Real Deficit

My posts have been sporadic lately, but the news has been mostly the same.  Europe, Europe, and more Europe.  I was trying to find my post from last year that started the same way.  I'll say the same thing I'm sure I did then.  IT'S NOT GOING TO BE "FIXED".  The good news for the US is that it makes the dollar look like it's safe.  Boy is that scary.

I saw this in the USA Today.  The typical American household would have to pay nearly all it's income in taxes to offset the budget deficit.  That is if the government used standard accounting rules.  The current average, per-household income in the United States is $49,000 a year. The U.S. actual, real deficit, according to existing accounting standards, totaled $42,000 per household last year… or just a little more than $5 trillion.

This comment is from Stansberry Research:
Unlike every other institution in the United States (and just about every other government in the world)… Congress exempts itself from normal accounting standards. Specifically, it doesn't include the cost of future retirement benefits. If any other institution in the U.S. – including corporations, state governments, local governments, or banks – did their accounting this way, they would go to jail.  But the U.S. Congress… That bastion of decency, tradition, and stature… the place where our national future is charted… where our credit and honor are housed? Nope. It doesn't have to include any of those expenses. And so the public is routinely lied to… every year… by every major media outlet…

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There is a major currency war going on right now.  It's a battle to debase the fastest.  The next few articles discuss this.

Gold Breaks Downtrend, Sort Of...

American gold traders see gold prices in a downtrend, and wonder whether the December 2011 bottom will hold as a support level.  There is not much to like in the chart of gold prices, as priced in U.S. dollars.

But European gold traders see a much different picture.  The chart plot of gold prices measured in euros has now broken its declining tops line, and appears to be in a much more favorable configuration.

So who is right?

Generally speaking, when the dollar price of gold disagrees with the euro price, it is usually the euro price plot that ends up being correct about where both are heading.  So there is important information to be gained by not just looking at each price plot, but also comparing the two.

These differences in behavior show up most obviously in the form of divergent tops or bottoms.  If the dollar price of gold makes a higher high, for example, while the euro price makes a lower high, it is time to worry.

But differences in behavior can also show up in a more subtle way, and that is what we are seeing right now.  The dollar price of gold is still in a downtrend, but the euro price has already broken its equivalent declining tops line.  Generally speaking, the breaking of trendlines like this in the euro quite often precedes the breaking of the equivalent line on the dollar price chart.

Interestingly, this same principle does not work for some reason when we look at silver prices in each currency.  Silver prices generally move in sympathy with gold prices, but silver tends to be more volatile than gold, and thus it tends to attract the "hot money".  I like to say that it helps to think of gold as the dog, and silver is the tail of the dog. The tail is going to go wherever the dog goes, but it will follow along much more excitedly.

Because silver trades with so much greater volatility than gold prices, it is harder to see the differences in the price plots that are caused by currency translations.  There is just not as much of a difference than what we see in the gold price charts.  When divergences appear, it is usually at price tops, and here we see the big difference in behavior.  For silver divergences, for some reason it is usually the dollar price plot that tells the truer story about where both are headed.

Coming back to gold, this sign of a downtrend break in the euro price of gold arrives at a time when investor sentiment toward gold is at a bearish extreme.

The non-reportable traders are owners of futures contracts whose total position size is considered by the CFTC to be so small that they are not worth having those positions reported individually.  They are considered to be the small-time speculators, and thus the opposite of the presumably "smart money" commercial traders. The recent data show that this group of traders is at its lowest net long position in years, as they are expressing a more bearish view toward gold. Seeing the small speculators get scared out of the gold market is a sign that the mission of the downtrend is about done.

Tom McClellan
Editor, The McClellan Market Report

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And The Currency Wars Heat Up

I don’t know about you but to me events seem to be accelerating in pace as we hurtle along towards what feels like another crisis point.  These are historic times we are living through as the global monetary system undergoes realignment.  The last time something like this happened World Wars I and II were fought and the global banking system moved its center from London to New York.

Some of the events of the past week have piqued my spidey-sense which is reacting to the sheer number of them in such a short period of time.   And the CME Group (NYSE:CME) stands at the center of it.


The Three Signs
The CME Group was involved in three major announcements this week, individually they mean very little but in conjunction say a lot:

The margin requirements for Gold and Crude Oil contracts were cut by 13% and 10% respectively.
They announced a 5 for 1 stock split and extended grain trading hours.
Both CME and Intercontinental Exchange (NYSE:ICE) were designated as systemic by the U.S. Dept. of the Treasury
By lowering the margin requirements for both gold and oil, this tells me, along with a few other factors that the floor has been put under the price of both commodities.  Lowering margin requirements makes it easier for speculative money to flow into the market.  With volumes and open interest in gold futures at levels not seen since late 2008, enticing more activity on the exchange makes sense. The SPDR Gold ETF (AMEX:GLD) saw inflows this week of $1.1 billion after losing $2.4 billion in redemptions for the first three weeks in May.

By opening up grain trading hours and lowering margins the CME is attempting to increase profitability and transaction volume on the exchange.  Now that they are no longer in the running to purchase the London Metals Exchange, which is down to ICE and the Hong Kong Exchange Company, CME has to react to the very negative past year with MFGlobal and the relentless Silver and Gold manipulation stories emanating from the trading community.

But, the timing of this announced split is odd.  CME’s chart is uninspiring.  The stock has been stuck in a decaying consolidation pattern for the past 3 years.  It looks to be trading near fair value, so why split it unless there was some other motive to entice retail investors to come on board at a lower price in conjunction with the recently announced dividend?

The Iranian Connection
The last portent is the most important, however, for its potential implications given the timing and the rest of the global macro situation.  Last week I went over in detail the devaluations of the currencies of those who have publicly stood by Iran since their expulsion from the SWIFT international bank transfer system.  Recently the Tehran Times reported that Iran had developed an alternative to SWIFT that was now operational; allowing Iranian banks and the Central Bank of Iran to do business with the outside world, bypassing the effects of the SWIFT dis-invitation.

As well, China announced that they would now be accepting Japanese Yen as well as U.S. Dollars in exchange for Yuan. Now the Yen can be used for the settlement of trade with China and not just the U.S. Dollar.  This is very bullish for the CurrencyShares Japanese Yen ETF (AMEX:FXJ) especially considering how quickly the Japanese are moving in their investments around Southeast Asia in countries like Vietnam, Cambodia, Myanmar and Indonesia.  This is also another direct blow to the U.S. petrodollar system.  The Yen was chosen not because of its strong fundamentals but because it is the most liquid of the currencies of Southeast Asia at this point.  I would expect to hear of other such conversions into the Hong Kong and Singapore Dollars in the coming months.

So, when we add those things to the announcement that both major U.S. commodity exchanges have been given an explicit bailout guarantee by the Federal Reserve to go into effect around the same time as sanctions against all friends of Iran go into effect we get a very worrisome thought.

Golden Signals
When you operate under the assumption that there are no coincidences then you have to wonder why this announcement now going into effect when it does?  The CME and ICE have been given these resources because those resources need to be in place.  If there was to be a failure of the COMEX or ICE due to an inability to deliver product to those longs who stand for delivery then the following course of action would take place:

The COMEX would declare force majeure and settle all contracts in Dollars.  Stiffing the longs who stood for delivery.
Those dollars would have to come from the Federal Reserve
Current Open interest in gold is 435,000+ contracts.  June open interest is currently 93,790 or 9.379 million ounces.  The COMEX states they have 11+ million on hand of which 8.5 million is eligible for delivery.  While under normal circumstances the number of contracts that settle physically are very small, in a panic situation that could change rapidly.  And if there was something that caused a run on the COMEX gold reserves, that would necessitate a bailout from the Federal Reserve.  
This is the vaunted commercial signal failure scenario that many gold commentators have been predicting would or could happen as the end-game for the Federal Reserve’s current policy of managing the rising gold price.  And if that were to occur, the CME group would need a bailout from the Federal Reserve.

On Friday, May 25th, 24,887 June contracts were settled and re-applied further out in time, with the lion’s share moving out to August, 17,437 of them. 
The failed talks between the U.S. and Iran over Iran’s nuclear program in which there were no negotiations only a hard line stance from the U.S. who refused to back off on sanctions.  The headlines this weekend were filled with stories of Iran building two reactors; it was front page on the Drudge Report along with a report from Reuters that Iran has enriched nuclear fuel to 27%.

The rhetorical war is heating up again.  Gold and oil have been given the green light for accumulation.  At this point it would not surprise me if there was some form of attack on Iran in the next 30-60 days.  If an attack on Iran or a failure of the Eurozone to work out their problems on the periphery were to occur, the gold and/or oil markets would go ballistic and the exchanges would have to be protected.  The groundwork is being laid for major events and I would recommend protecting yourself accordingly.

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Euro On The Brink



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More Fast Food Rage

This guy in Ohio crashed into the Taco Bell because they forgot one of his tacos.  I can't make this stuff up.

Today’s instance of drive-thru rage comes from Huber Heights, Ohio, where a 23-year-old man allegedly crashed his truck into a Taco Bell after he “did not get one of the tacos he ordered,” according to police.

Michael Smith was arrested early this morning for felony vandalism in connection with the bizarre 12:15 AM incident at the fast food restaurant. Smith, pictured in the mug shot at right, is being held in the Montgomery County jail.

Police were summoned to the Taco Bell by workers who reported that a “white male in a white truck struck” the eatery’s entrance and then fled the scene. Cops tracked a fluid trail leaking from the vehicle to Smith’s home, where he was arrested.

Smith, cops noted, admitted “intentionally striking the building after realizing he did not get one of the tacos he ordered.” Smith’s crash shattered windows and caused other damage to the Taco Bell, where a taco retails for 99 cents.
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I know the Facebook IPO has been an epic fail, but I think Zuckerburg made enough where he could at least tip his waitstaff.  Apparently, this is the second time on his trip this has happened.  What a douche...

Facebook founder Mark Zuckerberg left no tip after Rome lunch

The owners of the kosher restaurant in Rome's Jewish Ghetto – a historic quarter in the centre of the city – were surprised when Mr Zuckerberg and Priscilla Chan walked away without leaving a gratuity.
Their bill came to just 32 euros after a lunch consisting of deep-fried artichokes – a Roman Jewish speciality – fried pumpkin flowers and ravioli stuffed with sea bass and artichokes.
Instead of wine or beer they opted for a bottle of water and a pot of tea.

Waiters at Nonna Betta, which specialises in Roman Jewish cuisine, were amazed by Mr Zuckerberg's parsimony, not just because of his huge wealth but because of Americans' reputation for tipping generously, as is expected of them at home.
It was not a case of not enjoying the meal, said the owner of the restaurant.
"I asked him 'how was it?' and he said 'very good'", the owner, identified only as Umberto, told Corriere della Sera newspaper. "I had gone up to him and said 'Are you ...?' and he said 'Yes'."
It was not the first time that the multi-billionaire chose not to tip – he reportedly did the same thing the night before at Pierluigi, a historic trattoria near Campo de' Fiori, a pizza in the heart of Rome.
The couple's honeymoon was a closely guarded secret until a Polish tourist spotted them in the Sistine Chapel, snapped a blurry photograph, and posted it on Twitter – Facebook's social network rival.
True to his casual style, the young internet tycoon was wearing jeans, a T-shirt and trainers.
They left Rome on Monday, with speculation that they might be heading towards the Amalfi Coast south of Naples before heading back to the US.
Mr Zuckerberg, 28, whose shares in Facebook are worth nearly $20 billion, married his long-time girlfriend on May 19 in Palo Alto, California.
Their wedding took place a day after Facebook's initial public offering on the NASDAQ stock exchange.
The couple had planned the exchange of vows for four months, but surprised their guests, who thought they were to celebrate Miss Chan's recent graduation from medical school, a celebrity magazine reported.
Mr Zuckerberg, Time magazine's Person of the Year in 2010, started Facebook in his Harvard University dorm room eight years ago, before dropping out of the Ivy League school.
Ms Chan just graduated from medical school at the University of California, San Francisco. The couple met while at Harvard.

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If anyone thinks higher taxes is the cure, this is what happens when you tax people to death.

Escape From New York? High-Taxing Empire State Loses 3.4 Million Residents in 10 Years

(CNSNews.com) – New York State accounted for the biggest migration exodus of any state in the nation between 2000 and 2010, with 3.4 million residents leaving over that period, according to the Tax Foundation.

Over that decade the state gained 2.1 million, so net migration amounted to 1.3 million, representing a loss of $45.6 billion in income.

Where are they escaping to?  The Tax Foundation found that more than 600,000 New York residents moved to Florida over the decade – opting perhaps for the Sunshine State’s more lenient tax system – taking nearly $20 billion in adjusted growth income with them.

Over that same time period, 208,794 Pennsylvanians moved to Florida, taking $8 billion in income.

“Many of these New York and Pennsylvania residents no doubt moved to Florida for the warm weather,” says the foundation, a nonpartisan research group. “[B]ut many more may have moved there because the state does not have an individual income tax, an estate tax, nor an inheritance tax.”

The Tax Foundation has created a “migration calculator” based on data from the Internal Revenue Service, tabulating the number of individuals moving between states each year, and income affected by the shifts.

The calculator shows that 612,520 people renounced their citizenship in New York State and moved to Florida in the 10-year period, taking with them $19.7 billion in adjusted growth income.

Between 2009 and 2010 alone, 40,195 New York residents moved to Florida, taking $1.3 billion in income.

According to the group, New York ranked second among the states for the highest state and local tax burden in 2009.  The Empire State was ranked highest for tax burden every year from 1977 until 2006, except in 1984 when it was ranked second.

New York State has a progressive personal income tax rate ranging from 6.45 percent to 8.82 percent for those earning over $2 million. Sales varies by county, and is between seven and eight percent.  In Manhattan, the sales tax is 8.875 percent.

According to the Retirement Living Center, which examines tax burdens by state for those nearing retirement, New York also levies a gasoline tax at 49.0 cents per gallon and a cigarette tax of $4.35 per pack, along with an additional $1.50 per pack in New York City.

New York is also one of 17 states plus the District of Columbia that collects an estate tax, with a $1 million exemption and a progressive rate from 0.8 percent to 16 percent.

In 2007, New York State collected $1.1 billion from its estate and gift taxes, the highest of any of the states, according to the Tax Foundation.

California is also known for more onerous taxes and regulations, and the foundation shows similar trends of migration from there to other states like Texas and Arizona.

The Tax Foundation ranked the Golden State sixth highest in the nation for state and local tax burden in 2009.

Between 2000 and 2010, the most recent data available, 551,914 people left California for Texas, taking $14.3 billion in income.  Texas has no state income tax or estate tax.

A total of 48,877 people moved to Texas from California between 2009 and 2010 alone, totaling $1.2 billion in income.  Another 28,088 from California relocated to Nevada and 30,663 to Arizona, a loss of  $699.1 million and $707.8 million in income respectively.

Overall, California had the most departures between 2009 and 2010 – 406,883 people, representing a loss of $10.6 billion in income. Over that year 365,763 people moved there, representing a net loss of 41,120 residents.

Since 2000 1.2 million more people have left California than have moved there, the second biggest net loss, after New York.

Florida, meanwhile, had a negative net migration of 966,934 between 2000 and 2010 – meaning nearly a million more people moved to the state than left. Texas also has a negative net migration – 807,552 – during the same time period.

Florida and Texas rank the two lowest in net migration over the decade, followed by North Carolina, Arizona and Georgia, each of which has a negative rate.

The Tax Foundation acknowledges that taxes are not the only reason to flee a state. “Taxes are one of hundreds of factors that go into a person's decision to move,” it says on its website. “Others include age, technology, job prospects and the quality/quantity of government services provided.”

The foundation also points out that the migration calculator is not definitive.  “A true study that sought to quantify the importance of taxes for locational decisions would need to account for as many other factors as possible, in addition to possible serial correlation issues between variables, especially taxes.”