Hitler is not happy about his margin call...
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China Will Blink and Gold Will Soar
Posted on June 7, 2012
Republics are created by the virtue, public spirit, and intelligence of the citizens. They fall, when the wise are banished from the public councils, because they dare to be honest, and the profligate are rewarded, because they flatter the people, in order to betray them.
- Justice Joseph Story
When it becomes serious, you have to lie.
- Jean Claude Juncker, Luxembourg PM and Head Euro-Zone Finance Minister in 2011
The Game Continues
I have no idea why anyone is making a big deal about The Bernank’s testimony to Congress today. There was no way he was going to come out with anything meaningful. The only thing our favorite Keynesian sorcerer wants to do is get through the session in as painless a manner as possible. It would be completely foolish to rock the boat in any way during such testimony, as it would just invite all sorts of aggressive questions and make the entire thing more of a spectacle than it already is. It would also increase the likelihood of a verbal blunder, so there is just no need. In fact, I am 100% certain that The Bernank merely wants to toe the line as carefully as possible and at the same time get some nice propaganda out there to the sheeple. In that sense, I think he achieved his goal.
Mapping the Next Five Months
Everyone has an opinion and on days like today people really like to come out and spout theirs so I suppose I may as well join the club. In a recent article, I wrote that The Big Print is Coming and in this piece I want to follow that one up with exactly how I think it all will manifest between now and the election. Of course, no one can predict the future, but what I want to do is attempt to outline how I think Central Planner policy will unfold from now until the U.S. Presidential election in early November.
Ok so let’s start with the FOMC meetings. Between now and election day there are four. The first one as everyone know is June 20th, followed by August 1st, September 13th and then October 24th. Many pundits claim that if the Fed is going to act they may as well do so well before the election so as not to appear to be “influencing the election.” I’m not so sure about that. Maybe in times past, when the power structure was a bit more reserved and less blatant about their corruption and manipulations. They don’t hide that stuff anymore. The “elites” in America today are simply gangsters. We have already been officially christened as a Banana Republic. The criminal behavior that now governs our political and economic system is now all out in the open for anyone with eyes to see. They don’t care.
What I want to make clear in this piece is that just because I think a massive wave of liquidity is coming from the Central Planners, that doesn’t mean I expect it to happen in June. There is no doubt that The Bernank is now doubting all of his academic theories of the past and is scared out of his mind to “do more.” He is afraid it won’t work, he is afraid of the demand for physical gold and silver that it might spark, and he is also afraid to use the bullets now with asset prices where they are. He wants to save it for when he needs it and he knows he will need it.
So the game continues. Talk up the economy, talk down printing and pray. The beige book and today’s testimony represented textbook Fed strategy in 2012. Strategy that I have discussed many, many times in months prior. They can talk all they want and give all the reassurances they want but talk from monetary magicians does not alter the reality on the ground. As I have stated repeatedly in the last two weeks, I think the Fed is more behind the curve than at any point since 2008. Back then, The Bernank assured us that there was no housing bubble and that subprime was contained. Big bank CEOs were pimped out on CNBS to claim their solvency weeks before going under or needing a bailout. The only strategy left was to lie. Despite the fact that it didn’t work then doesn’t stop them from trying now. Why? They are insane.
Barring a market catastrophe in the next two weeks I do not expect the Fed to act at the June meeting. With rates where they are and stocks where they are there is little upside to action; however, this lack of action is precisely what will set the stage for the massive action that must come later. One of the main things that has allowed the Fed to kick the can down the road as long as it has is the fact that ever since 2008 they have acted aggressively on the first hint of weakness. While the beige book pointed to relatively rosy conditions for the U.S. economy, I think that is because they were looking at data from early April through late May together. If you look at the U.S. economic statistics, the data didn’t start turning for the worse in a serious manner until late in the second half of the month of May. The Fed knows this but they are purposefully misleading the market. In reading a Bloomberg article about the beige book the following quote stood out to me: “’The Beige Book is clearly at odds with the hard data we’ve been seeing,’ said Millan Mulraine, senior U.S. strategist at TD Securities in New York. ‘We’ve seen a dramatic slowdown in economic growth momentum that you’d think would be reflected in a few, if not the majority, of districts.’” Move along folks…nothing to see here.
As a result, if the market heads into the Fed meeting at current levels it runs the risk of being disappointed. If this is combined with continued economic weakness then the real set up happens between the June meeting and the August one. It is in that interim period that the market could throw another one of its hissy fits and beg for more liquidity. Money supply growth is extremely sluggish right now all over the world. The velocity never happened and the global economy is rolling over. The Fed is already behind the curve and so when they are forced to act the infusion will have to be huge just to stem the momentum. What will really be interesting is if they will be able to stem the momentum. I have no idea but the longer they wait the less likely they will be able to.
China Will Blink and Gold Will Soar
To illustrate the point. Take a look at China’s M2 Monthly year-over-year growth in the chart below. Do you really think they are going to allow that trend to continue? If they do what do you think the implications are for the world? For the U.S.? Want to bet on decoupling? I don’t.
China’s M2 Monthly year-over-year growth
The big point is that China will act and in a meaningful way. What I suggest people do is go back and look at different asset classes from the prior two lows in China’s M2 year-over-year growth rate. The first one occurred in late 2004. The M2 growth rate then accelerated until around mid 2006. In that time period gold prices went up around 85% and the S&P 500 went up 20%. In the second period of acceleration from late 2008 to late 2009 gold was up 60% and the S&P500 was up 15%. We are at one of these inflection points and considering the DOW/Gold ratio is still holding gains from its countertrend rally from last August of almost 40%, this is probably one of the best entry points to buy gold and short the Dow of any time in the last decade. Oh and if you want more juice, when China blinks silver does much, much better than gold…
Peace and wisdom,
Mike
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Jamie Dimon And The Fall Of Nations
Posted on June 5, 2012
Excellent article here by Simon Johnson, the former chief economist for the IMF and a professor at MIT’s Sloan business school. I think the following paragraph pretty much summarizes the root cause of America’s decline into Banana Republic status…
The historical evidence is overwhelming. Many societies have done well for a while – until powerful people get out of hand. This is an easy pattern to see at a distance and in other cultures. It is typically much harder to recognize when your own society now has an elite less subject to effective constraints and more able to exert power in an abusive fashion. And given the long history of strong institutions in the United States, it appears particularly difficult for some people to acknowledge that we have serious governance issues that need to be addressed.
Full article here
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Bank Gives Man Counterfeit Money, Refuses To Refund It!
Posted on June 6, 2012
This story from the Huffington Post is unbelievable. The bank itself, whose sole business is to deal with “money,” is not responsible for the fact that they provided their own customer with a counterfeit bill. No, in the United States of Banana Republic the banks are never wrong! It is your fault for somehow not knowing the bill was counterfeit. I mean this takes things to another level. So if a department store is selling fake Hermes bags is it the customers fault for buying it? This is so sick.
There is an even bigger takeaway from this. I think the primary driver in all of this is to discourage the use of cash. Remember the story about the Tennessee cop stealing the New Jersey man’s cash for no reason on the highway? This it to ingrain in people’s minds that cash is bad. That’s right serfs, be obedient little subjects and stay in your digital dollars.
Key Quotes:
Imagine withdrawing money from a bank and then finding out that the money is counterfeit and cannot be refunded.
Hagman withdrew $2,500 from his savings account at TD Bank in February, according to the Star-Ledger. Then he went to Bank of America to deposit the money, only to find out from the teller that one of the $100 bills was counterfeit.
He reported it to the Secret Service and went back to TD Bank to get a refund, but the supervisor said that was against the bank’s policy, since he already had left the bank with the cash. “I asked why a bank customer, me in this case, should have to serve as this bank’s ‘quality control officer,’” Hagman told the Star-Ledger.
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GOLF POEM
In My Hand I Hold A Ball,
White And Dimpled, And Rather Small.
Oh, How Bland It Does Appear,
This Harmless Looking Little Sphere.
By Its Size I Could Not Guess
The Awesome Strength It Does Possess.
But Since I Fell Beneath Its Spell,
I've Wandered Through The Fires Of Hell.
My Life Has Not Been Quite The Same
Since I Chose To Play This Stupid Game.
It Rules My Mind For Hours On End;
A Fortune It Has Made Me Spend.
It Has Made Me Curse And Made Me Cry,
And Hate Myself And Want To Die.
It Promises Me A Thing Called Par,
If I Hit It Straight And Far.
To Master Such A Tiny Ball,
Should Not Be Very Hard At All.
But My Desires The Ball Refuses,
And Does Exactly As It Chooses.
It Hooks And Slices, Dribbles And Dies,
And Disappears Before My Eyes.
Often It Will Have A Whim,
To Hit A Tree Or Take A Swim.
With Miles Of Grass On Which To Land,
It Finds A Tiny Patch Of Sand.
Then Has Me Offering Up My Soul,
If Only It Would Find The Hole.
It's Made Me Whimper Like A Pup,
And Swear That I Will Give It Up.
And Take To Drink To Ease My Sorrow,
But The Ball Knows ... I'll Be Back Tomorrow.
A recent study found that the average golfer
Walks about 900 miles a year.
Another study found that golfers drink, on
Average, 22 gallons of alcohol a year.
This means that, on average, golfers get about
41 miles to the gallon!
Kind of makes you proud. Almost makes you
Feel like a hybrid. . .
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Is the Table Set for a Mania in Precious Metals?
By Jeff Clark, Casey Research
It may feel like I'm out of touch with the precious metals markets to broach the subject of a mania today, but I think the table is being set now for a huge move into gold and silver.
There are, however, very valid reasons to reasonably expect a mania in our sector. For one thing, manias have occurred many times before, but the main issue is that a mania in gold and gold stocks is the likely result of the absolute balloon in government debt, deficit spending, and money printing. Saying all that profligacy will go away without inflationary consequences seems naïve or foolish. Inflation may not attract investors to gold and silver as much as force them to it.
Now, one could make the argument that any rush into gold and silver will be muted if no one has any savings, especially given that demographers say a quarter of the developed world will soon be retired. But even if individuals are wiped out, the world's money supply isn't getting any smaller, and all that cash has to go somewhere.
I wanted to look at cash levels among various investor groups to get a feel for what's out there, as well as how money supply compares to our industry. Data from some institutional investors are hard to come by, but below is a sliver of information about available cash levels. I compared the cash and short-term investments of S&P 500 corporations, along with M1, to gold and silver ETFs, coins, and equities. While the picture might be what you'd expect, the contrast is still rather striking.
Naturally, not all this money or even a big chunk of it will be used to buy GLD, Barrick, or American Eagles, but it's clear that if any significant fraction of the cash sloshing around the economy were to be used to buy gold, it would have a major impact on the price of gold – which would trigger the mania I fully expect. Let's take a quick look at what kind of impact our sector could experience if just a small amount of available funds were devoted to various forms of gold and silver.
The entire worldwide value of all gold exchange-traded products (ETPs) currently represents just 2.1% of the cash and short-term investments held by S&P 500 corporations. If 20% of these companies decided to put a mere 5% of their available holdings into these precious metals vehicles, their value would more than double.
If just 1% of the physical currency (M1) floating around the system were used to buy gold Eagles, it would be 13 times more than the entire value of all coins purchased last year.
If corporations chose to invest 1% of their cash in silver ETFs, it would surpass the total current value of all such ETFs.
If corporations moved 5% of their "short-term investments" evenly into gold stocks, the market cap of every gold company would increase by 20%.
If they chose silver stocks, they'd each grow by a factor of six.
Five percent of M1 would increase the market cap of gold producers by 14%. The same fraction would be 3.4 times bigger than the entire current value of all primary silver producers.
This is just S&P 500 corporations – there are many more corporations in the world, as well as pension funds, hedge funds, sovereign wealth funds, mutual funds, private equity funds, private wealth funds, insurance companies, and other ETFs.
It's striking, when you really stop to think about just how big the impact could be if some significant fraction of the larger financial world started chasing the small niche market that is gold. Such cash inflows will send our industry to the moon.
In the meantime, keeping our eye on the big-picture forces that have yet to play out is the plan to follow. Sooner or later, though, I'm convinced the catalysts will kick in that will pull/push/drag/compel/force the mainstream into our sector. I suggest beating them to it.
And when the mania arrives, we'll all wonder why anyone doubted it in the first place.
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