And Scene: ICI Reports 13th Consecutive Week of Massive Domestic Equity Outflows As Banks Start To Panic

 

Guest Post: Gold Meltdown Or Mania - Batten Down The Hatches

Get Ready for Gold Rush in China
China’s government announced it will loosen restrictions on imports and exports of gold amid strong internal demand for the metal. Experts say the move will boost gold trading in China and support prices.


GATA chairman Bill Murphy over at lemetropolecafe.com passed around an e-mail he received on this story suggesting that there may be more to it than meets the eye.  I agree with that. It might be a mea culpa in advance of what is about to happen to JPMorgan when decide to continue covering their grotesque short positions in silver... and gold.  We'll see. The Bloomberg headline reads "Blythe Masters Says ‘Don’t Panic’ as Commodities Slip"... and the link to this rather interesting story is here.

Israel Vows To Retaliate Against Monday's Attack, Blames Hamas

 

Guest Post: Clash On Israel-Lebanon Border Holds Potential For Strategic Escalation

 

Chinese Banking Stress Test Assumptions Imply Chinese Real Estate May Be Overvalued By As Much As 60%

U.S. Treasuries not safe for China, ex-central bank adviser says

 

Lawrence Williams: Beware the dragon's gold teeth

 

"US Treasury yields fall to record low on Fed's 'QE lite' plan".  Yields on short-term US Treasury debt have fallen to the lowest in history on mounting expectations of extra stimulus from the Federal Reserve.  As I've said many times... it's print, or die.  Empires have to fed... or they implode.  The link is here.

 

"Democrats have launched America on the most reckless policy experiment in its history"
A frightening assessment of how Obamacare could affect your life... 

In The News Today

Posted: Aug 04 2010     By: Jim Sinclair      Post Edited: August 4, 2010 at 1:48 pm
Filed under: In The News
Jim Sinclair’s Commentary
Like the 1950s science fiction movie, "The Blob," OTC derivatives, whatever the flavor of the day, continue to grow and grow.
Nothing has been cured and the potential for a second and more shocking economic event is real and in the present time.
Global Interest Rate Derivative Volume Near $450 Trillion End-June Wednesday, August 04, 2010 8:51:57 AM (GMT-07:00)
By Min Zeng
NEW YORK (Dow Jones)–The total outstanding notional amount for all interest rate derivative transactions reported by the 14 major dealers including Goldman Sachs & Co, Morgan Stanley and J.P.Morgan was $449.202 trillion as of June 30.
The data were compiled by TriOptima, an infrastructure provider for the over-the-counter derivatives markets, which runs the global data warehouse for the derivatives markets. The global data collection is a key element of efforts to bring more transparency to the derivatives markets that were at the heart of the financial crisis. Detailed reports are submitted monthly to regulators; public reports contain the aggregated data.
Policy makers in major economies have pushed for derivatives to trade in exchanges and settle through central clearing houses. In the U.S., the Congress just passed the biggest financial regulatory overhaul since the Great Depression including tighter rules on derivatives.
TriOptima said that 74%, or $332.237 trillion, of the notional total was made up of interest rate swaps, which allow companies and banks to exchange fixed-rate interest payments for floating rate payments as a way to hedge their exposure to fluctuating rates or bet on the direction of interest rates. Other interest rate derivatives include currency swaps.
Other major dealers in rate derivatives markets are Barclays Capital, BNP Paribas, Bank of America-Merrill Lynch, Citigroup, Credit Suisse, Deutsche Bank AG, HSBC Group, The Royal Bank of Scotland Group, Societe Generale, UBS AG and Wells Fargo Bank.
More…

Jim Sinclair’s Commentary
You have to love the made up stories on reasons why gold does anything. It should read shorts on the floor cover for technical reasons.
Money flows support potential for a hyperbolic rally soon.
Gold Tops $1,200 on China Shift BY MATT DAY
NEW YORK—Gold futures climbed to their highest levels in almost two weeks, supported by sustained physical buying and speculation about stronger demand from an expanded Chinese market.
The most actively traded contract for December delivery rose $16.20, or 1.4%, to $1,203.70 an ounce on the Comex division of the New York Mercantile Exchange.
Prices have advanced for five straight sessions, lifted by bargain
More…

Jim Sinclair’s Commentary
Round and round we go for a new economic experience in the Western World and a state of the USA. Japan with "QE to infinity" will result in currency induced cost push hyperinflation, perhaps everywhere except Asia and certain African countries.
Japan PM hints at additional economic stimulus
TOKYO — Japanese Prime Minister Naoto Kan on Tuesday said he would consider whether additional steps to boost the economy are needed amid fears Japan’s recovery is losing steam.
"The labour situation is still severe and economic conditions overseas have not necessarily stabilised," Kan, who took the leadership less than two months ago, told a budgetary committee of the parliament’s lower house.
"We have come to a point where we will have to consider whether taking action in any way is necessary," he said after a lawmaker urged the government to take additional measures to stimulate the economy.
Japan limped out of recession in spring 2009 but its recovery has been fragile, with recent data pointing to signs that export- and stimulus-led recovery may be stalling.
Last week the government said that unemployment had ticked up to 5.3 percent in June, the highest level since November and above market expectations of 5.1 percent.
More…

usawatchdog.com

Monday started out with a bang!  There were strong earnings reported from some big banks, manufacturing rose for the 12th straight month, construction spending edged up (mainly due to government projects) and the stock market jumped 200 points.  Problem solved—economy back on track, right? Wrong!  Tuesday, everything changed.  Some of the auto manufacturers did not have as much earnings growth as anticipated, data was released that consumers are reluctant to spend money; and even though manufacturing rose for 12 straight months, new orders dramatically tapered off during the last three.  Yesterday, a Reuters story spun the sour economic news this way, “Even though recent data has suggested slowing growth, most economists see low probability of another severe downturn in the near future.”

 I don’t know which “economists” Reuters is talking to because everybody from Paul Krugman to Alan Greenspan is warning about deflation and a double dip recession.  Economist John Williams at shadowstats.com has been forecasting another severe downturn in the economy for months, despite nearly $4 trillion in stimulus that was pumped into the banks and overall economy.  In his most recent report, Williams says, “Only politicians and Federal Reserve officials without viable options and Wall Street hypesters would claim that the current structural economic depression could be turned fundamentally by short-lived stimulus measures. Now, as the unaddressed structural issues reassert themselves, the problems at home are at the base of the renewed systemic woes. . .”   

So, while the stimulus is wearing off, the contraction is intensifying.  According to Williams, this is producing some unexpected consequences such as, “. . . additional explosive growth in the federal deficit, an unexpected further surge in Treasury funding needs, and unexpected renewed solvency concerns for the banking system. Such conditions are bad news for the U.S. equity and credit markets.”  I interpret this to mean stocks and bonds are going to take a hit sooner than later.  Long term, think dollar lower and gold higher.  Your main concern right now should be a return of capital and not a return on capital.   

How will the Federal Reserve battle a contracting economy and dreaded deflation?  Look no further than St. Louis Fed President James Bullard.  In a CNBC interview last Friday, he said, “Quantitative Easing is our best bet.”  Quantitative Easing, or QE, is money printing–pure and simple.  Bullard wants more inflation, and with interest rates already at nearly zero percent, there is little else the Fed can do.  Don’t think Bullard is “off the reservation” because his boss, Ben Bernanke, recently told Congressional leaders, “. . . we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential . . . .” 

Please watch the CNBC interview below of Mr. Bullard.  To me, he appears anxious and nervous as he talks about wanting to produce more inflation!

If the Fed wants inflation, it will surely get it with massive amounts of money printing.  Yesterday’s Wall Street Journal article echoes that thought by reporting, “A senior fund manager at bond-fund giant Pacific Investment Management Co. said Tuesday it is “extremely unlikely” the U.S. could see Japan-like deflation given that the Federal Reserve has the tools to combat a downward spiral in consumer prices.” 

So, the way it looks, there is definitely another plunge coming to the economy.  That will be followed by more stimulus and money printing (QE) and another rise in the economy.  At some point, this stomach churning roller coaster ride will come to an end.  Let’s hope we don’t make the U.S. dollar puke in the process.

Greg Hunter

www.purusaxena.com

BIG PICTURE – Many prominent economists define deflation as a decline in the general price level within an economy.  To make matters worse, these academics use the establishment’s highly manipulated inflation data as their yardstick.  Therefore, when the heavily massaged Consumer Price Index (CPI) and Producer Price Index (PPI) show a moderate increase, these folks celebrate the ‘perfect scenario’ of moderate inflation and when the CPI and PPI contract, they worry about deflation.  Unfortunately, the vast majority of people blindly follow the views of the mainstream economists.  Consequently, they end up making costly mistakes with their capital. 

You will recall that during the bottom of the previous bear-market, most of the pundits were shunning ‘risky assets’ (stocks and commodities) and they were advocating a heavy exposure to cash and fixed income assets.  Back then, the vast majority of strategists and their devotees were erroneously fretting about deflation.  According to these folks, deflation was a done deal due to the following reasons:

a. Contraction in private-sector debt – When the credit crisis arrived in the summer of 2008 and asset prices collapsed later that year, over-leveraged consumers and businesses started paying off their debt (Figure 1).  After all, this act of deleveraging was a logical reaction to the devastation caused by the most vicious bear-market since the 1930s.  So, when private-sector debt began to shrink, the proponents of deflation (deflationists) announced the death of inflation. “How could the global economy inflate when the private-sector was tightening its belt?” was their battle cry. 

Figure 1: Private-sector debt in the US

Source: St. Louis Fed

Although the deflationists had a point, their assessment was flawed because they totally ignored the borrowing capabilities of the governments.  Whilst it is true that from peak to trough, private-sector debt in the US contracted by roughly US$800 billion, this debt reduction was overwhelmed by the US government’s debt accumulation efforts.

Figure 2 shows that over the past two years, US federal debt has surged by a whopping US$3 trillion, thereby more than offsetting the deflationary impact of private-sector deleveraging.  If you have any doubts whatsoever, you will want to note that total debt in the US is now at a record high!

Figure 2: Explosion in US Federal Debt

Source: St. Louis Fed

It is interesting to observe that in response to the Great Recession, in addition to the US, most governments have taken on huge amounts of debt. And by doing so, they have managed to thwart the deflationary forces of private-sector debt repayment.

b. Excess capacity – The lack of aggregate demand and the excess capacity prevalent within the economy is another factor often cited by the deflationists. Let us explain:

You will recall that in the aftermath of the Lehman Brothers bust, the credit markets froze and the global economy came to a screeching halt.  Suddenly, worldwide consumption contracted and the world was left with idle factories, empty buildings and unwanted inventories.  Thus, the deflationists argued that with such a lack of aggregate demand and so much spare capacity, we could never experience inflation. 
Once again, the deflationists failed to understand that over-capacity has been a constant feature in our economic landscape and price increases (which they erroneously describe as inflation) have very little to do with capacity utilisation. 

It is interesting to observe that over the past 42 years, the US economy has never operated at full capacity (Figure 3).  Moreover, it is notable that even during the highly inflationary 1970s and the most recent inflationary boom (2003-2007), the US economy operated well below maximum capacity.  In case you are wondering, the same holds true for the global economy.  Therefore, the idea that inflation cannot occur in the face of excess capacity is ill-conceived and absurd.  

Figure 3: Chronic over-capacity in the US

Source: www.thechartstore.com

All the popular deflation myths aside, the reality is that inflation is an increase in the supply of money and debt within an economy.  Furthermore, the price increases often described as inflation are simply consequences of monetary inflation (euphemism for the dilution of the money stock). 

Look.  Whenever any central bank creates new money and whenever any entity (individual, business or government) takes on more debt, the outcome is inflation.  As Milton Friedman once said, “inflation is always and everywhere a monetary phenomenon”.

Today, under our fiat-money system, governments are willing borrowers and central banks are more than eager lenders (money creators).  Under these circumstances, a contraction in the supply of money and debt (deflation) is out of the question.  Conversely, given the short-sightedness of the politicians and their perpetual urge to ‘kick the can down the road’, the real risk facing the economy is extreme inflation or even hyperinflation. 

Given our grim outlook on inflation, we continue to favour hard assets and the fast-growing developing economies in Asia.  If our assessment is correct, our preferred sectors (energy, precious metals and industrials) and our favourite stock markets (China, India and Vietnam) are likely to generate spectacular long-term returns.  

Puru Saxena

Editor’s Note: Want to hear more? Join Puru Saxena and other industry heavyweights during the Kitco Metals eConference September 12-13, 2010.  A not-to-be missed event featuring Ron Paul, Marc Faber and others. The eConference is free with Pre- Registration www.kitcoeconf.com.