuel industry in the long term. [The market] is assuming it will get early warning, but my worry is that things often happen suddenly in the oil and gas sector.”

HSBC warned that 40-60% of the market capitalisation of oil and gas companies was at risk from the carbon bubble, with the top 200 fossil fuel companies alone having a current value of $4tn, along with $1.5tn debt.

Lord McFall, who chaired the Commons Treasury select committee for a decade, said: “Despite its devastating scale, the banking crisis was at its heart an avoidable crisis: the threat of significant carbon writedown has the unmistakable characteristics of the same endemic problems.”

The report calculates that the world’s currently indicated fossil fuel reserves equate to 2,860bn tonnes of carbon dioxide, but that just 31% could be burned for an 80% chance of keeping below a 2C temperature rise. For a 50% chance of 2C or less, just 38% could be burned.

Carbon capture and storage technology, which buries emissions underground, can play a role in the future, but even an optimistic scenario which sees 3,800 commercial projects worldwide would allow only an extra 4% of fossil fuel reserves to be burned. There are currently no commercial projects up and running. The normally conservative International Energy Agency has also concluded that a major part of fossil fuel reserves is unburnable.

Citi bank warned investors in Australia’s vast coal industry that little could be done to avoid the future loss of value in the face of action on climate change. “If the unburnable carbon scenario does occur, it is difficult to see how the value of fossil fuel reserves can be maintained, so we see few options for risk mitigation.”

Ratings agencies have expressed concerns, with Standard and Poor’s concluding that the risk could lead to the downgrading of the credit ratings of oil companies within a few years.

Steven Oman, senior vice-president at Moody’s, said: “It behoves us as investors and as a society to know the true cost of something so that intelligent and constructive policy and investment decisions can be made. Too often the true costs are treated as unquantifiable or even ignored.”

Jens Peers, who manages €4bn (£3bn) for Mirova, part of €300bn asset managers Natixis, said: “It is shocking to see the report’s numbers, as they are worse than people realise. The risk is massive, but a lot of asset managers think they have a lot of time. I think they are wrong.” He said a key moment will come in 2015, the date when the world’s governments have pledged to strike a global deal to limit carbon emissions. But he said that fund managers need to move now. If they wait till 2015, “it will be too late for them to take action.”

Pension funds are also concerned. “Every pension fund manager needs to ask themselves have we incorporated climate change and carbon risk into our investment strategy? If the answer is no, they need to start to now,” said Howard Pearce, head of pension fund management at the Environment Agency, which holds £2bn in assets.

Stern and Leaton both point to China as evidence that carbon cuts are likely to be delivered. China’s leaders have said its coal use will peak in the next five years, said Leaton, but this has not been priced in. “I don’t know why the market does not believe China,” he said. “When it says it is going to do something, it usually does.” He said the US and Australia were banking on selling coal to China but that this “doesn’t add up”.

Jeremy Grantham, a billionaire fund manager who oversees $106bn of assets, said his company was on the verge of pulling out of all coal and unconventional fossil fuels, such as oil from tar sands. “The probability of them running into trouble is too high for me to take that risk as an investor.” He said: “If we mean to burn all the coal and any appreciable percentage of the tar sands, or other unconventional oil and gas then we’re cooked. [There are] terrible consequences that we will lay at the door of our grandchildren.”


April 18, 2013

'No Doubt, Pensions Are Screwed'

In a SPIEGEL interview, Harvard economist Carmen Reinhart argues governments are incapable of reducing their debts and that central banks are now stepping up to resolve the crisis themselves. In the end, she argues, everyday savers will pay the price. Reinhart: No central bank will admit it is keeping rates low to help governments out of their debt crises. But in fact they are bending over backwards to help governments to finance their deficits. This is nothing new in history. After World War II, there was a long phase in which central banks were subservient to governments. It has only been since the 1970s that they have become politically more independent. The pendulum seems to be swinging back as a result of the financial crisis. – Der Spiegel

Dominant Social Theme: Thank goodness for central banking.

Free-Market Analysis: Der Spiegel interviews Harvard economist Carmen Reinhart who has the novel idea that central banks are acting like the "adults" in the room by cleaning up after spendthrift governments.

"Governments are incapable of reducing their debts and now central banks are stepping in."

Perhaps this argument sounds reasonable to a Martian that has not been following exactly what central banks have been doing and continue to do, but last time we looked we weren't Martian.
The idea that monopoly central bankers are "responsible" and politicians are not seems a spurious question, in our humble view. A pox on both their houses.

Politicians spend money as fast as they can and central bankers work for instrumentalities that facilitate that spending.

A monopoly central bank is built to print money. That is what it is supposed to do. To deny it is to deny that a horse is configured to run, or a tiger to hunt, or an elephant, occasionally, to trample.
Here's some more from this "illuminating" interview:

SPIEGEL: Ms. Reinhart, central banks around the world are flooding the markets with cheap money in order to spur economies and support governments. Are these institutions losing their independence?

Reinhart: No central bank will admit it is keeping rates low to help governments out of their debt crises. But in fact they are bending over backwards to help governments to finance their deficits. This is nothing new in history. After World War II, there was a long phase in which central banks were subservient to governments. It has only been since the 1970s that they have become politically more independent. The pendulum seems to be swinging back as a result of the financial crisis ...

SPIEGEL: But the danger of such a central bank policy is already well known: It can lead to high inflation.

Reinhart: True. But it is certainly more difficult for a central banker to raise interest rates with a debt to gross domestic product ratio of over 100 percent than it is when this ratio stands at 39 percent. Therefore, I believe the shift towards less independence of monetary policy is not just a temporary change.

SPIEGEL: As a historian who knows the potential long-term consequences very well, doesn't such short-sighted decision-making frighten you?

Reinhart: I am not opposing this change, I am just stating it. You have to deal with the debt overhang one way or the other because the high debt levels are an impediment to growth, they paralyze the financial system and the credit process. One way to cope with this is to write off part of the debt ...

SPIEGEL: In other words: When the inflation rate is higher than the interest rates paid on the markets, the debts shrink as if by magic. The downside, though, is that this applies to the savings of normal people.

Reinhart: The technical term for this is financial repression. After World War II, all countries that had a big debt overhang relied on financial repression to avoid an explicit default. After the war, governments imposed interest rate ceilings for government bonds. Nowadays they have more sophisticated means.

SPIEGEL: ... with the consequence that people are going to lose their savings?

Reinhart: No doubt, pensions are screwed.

We learn a lot here in a short period of time. Monopoly central banks as virtual appendages of government are doing what governments are incapable of doing – which is cutting spending and reducing debt.

We also learn this is not new, that in previous generations (and monopoly central banking in Europe has been around for much of the past century) the word for this policy is "repression."
Finally, we learn – inevitably – that people's savings are going to be massively affected by all this deliberate money printing.

We could also sum up these insights differently. First, monopoly central banking is an invitation to spend, as politicians are always aware that central banks stand ready to monetize debt.

Second, central bankers will print money to "stimulate" economies, but if we believe what is said in this interview, a deeper game is played. The stimulus is also aimed at inflating currency, thus reducing the amount of debt that governments owe.

A third insight provided by this interview is that central bankers and politicians really don't care about people's savings in a fiat money economy. The savings that people have are merely fungible pools of money that in aggregate have little or no relationship to policy.

There is, of course, a fourth reason that the interview does NOT mention – and that is monopoly central banking is very effective at enriching those who are closest to it. Fresh money, first issued, is very powerful money that has not suffered the ravages of price inflation.

Even more importantly, central bank money printing creates first booms and then busts, centralizing power further in the hands of those conducting and controlling monetary power.

Monopoly central banking aggravates economic cyclicality, encourages government profligacy, inflates the currency and despoils people's savings and retirements. Additionally, it centralizes power and control in the hands of the few at the expense of the many.

It is incredible in this Internet Era that smart people issue forth from European and American schools of "higher learning" still trying to defend and endorse this degraded system.

Even when its defenders such as Ms. Reinhart provide us with a steady stream of justifications and positive analyses, anyone even remotely aware of central banking functionality must see the negatives outweigh the putative positives.

Are there any benefits to central banking? Only if you believe that price fixing and abuse of monetary power is generally a good thing.

Conclusion: Professor Reinhart no doubt believes she is providing us with a realistic – and in a sense positive – perspective about monopoly central banking. She's fooling herself ... but not (these days) so many others.


April 17, 2013

Vice Chairman of Chinese Accounting Association Warns Chinese Local Debt Could Create Bigger Crisis than US Housing Implosion

On the one hand, Bloomberg today tells us retail demand for stocks is as hot as ever:
“Over the last few weeks, every down move has been met with buyers that have come in,” Brad Sorensen, director of market and sector analysis at San Francisco-based Charles Schwab Corp., said by telephone. His firm has $2.08 trillion in client assets. “People on the sidelines are waiting for a pullback to get into the market that they’ve missed for the past six months. We’re seeing more of that today.”
On the other, we have someone well-placed in China telling the world that its local debt is a train wreck waiting to happen, a classic Minksy Ponzi unit, but the timing of the unraveling is uncertain. And the source is an authority and not the sort one would expect to make remarks like that casually.
The Financial Times tells us the alert comes from Zhang Ke, vice chairman of the Chinese accounting association, who said his accounting firm, ShineWing, had virtually stopped signing the financial statements for bond sales by local governments. He described the debt as “out of control” with the potential to cause a bigger-than-housing-crisis level bust. But since the obligations can still be rolled, who knows when the dubious debt will fall under its own weight. As the article explains:
Local government debts soared after 2008, when Beijing loosened borrowing constraints to soften the impact of the global financial crisis. Provinces, cities, counties and villages across China are now estimated to owe between Rmb10tn and Rmb20tn ($1.6tn and $3.2tn), equivalent to 20-40 per cent of the size of the economy. 
Last week, Fitch cut China’s sovereign credit rating, in the first such move by an international agency since 1999. On Tuesday, Moody’s cut its outlook for China’s rating from positive to stable. 
Local governments are prohibited from directly raising debt, so they have used special purpose vehicles to circumvent these rules, issuing bonds under the vehicles’ names to fund infrastructure projects. 
Investment companies owned by local governments sold Rmb283bn of bonds in the first quarter of 2013, more than double the total for the same period last year. Such an increase would normally be expected to boost the economy, but China’s growth unexpectedly slowed to 7.7 per cent in the first quarter of 2013. 
Mr Zhang said many local governments had invested in projects from public squares to road repairs that were generating lacklustre returns, and so were relying on financing rollovers to pay back their creditors. “The only thing you can do is issue new debt to repay the old,” he said. “But there will be some day down the line when this can’t go on.”
Zhang pooh-poohed the value of perceived guarantee by provinces and local authorities and says his firm will sign off on deals only when they see sufficient cash flow.

Now as the FT points out, ShineWing has a competitive axe to grind, since it is trying to break into the big leagues of international accounting firms. But this could also be self preservation. Do you think in a wealth-destroying local government bust that the national government would behave charitably towards the enablers, particularly since it has been trying to rein local borrowing in?

In an interesting bit of synchronicity, MacroBusiness has a new exclusive from Michael Pettis on the local debt issue which casts more light on this issue.

By Michael Pettis, finance professor at the Guanghua School of Management at Beijing University. Cross posted from MacroBusiness

[Saul] Eslake has argued as late as last September that he expected China to continue growing strongly over the next few years, and further claimed, in a 2011 report, that Chinese demand for hard commodities will rise quickly for at least another eight years and probably a lot longer:
But I believe that, even on quite conservative assumptions (which entail some slowing from the growth rates it has recorded over the past two decades), China’s demand for commodities will continue to grow strongly until at least 2019, and may not start to fall away until 2024; while in India, where the commodity-intensive stage of economic development only began in earnest in 2007, it is likely to continue well into the 2030s.
…Eslake says that while the full extent of China’s debt is unclear, much of it is owed by one part of the government to another. “There is the potential for writing off unsustainable obligations that doesn’t necessarily exist in other situations,” Eslake said. “I’m not disputing there are problems there and there is an opaqueness about the size, breadth of the debt problem, but it doesn’t automatically follow that China is facing its own Lehman Brothers moment.”

I am not sure what Eslake means by claiming that much of the debt “is owed by one part of the government to another”, but to the extent that this statement is correct it is pretty meaningless and to the extent that it means anything at all it is simply wrong. Although there are a number of intermediaries in the debt process in China, some of whom are indeed government entities, broadly speaking Chinese debt is owed by a group of borrowers that consists mainly of local and provincial governments and their financing vehicles, state-owned enterprises, real estate developers, large manufacturers, and other government related entities (the PBoC, the MoF, the various development banks, etc.).

These debts are owed mainly to Chinese households, either indirectly in the form of bank deposits and wealth management products intermediated by the banks, or, to a lesser extent, directly in the form of mutual funds, insurance companies, pension funds, and so on. To the extent that there is intergovernmental debt, this mainly occurs as agencies intermediate depositors and the ultimate borrowers.

…When solvency is the problem, implicit losses have to be resolved one way or another, and the costs must ultimately be assigned to some sector of the economy. Insolvency is a risk whenever the economic benefits created by an investment are less than the economic costs associated with the investment. In that case the investment makes a country poorer, but failure to recognize bad debt allows the county to feel richer when the investment is made. How the investment is financed can affect the stability and liquidity of the borrowing entity, but it cannot create or eliminate the original loss.

…Who pays for the transfer? In the past in China – and usually in every case in the world – the loss is paid for by the household sector, either in the form of busted deposits, taxes, or hidden transfers, of which the financial repression tax usually is the most important. China’s last banking crisis was paid in this way. Fifteen years ago China’s banking system was insolvent, with estimates that up to 40% of total loans were effectively non-performing had they been correctly identified.

The banking system was cleaned up over the next decade partly by implicitly granting massive debt forgiveness to borrowers in the form of extremely low interest rates (perhaps negative in real terms for most of the past fifteen years), which allowed the borrowers to “grow out” of their debt burden, and partly by the very wide spread mandated by the PBoC between the minimum lending rate and the maximum deposit rate, which guaranteed banks a huge profit. After 10-15 years of this, China’s domestically financed bad debt seemed miraculously to resolve itself.

But there was no miracle, and I think this what confuses Eslake and others like him who did not understand how the bad debt was actually resolved. There was simply an annual – if hidden – transfer of resources equal, according to my back of the envelope calculation, to between 5% and 8% of GDP from households to banks and borrowers. Did this have an economic impact? Of course it did.


April 16, 2013

Is The Takedown Of Gold A Sign That The Entire Global Financial System Is About To Crash?

Somebody out there is sure getting prepared for something really big.  We have just witnessed a takedown of gold and silver unlike anything that we have witnessed in decades.  On Monday, the price of gold had fallen by more than 10 percent at one point.  It shocked investors all over the globe, and overall what we have just seen was the largest two day decline in the price of gold in 30 years.  The price of silver dropped even more rapidly on Monday.  It was down more than 14 percent at one point.  There was an atmosphere of "panic selling" as investors and financial institutions raced to liquidate their holdings of silver and gold.  But was this exactly what someone out there wanted?  As I wrote about the other day, big banks and news outlets all over the world have been boldly proclaiming for weeks that gold is entering a "bear market" and that now is the time for all of us to sell our gold.  In particular, Goldman Sachs reportedly told their clients earlier this month that they "recommend initiating a short COMEX gold position".  Was that just a "good guess" on their part, or was something else going on?  Were they actually trying to help create a "selling frenzy" that would drive the price of gold much lower?

What we witnessed on Monday was absolutely jaw-dropping.  Just check out this chart of the price of gold over the past 10 years.  The takedown of gold on Monday sticks out like a sore thumb...

And that chart does not even show the full extent of the collapse.  As I write this, the price of gold is sitting at $1355.20.

But this is just the beginning for gold and silver.  As I have warned repeatedly, the price of gold and the price of silver will experience wild swings in the years ahead.

For example, the following is what I wrote about gold and silver on August 7th, 2012...
I like precious metals myself, but if you are going to invest you need to get educated so that you know what you are doing.  If you go in blindly you are likely to get burned at some point. 
In addition, you need to be prepared for wild fluctuations in price over the coming years.  There will be times when gold and silver absolutely soar and there will be times when they drop like a rock. 
So if you are going to play the game you need to be able to handle the ride.
Monday was an example of what I meant when I said that "you need to be able to handle the ride".  There are going to be a lot more days like Monday (both up and down) for gold and silver in the years ahead.

The foolish people are those that are scared out of their wits and that are selling off all of their gold and silver right now.

Sadly, there was reportedly a tremendous amount of panic selling of gold and silver during this collapse.  The following is what Dennis Gartman told CNBC on Monday...
"There are a lot of people throwing up their hands. Throwing positions overboard. Panic is everywhere," Gartman said in a "Squawk Box" interview on Monday. "I've never seen anything like this. I mean it."
It just shows that there are a lot of stupid people out there.  The following is an excerpt from another CNBC report about the panic selling that was happening on Monday...
"I think the last $20 has been margin selling. The market is falling like a knife. People are saying, 'Get me out now,' " Phoenix Futures President Kevin Grady said. "You're also seeing people selling energy profits to pay for metals losses. You're seeing a tremendous amount of gold liquidation today."
According to Dr. Paul Craig Roberts, Assistant Secretary of the Treasury under President Ronald Reagan, all of this panic selling is the result of an orchestrated takedown of gold and silver...
This is an orchestration (the smash in gold). It’s been going on now from the beginning of April. Brokerage houses told their individual clients the word was out that hedge funds and institutional investors were going to be dumping gold and that they should get out in advance. 
Then, a couple of days ago, Goldman Sachs announced there would be further departures from gold. So what they are trying to do is scare the individual investor out of bullion. Clearly there is something desperate going on...
So who is behind all of this orchestration?  Well, according to Dr. Paul Craig Roberts, it is actually the Federal Reserve...
The Federal Reserve began its April Fool’s assault on gold by sending the word to brokerage houses, which quickly went out to clients, that hedge funds and other large investors were going to unload their gold positions and that clients should get out of the precious metal market prior to these sales. As this inside information was the government’s own strategy, individuals cannot be prosecuted for acting on it. By this operation, the Federal Reserve, a totally corrupt entity, was able to combine individual flight with institutional flight. Bullion prices took a big hit, and bullishness departed from the gold and silver markets. The flow of dollars into bullion, which threatened to become a torrent, was stopped.
In fact, Dr. Roberts says that former Goldman Sachs trader Andrew Maguire is reporting that the Fed orchestrated the dumping of 500 tons of naked gold shorts into the market on Friday...
According to Andrew Maguire, on Friday, April 12, the Fed’s agents hit the market with 500 tons of naked shorts. Normally, a short is when an investor thinks the price of a stock or commodity is going to fall. He wants to sell the item in advance of the fall, pocket the money, and then buy the item back after it falls in price, thus making money on the short sale. If he doesn’t have the item, he borrows it from someone who does, putting up cash collateral equal to the current market price. Then he sells the item, waits for it to fall in price, buys it back at the lower price and returns it to the owner who returns his collateral. If enough shorts are sold, the result can be to drive down the market price.
As Dr. Roberts noted, this represents an absolutely massive amount of gold...
Consider the 500 tons of paper gold sold on Friday. Begin with the question, how many ounces is 500 tons? There are 2,000 pounds to one ton. 500 tons equal 1,000,000 pounds. There are 16 ounces to one pound, which comes to 16 million ounces of short sales on Friday. 
Who has 16 million ounces of gold? At the beginning gold price that day of about $1,550, that comes to $24,800,000,000. Who has that kind of money?
If any of the allegations above are even remotely true, then a whole lot of people need to be criminally investigated.

Meanwhile, many are considering this takedown of gold to be an ominous sign that another major financial crisis may be heading our way.

Just remember what happened back in 2008.  As Zero Hedge noted on Monday, the price of gold suddenly plunged 21 percent in July 2008.  That was just a couple of months before the U.S. stock market crashed in the fall...
The rapidity of gold's drop is impressive, concerning, and disorderly. We have seen two other such instances of disorderly 'hurried' selling in the last five years. In July 2008, gold quickly dropped 21% - seemingly pre-empting the Lehman debacle and the collapse of the western banking system.
Is this collapse in the price of gold a harbinger of another major stock market crash?
Time will tell.

Meanwhile, many average Americans are wondering if they should dump their gold and silver while they still can.

As I mentioned above, gold and silver are going to experience wild fluctuations over the next few years.  When the next stock market crash comes, gold and silver are probably going to go even lower than they are today for a short time.  But in the long run gold and silver are going to soar to unprecedented heights.

Investing in gold and silver is not for the faint of heart.  If you cannot handle the ride, you should sit on the sidelines.  We are entering a period of tremendous financial instability, and holding gold and silver is going to be like riding a roller coaster.  The ups and downs are going to shake a lot of people up, but the rewards are going to be great for those that stick with it the entire time.



April 15, 2013

Today's Low Gold & Silver Prices Are Not Realistic

During this very tumultuous week for precious metals prices, Chris sat down with Mike Maloney, founder and owner of GoldSilver.com, one of the world's largest bullion dealers.

Mike is a true scholar of monetary history. His reasons for getting into the bullion business have their roots in a very predictable cycle that has happened time and again over the centuries (more accurately millennia):
  1. A new monetary system is introduced, based on sound money (most commonly, using gold and/or silver)
  2. Currency (e.g., paper bills backed by sound money) is introduced to faciliate trade and commerce
  3. Governments begin to tinker with ways to 'print' more currency than can be fully backed (e.g., coin clipping, partially-backed notes, FRNs)
  4. A false prosperity ensues. Those closest to the new money creation benefit most and debase the currency further to forward their advantage.
  5. Reality begins to catch up with this deficit spending and the purchasing power of the currency weakens dramatically.
  6. The monetary system collapses under too many claims on a limited pool of sound money.
  7. Eventually, a new monetary system backed by sound money rises from the ashes (see Step 1, above).
Mike believes that we are currently experiencing Step 6 and that we will witness the birth of a new monetary regime within the next ten years.

What makes this moment in history unique is that all past monetary regime collapses have happened regionally. This is the first time in human history in which all the world's major currencies are collapsing together. Which is why he is so passionate about owning gold and silver.

In his opinion, we will soon witness the greatest transfer of wealth ever seen, as countries worldwide realize they need to revert to monetary systems backed by sound money (i.e., the precious metals). Those acquiring gold and silver beforehand will not only preserve their wealth as existing fiat currencies are extinguished, but will see staggering increases in their purchasing power. Those interested in learning more of Mike's specific vision can watch Episode One of his new Hidden Secrets of Money video series. (Chris and I received advance screenings of the next few episodes, which are excellent in terms of explaining the processes and shortcomings of our current monetary system.)

On the Tightening Physical Market for Gold & Silver

What most people do not understand is that the price of gold and silver are not determined by how much gold and silver is being sold. It is how many gold and silver IOUs are being sold. And you can write as many IOUs, futures contracts and options, as you want. Those are unlimited. The supply, though, of physical gold and silver is quite limited, and so when people actually start asking for it and they want the physical, then there is a divergence of the paper price versus the physical price, and we are seeing that right now.

We are in a back-order situation with all of the suppliers. Spreads are going up. Silver eagles cost about fifty cents over spot more than they normally cost because all of the suppliers have had to raise their price to try and find the supply/demand equilibrium that the markets are for. The markets are there to try and find a supply/demand equilibrium, so then price is the arbitrator. Price rises; that draws more supply and reduces demand. Price falls; that reduces supply and increases demand.

So the price discovery mechanism of the markets is what is supposed to ensure that things are in equilibrium. We have this broken system where there are a few big players that manipulate the market, and it always shows up when shortages start developing in the physical market. You know that the price of gold and silver right now are too low to be realistic. And the good thing about that is that it cannot last.

On the Hidden Wealth Transfer Caused by Inflation Targeting

Everybody got in an uproar over [the Cyprus bank deposit haircuts], but nobody gets in an uproar over the central banks targeting 3% inflation. That compounds out to 34% of your wealth that they are confiscating every decade. People got mad because it happened all at once and they could see it. One day their bank account said one thing; the next day it said another thing. With this insidious confiscation known as inflation, this is the inflation tax – you do not see it because the number on your bank account might say that you could make a deposit and if there are no fees or anything on that deposit, $100,000 deposit a decade ago still stays $100,000. Except gasoline went from $1.25 to near $5.  Measured in gasoline, you lost 75% of that $100,000, but it still says $100,000.

So the central banks targeting this 3% inflation rate is a wealth transfer from the public to the financial sector.

On the Recent Price Weakness in the Precious Metals

You do not want to stay in just one investment class your whole lifetime. But it is a very powerful tool to be able to measure these classes against each other and then jump from an over-valued asset class to an under-valued asset class at the appropriate time for the road to true wealth. And it only requires a few big decisions during your lifetime.

Now, when I discovered wealth cycles, I was looking at the Dow Gold ratio and thinking this thing has a cycle. I made another check of the Gold Dow ratio instead the Dow Gold ratio, and put them on top of each other. Lo and behold – there is a cycle. It has a positive side and a negative side. If you are doing a Dow Gold ratio, you jump from being invested in paper assets like stocks and then back to gold for the long investment waves. I would say it is somewhere between 8 and 20 years you spend in an asset class, and you can do this with anything. If you measure your house in how many barrels of oil it is worth over a century and you jump back and forth from being invested in oil wells to being invested in real estate, it is the same thing as being invested in gold or the Dow. It is a very powerful tool that I believe has a high degree of predictability and safety to it, if you do not let the short-term noise flush you out.

Right now we are in consolidation. Gold has been chopping sideways for 19 months now, and it has worn people out. But basically gold is up. It is not up from 19 months ago when it was nearing $2,000, but it sure is up over the last decade. So I do not let the short-term noise affect me now that I know that we have not reached the point where the price of gold equals the points on the Dow. Right now gold’s value is one-ninth of the Dow, and so I know that it needs to rise by a factor of 18 against stocks before I need to get worried and start watching gold.

So I am very comfortable in these pullbacks. It gets a little aggravating, but still it does not bother me that much and is definitely not going to flush me out.

April 12, 2013

Of Bubbles and Bitcoins

The newest invention in monetary affairs are the so-called Bitcoins. Their creators and promoters explain them as follows: 'Bitcoins are digital money. They are transferred person to person through Internet without going a bank or a clearinghouse, so they are independent of the current monetary system. Several currency exchanges exists where you can trade your Bitcoins for dollars or euros, and some small business and freelancers are starting to accept them in payment.'

The Bitcoin is a game. We live in a highly confused and perplexed world regarding what real money has to be. Let's get this straight: Real money has to be the commodity that is generally accepted by society as payment in full for goods or services received.

Throughout history, the commodity most generally accepted in payment has been gold. Silver has taken the second place after gold. Gold and silver were chosen by humanity thousands of years ago, as the commodities with which to make payments.

In the exchange of any given merchandise for gold (or silver), neither of the parties to the interchange ends up owing the other party. There has been "settlement."

The Bitcoin may serve as a medium of exchange, as do the world's currencies, but neither the Bitcoin nor any of the currencies of the world can achieve settlement, because the Bitcoin is not a commodity, and neither are the dollar, the euro, the yen, the yuan, etc.

Since there can be no settlement with Bitcoins, at some point many people are going to be more or less seriously burnt when this Bitcoin game goes out of fashion, depending on how much they are holding when the game ends.

So you won playing that great game, "Monopoly"? It's a great satisfaction to win playing "Monopoly" – you have all those bills, and your game partners are busted! In truth, all the high and mighty fellows running the world's Central Banks are keeping us amused and busy as we attempt to gather as much as we can of the "Monopoly" money they print up for us. But when you have a lot of their "Monopoly" money, or of Bitcoins, what do you really have when the game ends? You have papers or worthless digits, period.

The only thing that the holder of Bitcoins can do – like any holder of currencies – is to get rid of them by buying things, while there is someone willing to receive them in "payment." I use quotes around the word "payment," because since August 1971 there is in this world no real payment at all. Real payment involves settlement, and neither Bitcoins nor currencies can achieve settlement. The proof lies in the $11 Trillion of International Reserves that have built up around the world, because there has been no settlement of international trade imbalances since August 1971. If the Bitcoin mania continues to grow, expect digital quantities of Bitcoins to show up in Chinese Central Bank reserves. Then the creators of the Bitcoins will have to proceed to issuing Bitbonds, so that the Chinese can trade there Bitcoins for Bitbonds which pay interest. It's all a huge game, dollars, euros, pounds, yen, yuan and now Bitcoins – all the same garbage.

Bitcoins cannot be accumulated safely as savings, because they are not a commodity, nor redeemable into any commodity. We are seeing how unsuspecting depositors of sums of currency in banks are in danger of seeing their deposits cancelled by government decree. Tangible commodities such as gold and silver cannot evaporate because they are not created artificially.

The world of artificial currencies – which now includes the famous Bitcoin – will end in disaster. A truly maddened world knows not where to turn for safety. The vicious drug of artificial money has got the world on a "high." More drug will kill our civilization, but less drug will send it into a violent withdrawal. Humanity seems to be trapped in a death-cult.

The popularity of the Bitcoin is based on the existing mentality, which considers that something designed "scientifically" must have some value.

The Bitcoin is an example of the tremendous hold that the idea of the omnipotence of technology to solve human problems has upon humanity. However, technology cannot create matter; it cannot create commodity-money, as it cannot create petroleum. Technology may give various forms to matter, but it cannot create matter or substance, and money must be the substance that is most accepted in commerce. All the Ph.D.s and Nobels in Economics are playing games to keep the world entertained. The less their pronouncements make sense, the wiser they think we will consider them.

You tell me: What is the future that awaits a humanity so confused that it can no longer distinguish between an abstract concept and what is real and material? Very confused people are participating in speculations in imitation currencies – dollars, pounds, euros, yen, yuans, Bitcoins − in the hopes of obtaining some profit or benefit, because unable to think for themselves, they can do nothing but speculate − and ruin themselves.

What worries me is not how the speculators will fare; what worries me is: how are the masses going to behave toward me and my family when the fraudulent currencies of the world, Bitcoins included, have turned those masses into hungry beggars?