Thursday, June 30, 2011

St. Louis Fed study says QE devalued dollar by 6.5 to 11 percent


Eric Sprott and Andrew Morris: Let the silver sellers beware


Central bank gold sales now seen as evidence of weakness, trader tells WSJ


Thom Calandra: Trawling for gold juniors in the race to $1 billion


In The News Today

Jim Sinclair’s Commentary

Here is the latest from John Williams’

- Real Disposable Income on Track for Second-Quarter Contraction
- An Unlikely U.S. Default Would Hit Dollar and Accelerate Inflation
- New Action to Depress Officially Reported Inflation?

“No. 376: General Update”

Federal Withholding Tax Data Says The US Is Already In A Recession
Lee Adler, The Wall Street Examiner | Jun. 29, 2011, 9:35 AM
I like tracking withholding taxes because they are one of the only economic barometers that we can follow virtually in real time on a daily basis. The charts below contain daily data through June 23.
The first chart shows this year and last year superimposed on one another. The blue shaded line is this year. The brown shaded line is last year at the same time date. That this year has had gains versus last year most of the time as indicated by the spread between the two lines. However, that has begun to change in recent weeks, with this year no longer showing material gains versus last year.
I was wondering how much of the gain was due to inflation, so I calculated the year to year difference and then adjusted it by the government’s employment cost index annual rate of change. That measure has been running consistently running around 2%, which is lower than the CPI (surprise, surprise, surprise). The resulting chart is below.

Jim Sinclair’s Commentary

That means they are broke! You think the euro has problems? Hang on.
Maybe Illinois will inquire about opting out of the Union of the United States. Then Illinois can print the Chicago Rupee.
Illinois out of money for income tax refunds

State owes businesses $620 million in income tax refunds dating to 2009
Posted Jun 28, 2011 @ 10:02 PM

SPRINGFIELD — With the start of a new budget year just two days away, thousands of Illinois businesses are still waiting for state income tax refunds dating back to 2009.
The Illinois Department of Revenue said Tuesday it would end the fiscal year June 30 still owing about $620 million in business income tax refunds. As of June 21, the department still owed 7,572 business income tax refunds, although spokeswoman Sue Hofer said the number by the end of the month would be lower because some since have been paid.
The oldest of the overdue refunds goes back to April or May of 2009, she said. The average amount of the refunds owed is $104,000. Hofer said refunds less than $5,000 have been paid.
“There is not enough money in the Income Tax Refund Fund,” Hofer said in explaining the delays.
The Income Tax Refund Fund is set up to provide sufficient money each year to cover refunds. State law determines the amount set aside annually.
This is not the first year that fund has fallen short. According to the audit, the funds for businesses and individual refunds combined ended fiscal 2010 with a $1.380 billion deficit and fiscal 2009 with a $949.3 million deficit.

Jim Sinclair’s Commentary

Positive PR on non-offensive good ole QE when it is ending. Why?

Fed’s Bullard: QE effective proxy for rate cuts
By Mark Felsenthal
ST. LOUIS | Thu Jun 30, 2011 7:21pm EDT

(Reuters) – Large-scale bond buying can be an effective monetary policy substitute when the Federal Reserve runs out of room to cut interest rates, a top official of the U.S. central bank said on Thursday.
Speaking on the final day of the Fed’s latest bond-buying initiative, James Bullard, president of the St. Louis Federal Reserve Bank, pronounced the purchases, which have totaled $2.3 trillion in all, successful in easing financial conditions.
“This experience shows that monetary policy can be eased aggressively even when the policy rate is near zero,” he said at a St. Louis Fed conference evaluating quantitative easing.
Bullard qualified his assessment by saying the effects of bond buying on reviving the economy are harder to evaluate and have been clouded by shocks, including disruptions from the Japanese earthquake and European debt problems.
The Federal Reserve exhausted its conventional tools when it cut short-term interest rates to near zero in December 2008.
Since then the Fed has sought to provide an additional boost to the economy via two asset-buying programs — with the second program dubbed QE2 — effectively showering the banking system with money to try to spur lending. Economists call this tactic quantitative easing.

Jim Sinclair’s Commentary

Releasing oil from storage is going to cure what? Do you think we have some systemic problems?

New San Francisco bridge built in China to be shipped to US
First, China made cut-price clothes and knick-knacks. Then it learned how to make mobile phones and iPads. Now it is making a 2,050ft-long bridge spanning the San Francisco bay.
By Malcolm Moore, Shanghai
11:32AM BST 28 Jun 2011

Next month, four enormous steel skeletons, the last of the 12 segments of the bridge, will be shipped 6,500 miles from Shanghai to San Francisco before being assembled on site.
The bridge, which will connect San Francisco to Oakland on the other side of the bay, is a sign of how China has moved on from building roads and ports in Africa and the developing world and is now aggressively bidding for, and winning, major construction and engineering projects in the United States and Europe.
After building forests of skyscrapers in Beijing and Shanghai, showpiece buildings like the Bird’s Nest stadium and the Guangzhou Opera House, and a high-speed rail network that is the envy of the world, Chinese construction companies are flush with cash and confidence. This week, Wen Jiabao, the Chinese premier, lobbied David Cameron to give the contract for the UK’s new high speed rail link to a Chinese company.
According to Engineering News Record, five of the world’s top 10 contractors, in terms of revenue, are now Chinese, with likes of China State Construction Engineering Group (CSCEC) overtaking established American giants like Bechtel.
CSCEC has already built seven schools in the US, apartment blocks in Washington DC and New York and is in the middle of building a 4,000-room casino in Atlantic City. In New York, it has won contracts to renovate the subway system, build a new metro platform near Yankee stadium, and refurbish the Alexander Hamilton Bridge over the Harlem river.

So Much For That Japanese Recovery: Large Manufacturer Confidence Plummets 

So much for the Japanese renaissance which somehow is supposed to lead to a surge in Q3 US GDP growth. Following yesterday's surprisingly strong factory production growth rate of +5.7% (the second highest in history), every economist (and Joe LaVorgna), was already shifting their strawman from declining energy costs (which are now back to early June levels courtesy of the IEA idiocy), to Japan as the last bastion of growth. Alas, the just released Tankan quarterly index of large manufacturer confidence has confirmed that the rumors of Japan's economic reincarnation have been greatly exaggerated after it dropped by the most since the Lehman collapse, plunging from +6 in March to -9, well below the economist (and Joe LaVorgna) consensus of -7. From Bloomberg: "Forecasts by Panasonic Corp. (6752) and Hitachi Ltd. for weaker earnings have added to signs of depressed demand. Monetary tightening by Asian economies grappling with inflation means that Japanese companies also can’t count on customers within the region for boosting sales. “The global economy is starting to slow, heightening uncertainties about its future direction,” Ryutaro Kono, chief economist at BNP Paribas in Tokyo, said before the report. “The downside risks to China and other emerging economies seem to be on the rise." In other words, the global economic growth is impacting Japan, and it is not the Japanese slowdown that is impairing some mythical global growth story. Of course, by the time the economist (and Joe LaVorgna) pool figures this out, QE 3 will be well on its way.

Guest Post: Deconstructing Algos, Part 2: Leveraging Chaos Into High-Frequency Arbitrage Opportunities 

The recent elegant explanation for the activities of the HFT algos by Nanex seems likely to be a better one than the analysis that follows, as it answers the all-important question--why? In the following analysis we will look a little bit at how, but most or our interpretation of the results is coloured by the Nanex explanation. It explains why so many trades happen outside the bid-ask spread, particularly as the bid and ask prices are moving rapidly. They are scalping fractions of pennies from some poor fool who has data more than a few ms old. As this is the reason, the method of choosing bid and ask prices pales in significance next to the methodology of stuffing the orders. This methodology I know nothing about and will not address. This article will address how to use this stuffing to create endless opportunities for arbitrage. The principal advantage discussed in the Nanex report is stuffing the market with so many orders that competitors have trouble seeing the present state of the market. Whenever such inefficiencies are created, an arbitraging opportunity may also be created. One method of creating arbitrage opportunities is through manipulation of time. We are accustomed to thinking of information flow as instantaneous, but it is limited by the speed of light. How might HFT take advantage of this?


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Harvey Organ, Thursday, June 30, 2011

Open Interest in Silver drops to 112,000/12 million silver oz standing for delivery

Fed Halts Sales Of Toxic AIG Sludge Upon Realization Any Balance Sheet Unwind Crashes The Market 

Three weeks ago, when discussing the failed (yes, failed) Maiden Lane 2 auction by the New York Fed, we said: 'Something quite disturbing happened during today's latest attempt by the Fed to sell $3.8 billion in face amount of Maiden Lane 2 assets: it had a busted dutch auction. In fact, the auction was so massively busted, the New York Fed managed to sell only half of the bonds for sale, or $1.898 billion in 36 Cusips of the total 73 Cusips offered for sale." Subsequently we noted the sudden radiosilence from the Fed on this issue on Twitter. To be sure, every MBS trader and the kitchen sink promptly complained that the Fed was saturating the market with toxic AIG garbage, which prompted us to declare that: "unless someone opens up a release valve, we are about to see a massive regurgitation and even more massive repricing of credit risk, first in IG, then in HY and ABX/CMBX, and lastly, and most massively, in equities, which continue to exist in their own world and which are now totally disconnected with HY, which they used to track so very closely." We just got the release valve: from Bloomberg: "The Federal Reserve Bank of New York is halting its sales of mortgage bonds acquired in the rescue of American International Group Inc. "Given prevailing market conditions” for residential mortgage-backed securities, “we do not anticipate any sales of bonds in the near term or until such time as the New York Fed deems it will achieve value for the public," Jack Gutt, a New York Fed spokesman said in an e-mail." Uh, what prevailing market conditions: a Nasdaq which has ripped over 100 points in one week (granted on no volume and on unprecedented market manipulation but so what). Regardless, this is a huge slap in the face for the Fed, which has just proven that even in a surging market it can not unwind an amount from its book that is less than 1% of its total asset holdings without actually crashing the market.


QE2 Ends Today But Fed Will Still Buy $25 Billion per Month in Treasuries

Author: goldnews | Filed under: Central Bank News, Forex News, Precious Metals News Today is the final day of QE2, the Federal Reserve’s balance sheet expansion program, but the real end is far from sight. Despite the expected slowdown in purchases, the buying of Treasury securities will continue as the Fed reinvests their maturing principal on current assets. Over the next year, the Fed will purchase another $300 billion in Treasuries alone, a pace about four times slower than during QE2, but still a significant chunk of the total supply coming to market. Read the rest of this entry »

Caught In The Act: HFT Option Algos Observed Frontrunning Today's PMI Release 

In another case of purely coincidental serendipity, three days ago Zero Hedge informed readers that the "NYSE Boerse [sic] has just announced its purchase of Kingsbury International Ltd., which surveys managers for the Chicago Business Barometer, also known as the company that hosts the Chicago PMI data, in order to bring PMI data direct to feed subscribers. Net result: expect even more market volatility at each PMI release, now that the market is not two but three-tiered, and consisting of regular HFTs, HFTs with access to the Deutsche Boerse feed, and everyone else." We concluded: "It is unclear if the ultra-speed, HFT friendly feed would be activated before its next release on June 30. That said, we will certainly coordinate with our friends at Nanex for any trading abnormalities, primarily in the critical ES futures, this Thursday at 9:42am, keeping a close eye on the tape, and indicating precisely when the tiered data release hits." Well, as promised here is the Nanex data. As expected, it's a stunner.

Swiss Franc and the possibility of huge mortgage defaults in Central Europe
06/30/2011 - 17:03
It was really easy getting that mortgage in Hungary, and the best of all, denominated in Swiss Francs, so the interest rate was low. Such a great plan, if it wasn’t for that currency risk.....
America's Oil Price Inflation Crisis is Yet to Come

NIA is very disturbed by President Obama's decision to sell off oil from the U.S. emergency oil reserve, in an attempt to drive down oil prices. One week ago it was announced that the U.S. and other oil-consuming nations that are a part of the International Energy Agency (IEA) will begin releasing 60 million barrels of oil from their reserves, with 30 million barrels coming from the U.S. government-owned reserve. They hoped that by flooding the market with excess supply, they would cause an artificial forced liquidation of oil futures contract holders who bought using leverage.
The U.S. Strategic Petroleum Reserve is the world's largest government-owned stockpile of emergency crude oil reserves and is maintained by the U.S. Department of Energy (DOE). It holds 727 million barrels of oil reserves at four different sites along the Gulf of Mexico. Considering that the U.S. is releasing 30 million barrels of oil from these reserves, we are reducing the size of our emergency reserve by 4.1%.
After Obama's decision was announced on June 22nd, crude oil prices originally dipped as much as $5.71 per barrel from $95.41 per barrel down to a low of $89.70 per barrel on June 23rd. Oil prices declined slightly more during the next two trading days, reaching a low this past Monday of $89.61 per barrel and closing Monday at $90.61 per barrel. However, oil prices have surged $4.81 during the past three days and are currently $95.42 per barrel. Oil has recovered the entire dip that came after Obama's decision was announced and is now a penny higher than before his announcement. Unlike 2008 when most oil futures contract holders were hedge funds using leverage in an attempt to make short-term profits, today most oil investors are much stronger hands who bought with cash, because the world is now flooded with dollars thanks to Federal Reserve Chairman Ben Bernanke.
It certainly wasn't worth jeopardizing the homeland security of this country by reducing our emergency oil reserve by 4.1%, just to see a $4 reduction in oil prices that lasted for only 3 days. If the White House had any faith whatsoever in Bernanke's assertion that rising oil prices are only transitory, there would be no reason to release 30 million barrels of oil from our emergency reserve. The rising oil prices we have experienced so far is far from an emergency. The emergency will come soon when the world turns its back on the U.S. dollar and we see a rapid decline in its purchasing power. The emergency will be here when the U.S. can no longer import oil from foreigners at any price due to hyperinflation, and we are forced to live with only the oil produced in this country.
At any time that they choose, China has the power to set off in our country the economic equivalent of a nuclear bomb. China can at any time announce that they are no longer going to buy U.S. treasuries, but they are going to take their $2 trillion in U.S. dollar reserves and use them to buy gold. The price of gold would double overnight, with the U.S. dollar immediately losing half of its purchasing power. The yuan would then skyrocket in purchasing power, automatically giving China the world's largest economy with the Chinese GDP soaring past U.S. GDP. There would be a massive rush out of the U.S. dollar with our trading partners unwilling to export any oil to us.
The U.S. currently produces only 5.5 million barrels of oil per day, but consumes about 19.3 million barrels of oil per day, with total input into refineries of 14.7 million barrels of oil per day. This means the U.S. currently needs to import 9.2 million barrels of oil per day. U.S. commercial crude oil stockpiles are currently 359.5 million barrels or enough to last for 24 days without any domestic production. In the event of hyperinflation where the U.S. is cut off from oil imports, if we were forced to live off of our own oil production of 5.5 million barrels of oil per day, our commercial stockpiles would be gone in 39 days.
Without an emergency oil reserve, in the event of a major oil shortage due to hyperinflation, after a period of just 39 days, farmers won't have enough oil to produce food, manufacturing plants won't have enough oil to process and package food, and logistics companies won't have enough oil to get finished food products into our supermarkets. This is why we have an emergency oil reserve, to prevent store shelves from becoming empty in our supermarkets due to a fuel shortage.
It takes 13 days for oil from our emergency reserve to begin entering the market and once it does, the most it can add to the market on a daily basis is 4.4 million barrels of oil. Therefore, in a crisis we must first use only our commercial stockpiles for 13 days, which would cause our commercial reserve to decline down to 239.9 million barrels of oil. Beginning on the 14th day of a crisis, 4.4 million barrels of oil per day can come into the market from our emergency reserve with 4.8 million barrels of oil per day entering the market from our commercial reserve.
After 50 additional days, our commercial reserve will be depleted and all that will be left is 507 million barrels of oil in our emergency reserve. That will give us 115 more days where we can withdraw 4.4 million barrels of oil per day, but the U.S. will be forced to reduce its daily oil consumption by 33% during those 115 days. This is based off of an emergency reserve of 727 million barrels of oil. With Obama this month prematurely releasing 30 million barrels of oil from our emergency reserve, we will actually only have 108 days where the U.S. will be able to consume 2/3 of its normal oil consumption, after 63 days of full oil consumption.
The solution to high oil prices is not more government intervention, but is less government interference in the free market. Instead of trying to manipulate oil prices down using artificial methods that will only last temporarily, the U.S. government should look at the root cause of rising oil prices. Oil is rising due to the U.S. government's deficit spending and the Federal Reserve's willingness to monetize our deficits and debts. If they want to see lower oil prices, the government should start out by eliminating the DOE. The DOE was created in 1977 to make the U.S. less dependent on oil imports. In 1977, we imported 44% of the oil used in U.S. refineries. Today, we import 63% of the oil used in U.S. refineries. Eliminating the DOE would save this country $27 billion annually.
Priced in terms of real money (gold), oil prices haven't been rising at all. The Federal Reserve's QE2, in which it printed $600 billion out of thin air, has created artificial demand for oil. If it wasn't for the Federal Reserve working tirelessly trying to prevent a much needed recession, Americans would be cutting back on oil consumption and oil prices would be declining. If the free market was allowed to operate, falling oil prices would make it easier for Americans to live with the real unemployment rate currently at 22.3%.
It is important to spread the word about NIA to as many people as possible, as quickly as possible, if you want America to survive hyperinflation. Please tell everybody you know to become members of NIA for free immediately at:

Economic Armageddon and You...Prepare for the Worst...

Jim Sinclair’s Commentary

Here is the entire story. I would suggest spreading the truth to offset the lies. 

Fed's Massive Stimulus Program Had Little Impact on Economy: Former Chairman Greenspan Tells CNBC (Click for More)

Tim Geithner: Welcome To The Unemployment Line 

Explains why the market just ripped.
In the meantime, a cubicle at 270 Park is being prepared.

Slick Willie Calls For Broad Principal Mortgage Writedowns 

Bill Clinton, in what appears to be an attempt to succeed where the IEA failed so miserably to score some brownie points for the president, told Bloomberg's Al Hunt during an interview, that Bank of America Corp.’s accord with mortgage-bond investors may give more “underwater” homeowners a chance to cut the principal on their home loans. "You’d relieve the anxiety of countless Americans who would know they could hold onto their homes." That you would also bring moral hazard to the masses and demonstrate to the public that the alternative of prudent monetary management is not insolvency, but yet more bailouts, apparently was lost on the slick one. And confirming that he still has no clue how anything in the ponzi system works, he added: "You lift not only an economic, but a psychological burden off of the homeowners and the banks,” he said. “And we’re free to start lending again, we’re free to engage in normal economic activity." Apparently marking down one's assets, which would in turn lead to massive Tier 1 capital (as artificial as it may be) erosion, and a need to funnel hundreds of billions of new cash in on the balance sheet, while at the same time setting off a chain reaction whereby everyone else is forced to remark their assets (all currently at par thanks to FASB encouraged Mark to Unicorn), an act which QE 1, Lite and 2 have been doing all they can to avert, is stimulative to "lending". And this is the thought process of the person credit with generating the last American budget surplus...

The CDO At The Heart Of The Eurozone 

A few days ago, we demonstrated that the latest Greek bailout package is nothing more than recycled MLEC special purpose vehicle designed to cover up toxic assets off balance sheet, like that one that was supposed to wrap up the subprime toxic mess. Luckily that did not happen as all it would do is make the credit crash even more acute when it finally did hit. In the meantime, the other Frankenstein contraption proposed by Wall Street to contain the fallout of the PIIGS bankruptcy, is the EFSF, which also got a facelift a few weeks back, and which is effectively a CDO: the same instrument which caused European banks to now be insolvent after buying up all tranches offered them by Goldman et al in the 2005-2007 period, once US banks realized just how toxic the less than AAA tranches were. It is poetically ironic that the instrument that led to Europe's insolvency is now what is supposed to prevent (temporarily) its plunge into outright default. For all who are wondering what the details of the new and improved CDO at the heart of the Eurozone are, here is Nomura's Nikan Firoozye. 

While Criminal US Bankers Receive Golden Parachutes, Barbarian Afghanistan Has Just Arrested Executives Of Failed Kabul Bank 

Sometimes it is good to put things in perspective when comparing developed democracies like America and barbaric despotic dictatorships like Afghanistan. In one country, radioactively orange criminal heads of imploded mortgage lenders, who are responsible for billions in losses at rescued companies that will soon require more taxpayer bailouts, received multi million dollar golden parachute severance packages and slips on the write from the country's "regulators." In the other, former executives of a major failed bank have been arrested over huge fraud that led to its near collapse, while the head of its central bank flees to the first country on fears of prosecutions. Take a wild guess which country is which... 
Predictable Surprises
Chris Pavese
06/30/2011 - 14:29
The way we see it is quite simple. With every investor and every company in the world seeking exposure to China and betting on continued and unabated Chinese growth, what happens if they are wrong? Is it at least worth having some insurance in the portfolio to hedge against the risk of being wrong? If nothing else, we recognize that we are sometimes (often) wrong! GMO’s James Montier recently shared the following thoughts with investors...

Radiation Detected In Fukushima Children Urine Samples As Fort Calhoun Orders 10 Mile Evacuation Radius 

The Fed may have stopped printing money, but that does not prevent Fukushima from printing radiation, and a flooded Fort Calhoun to print notices of "all's well" even as a 10 mile evacuation zone has been established. Per Ex-SKF, quoting the Sankei Shinbun: "A citizens' group in Fukushima Prefecture "Fukushima Network to Protect Children from Radiation" tested the urine samples from 10 children in Fukushima City, age 6 to 16, and announced on June 30 that a small amount of radioactive materials was detected from all samples. The highest amount of cesium-134 was from an 8-year-old girl, at 1.13 becquerels per liter. The highest amount of cesium-137 was from a 7-year-old boy, at 1.30 becquerels per liter. The samples were taken in late May, and sent to the French laboratory ACRO (Association pour le Contrôle de la Radioactivité dans l’Ouest) to testing for radiation. ACRO has experience in surveying the radiation exposure in children after the Chernobyl accident. ACRO's president David Boilley said in the press conference, "There is a very high possibility that children in and around Fukushima City have been exposed to internal radiation. Prior to the [Fukushima] accident, these numbers would have been zero." Nothing to see here. Just as there is nothing see in Nebraska, where the NRUC said there is nothing to worry about... despite the imposition of a 10 mile evacuation radius. As a reminder Fukushima has a roughly 18 mile evacuation radius zone.

Risk Spread Compression Time 

It's that time of the day when Brian Sack is holding the ES flat or rising even as his increasingly depleted arsenal to push other risk assets higher causes the RISK basket to decline. The latest: the ES-RISK (commodities, FX carry and rates) spread has just blown out to a 7 ES point equivalent. In the past 2 months the divergence has not failed to close upon emergence within 48 hours. Those with discount window access and wishing to take on the Fed in this relatively low risk pair trade, now that the Fed is about to step out of overt market manipulation (and just be stuck the covert one... and with the fiber optic cable to 131 South Dearborn Street) are as usual advised to take a long, hard look at a compression trade at these levels. 

Guest Post: How Much Would It Cost To Buy Congress Back From Special Interests? 

We all know special interests own the U.S. Congress and the Federal machinery of governance (i.e. regulatory capture). How much would it cost the American citizenry to buy back their Congress? The goal in buying our Congress back from the banking cartel et al. would not be to compete with the special interests for congressional favors--it would be to elect a Congress which would eradicate their power and influence altogether. A tall order, perhaps, but certainly not impossible, if we're willing to spend the money to not just match special interest contributions to campaigns but steamroll them. A seat in the U.S. Senate is a pricey little lever of power, so we better be ready to spend $50 million per seat. Seats in smaller states will be less, but seats in the big states will cost more, but this is a pretty good average. That's $5 billion to buy the Senate.

Muddy Waters' Carson Block "I Am Not A Ninja Assassin" 

But as far as the credibility of at least one $30+ billion (?) hedge fund, he sure as hell is.

Market Commentary From Monty Guild

Eye on Washington: Oil and Food Price Manipulation
Nothing stirs politicians into action more than a loss in public confidence…especially with an election coming.  Currently, food and fuel inflation is contributing to disenchantment. The fact that policies the politicians themselves have brought about are responsible for the inflation is lost on them. In response to sinking poll numbers they go into scramble mode, looking for political quick fix buttons they can press.  The problem is that quick fixes often work in the short run, but create problems in the long run; in this case, more inflation. It’s a shame, but the system operates by applying political quick fixes that serve self-interest but not the greater good.
In the 1970s, U.S. and European governments engaged in multiple sales of government-held gold.  They sold a great deal of gold between $200 and $300 dollars an ounce. Between 1999 and 2002 Gordon Brown, then the U.K. finance minister, liquidated about 60 percent of the British gold reserves for about $275 per ounce.
How smart do these sales look now?  And how smart will current manipulations look later?
Washington is now selling national strategic stockpiles of oil at $90 per barrel to bring down the price of gasoline. We expect oil to rise eventually to $150 per barrel as a result of the continuing battle over control of the massive reserves present in Middle East oil-producing countries.

Outside Hands Stirring the Middle East Cauldron
For many nations, whether they want to maintain their standard of living (the developed world) or feed their growth (China, India, among others), the Middle East reserves represent an irreplaceable source of sustenance.  Thus, it is no wonder why we see growing evidence of significant foreign machinations and manipulation of local political groups as a backdrop to political unrest and upheaval in the Middle East.
What’s to come of this?  For one thing, we expect expanded military action in Libya, namely the U.S. and Europe committing ground troops.  The purpose is to restore the flow of that North African country’s light, sweet, easy-to-refine crude oil and bring the price of oil down before the 2012 election. Our guess is that they will try to get Libyan dictator Qaddafi out by the end of this year and have the oil flowing again by September 2012 so that gasoline prices will be lower by election day in November.
Our wise friend Larry Jeddeloh of The Institutional Strategist foresees a war between Iran and Saudi Arabia for control of Saudi Arabia’s oil fields and with major countries backing one or the other parties. The west and NATO will surely support the Saudis while Russia will back the Iranians. It is too early to be sure where China will stand.

The Guild Basic Needs IndexTM —Why it exists
In a recent newsletter we introduced the Guild Basic Needs IndexTM as an important touchstone for Americans who wish to keep track of how the prices of goods they require for daily life are changing. As we stated, the power of the index is its simplicity and focus. Moreover, it is tamper-proof. That makes it unique and reliable compared to the often-cited U.S. Consumer Price Index, which, like other indices of consumer and wholesale prices, can be seasonally adjusted or altered by the inclusion or exclusion of index elements.
Such tampering is typical of governments, not just in the U.S., and it is inspired by strong incentives to understate cost-of-living increases.  Those incentives include the following:
●  To lull the masses and avoid criticism from constituents.
● To keep pension and public assistance payments down. In many countries payments to retirees and to those on public assistance are calibrated to inflation.  Payments rise with inflation. In order to keep government spending down, many countries manipulate the statistical basis of price indices to understate inflation. In many fields, conflict of interest requires disclosure. Not here, it seems.  Governments are masters in the art of spinning reality and masking conflict of interest.
Along these very lines, a recent Dow Jones article revealed that Congress is discussing changes to the CPI index that would understate inflation and save money by minimizing payout increases to those with income pegged to the CPI. Check out the link to the article for yourself and decide whether this is manipulative and reeks of conflict of interest.
Dow Jones Newswire
Our belief is that for individuals with a strong desire to maintain the buying power of their assets, reliable index like the Guild Basic Needs Index TM offers great value. Let the politicians do their customary manipulations.  Our readers will have the correct information, the Guild Basic Needs TM index shows a strong inflationary trend exists today in the basic needs of food, clothing, shelter, and energy.
The Rising Value of Chinese Exports
We have been saying for some time that the developing world (which has been a source of lower prices for manufactured goods) is now exporting higher-priced products abroad and contributing to inflation. A recent Wall Street article and video discusses just that: how higher wages and higher commodity costs are resulting in the end of low cost goods from China.  Please click image below:
Our Recommendations
We are making some changes to our recommendations.  We recommend that investors can repurchase Malaysian equities as their market looks poised to move higher after its recent pause.  U.S. equities also look like they are set for a rally that could last four to six weeks, so we recommend them for a trade.  We also remain committed to our bullish recommendations on Japan and India. 
Gold and Oil continue to act stunningly well in the face of higher margin requirements on commodities and other governmental attempts to get them to fall in price.  Investors should continue to be long gold, oil, and corn in the commodity arena.
We are taking profits in our Australian dollars as the Reserve Bank of Australia may be done raising interest rates for the time being.  However, we still recommend currencies with strong economic fundamentals like the Singapore dollar, Canadian dollar, Swiss franc, Brazilian Real, and the Chinese Yuan.  All of these are much better options than holding a lot of U.S. dollars, Euros, or yen.
Please see our recommendation table below, and stay tuned to our upcoming letters for new recommendations.
InvestmentRecommendedClosedin U.S. Dollars
Commodity Market Recommendations


Japanese Yen4/6/2011Open-5.7%
Brazilian Real9/13/2010Open+9.2%
Canadian Dollar9/13/2010Open+6.0%
Chinese Yuan9/13/2010Open+4.4%
Singapore Dollar9/13/2010Open+8.4%
Swiss Franc9/13/2010Open+20.8%
Australian Dollar9/13/20106/29/2011+14.1%
Thai Baht9/13/20106/22/2011+6.5%
Japanese Yen9/14/201010/20/2010-3.3%
Equity Market

Malaysia (NEW)6/29/2011Open 
U.S. (NEW)6/29/2011Open 
South Korea1/6/20113/3/2011-2.9%
Bond Market

30 YR Long Term   
U.S. Treasury Bond 8/27/201010/20/20100.0%

Paulson Dumping Bank Of America 

According to CNBC's Kate Kelly, Paulson has given up on his $30 price target on Bank of America by the end of 2011, and instead has dumped a "substantial stake" in its holdings of the bank's stock. And so, the claims that the hedge fund which has now become the butt of all due diligence jokes, is about to eat more crow, especially as other objective skeptics have long been warning that the bank is massively underreserved for what is about to become a legal fee freeforall following the just announced non-settlement with the BlackRock, Pimco, New York Fed group, and thus a ticking timebomb. But no, Paulson is in it, so it must be a Buy, Buy, Buy. Idiots. Incidentally the market is only slowly getting to realize that the "settlement" announced a few days ago is actually horrendous news for the bank (but confirms that monkey throwing feces move the marginal money) as we said first upon hearing the news.



"Irrational Exuberance" Is Back... For The Third Time 

Exhibit A.







Fort Calhoun Nuclear Plant Main Building Underwater, 10 Mile Mandatory Evacuation Area

Do you really think everything is really OK? Do you think they would tell you the truth?



Corn Plummets On USDA Report 

Corn traders, especially of a bullish persuasion, are being carted off trading floors feet first after a report by the USDA crushed expectations that there is a supply shortage. Reuters reports: "Corn futures plummeted more than 10 percent in early trading on Thursday after a U.S. government report said farmers were able to seed far more corn acres this spring than many analysts expected and that supplies are not as tight as many thought." And while the front month dropped by the maximum allowed limit, that did not stop the July contract, which has entered the delivery period and is trading without limits, to plunge by a whopping 70 cents. "The declines leave corn with the biggest monthly fall since June 2009." This is one time when those listening to Goldman would have been a well-advised action. From Damien Courvalin's note released yesterday: "We expect corn and cotton acreage will be higher than projected by the June WASDE, to the detriment of soybeans." 

Ambush in the Oil Market
06/30/2011 - 11:34
A new interventionist, activist approach by governments towards the energy space. If the IEA’s strategy works, and prices stay down 10% over time, this would inject $300 billion into the world economy. Howls of leaked information and insider trading. . Traders may bet against the national interest, but now do so at their peril. This is the first real attempt by the consuming nations to eliminate the oil risk premium, estimated at up to $50 a barrel. Cutting Brent prices by a whacking great $30 a barrel. Is this QE3 in black? 

06/30/2011 - 11:01
"I ask my friends and colleagues: what would it take to bring you to the streets? My death? Your friend's death?, Your lover's death? Your child's death? Sunny was a dear friend, but he did not have a big enough sphere of friends to make problems for the cops when they killed him."

And...It's Gone: QE2 Ends As Dealers Flip Just Auctioned Off 7 Year Back To Fed After Holding It For Under 22 Hours 

Goodbye net monetization of US debt. Going forward the Fed will only roll maturing debt, as per QE Lite announced in early August, and due to the fact that it will be roughly one fifth the notional periodic impact of QE2, is not what so many erroneously classify as QE2.5 (a topic beaten to death previously). The biggest question of who will buy bonds now that Primary Dealers will be unable to roll debt to the Fed remains, judging by today's carnage in bonds, completely unanswered. And confirming that PDs always and only cared about flipping the On The Run bond, is the just concluded last POMO, which out of $4.909 billion bonds monetized, saw a vast majority, or $4.405 billion in the form of Cusip QT7: the 7 year just auctioned off yesterday! In other words, Dealers held the On The Run for less than 22 hours before flipping it back to the Fed!!! Well, those days are now over.

Treasury Complex Collapses To Celebrate Last QE2 POMO 

The ever-recurring and oh so critical rhetorical Bill Gross Treasury question, which the head of PIMCO retweeted earlier this morning for emphasis, is starting to demand answers. And once today's window dressing exercise in stocks is over (which alas will not do much for most hedge funds which continue to underperform their benchmarks by a wide margin), and when the world wakes up to the realization that crude prices are rapidly heading back to triple digit levels, not to mention the dramatic rise in interest rates, vacuum tubes and momos will need to think hard and long about what the next upside catalyst will be. 

A Conversation Between a CDS Trader and an Equity Strategist on the Coming European Implosion
Reggie Middleton
06/30/2011 - 10:01
... I would tend to believe that from here, things are more double sided than before, and risk-reward much less interesting than it used to be, because there are now external factors like government intervention which can kick the can, and screw valuations for a long time.

The Insidious Effects of Monetary Inflation
By: Steve Saville, The Speculative Investor

Gold Holds Steady, "Train Wreck" Greece Could "Give Up" on Cuts, "QE2 Inflation a Success"
By: Ben Traynor, BullionVault

A Greek Tragedy that Is the Euro, Bad Actors, Bad Lines and More Lies; Gold Watches on
By: GoldCore

This is Jim Rogers' greatest worry in the world today
"It's not going to be solved until we have a big, big, big problem... Be prepared..." 

 JPMorgan's Jamie Dimon is one of America's biggest "welfare queens"
"His 10-figure paycheck is largely coming courtesy of us..." 

Eric Sprott Lashes Out Against The "Tyranny Of A Rigged Paper Monopoly Over Silver Price Discovery" 

We have a very tough time understanding those bearish arguments against silver. We look at the real silver market, and based on the supply and demand data coming from the real, physical markets for silver, the fundamentals are only getting stronger. And yet there exists another silver market, which as we’ve shown, is not very connected to the physical realm at all. And though silver investors have for decades suffered the tyranny of a rigged paper monopoly over silver price discovery, it appears to us that the tides are turning. In the age of QE to infinity, investors are being more scrupulous with their capital and as such they are demanding physical silver in quantity. With more and more dollars flowing into the silver markets and a finite supply of physical to meet that demand, the theoretical losses for the paper silver short-sellers are near infinite. And with such a skewed and obvious risk/reward payoff vastly favoring the longs, we pose the following question. Who is most at risk in the silver markets: the buyers of a scarce and real asset that serves a growing multitude of purposes, or the sellers, who are short a quantity of silver which may very well not even be obtainable at anywhere near current prices? Let the Seller Beware! 

Goldman Trading Desk Sees Surge In Gold Prices Into Year End 

While Goldman's traditional, client-facing sell-side research is terminally useless and empirical evidence suggests that doing the opposite of what is recommended yields profitable results more than two thirds of the time, what its trading desk releases to select clients is far more targeted, nuanced, and, in one word, correct. Which is why we were surprised to hear what Goldman's traders had to say about gold. To wit: "We are hearing anecdotes of strong physical demand already coming through in the last few days. Official sector buying is also likely to feature...Although having been rather wrong footed by this recent setback I continue to believe that gold will have a strong end of summer into q4 and that current price moves are creating another great buying opportunity." And unlike the reverse psychology in the research department, the sales guys are much more careful as they have named accounts they get make commission revenue from. Piss these off one too many times and you are cut off. Which makes us believe that Goldman is really long and strong here.

Treasury Complex Collapses To Celebrate Last QE2 POMO 

The ever-recurring and oh so critical Bill Gross question, which the head of PIMCO retweeted earlier this morning for emphasis, is starting to demand answers. And once today's window dressing exercise in stocks is over (which alas will not do much for most hedge funds which continue to underperform their benchmarks by a wide margin), and when the world wakes up to the realization that crude prices are rapidly heading back to triple digit levels, not to mention the dramatic rise in interest rates, vacuum tubes and momos will need to think hard and long about what the next upside catalyst will be. 

Second Greek Budget Bill Passes 

No TARP version 1-style surprises allowed:
The Hamptons will be crowded this weekend. Keep an eye out for photoshopped receipts where hedge funds supposedly hold $100 million in accounts which only have $100,000 in FDIC insurance.

Chicago PMI Surges, Trounces Expectations, Despite Across The Board Responder Pessimism 

Making a complete mockery of regional Fed indices, the June Chicago PMI just printed at a ridiculous 61.1 on expectations of 54.4, up from 56.6, in the process posting its 21st month of growth. Everything is now being done to prevent the all critical now ISM from printing below 50 and to extract as much juice as possible from the last QE2 POMO (the subsequent POMOs are part of the continuing QE Lite). From the report: "PRODUCTION and NEW ORDERS accelerated to mark nearly two years of expansion while their three-month averages declined; ORDER BACKLOGS diverged from improvements in PRODUCTION and NEW ORDERS; Breadth of inflation reported in PRICES PAID eased for a third month." Among the indexes that surged were Production (up from 56 .0 to 66.9), New Orders (from 53.5 to 61.2) and Capital Equipment (120.8 to 135.0). While prices paid declined modestly from 78.6 to 70.5, the biggest drop was in Inventories which plunged to 46.9 from 61.6: this is not good for the I in GDP, although everyone has now written off Q2 GDP so this is irrelevant.As usual the respondents provide the best color, and nobody captures it best than this guy: "The recession, the "recovery," and the disappearance of industrial arts in our schools seem to have diminished a formerly strong labor pool" and this: "Hopefully something will break or the 4th quarter is going to look sad."

Goldman Vs Pimco Round 2: Goldman Buying Belly Again As It Doubles Down On Client Call To Short The 5 Year 

Three months ago, Goldman's Francesco Garzarelli released a note to clients advising them to short the 5 Year as follows: "We recommend going short 5-yr US Treasuries at 1.936% for a potential target of 2.30% and a close below 1.80%." Naturally, our cynical outlook on life prompted us to say the following: "As usual, since that would mean Goldman is now accumulating 5 Year inventory, it appears we will soon have a rather dramatic duel between the two biggest Wall Street titans: PIMCO and Goldman, at least as pertains to their outlook on rates." Well, Goldman won so far (its clients not so much). Today, Goldman is telegraphing that it is starting to accumulate the next batch of 5 years, which makes sense considering the point on the curve experienced its 3rd worst 3-day decline ever as reported yesterday. To wit: "Ahead of key data for June, starting with the June ISM report this Friday, we recommend initiating short positions in 5-yr UST at the current level of 1.70%, for an initial target of 2.00%, and stops on a close below 1.40%." Round two of Goldman vs PIMCO is now on. 

IEA Already Considering Extending Oil Release Period, Fireselling More Crude To China 

Following the abysmal decision by the Obama administration, presented in IEA letterhead, to release crude stockpiles, the resulting lower prices lasted less than one week, and in the case of gasoline, the price has actually surged way above the decision day fixing. So what is an administration with no credibility to do? Why double down of course, and sell even more crude at firesale prices to the Chinese. Per Reuters: "The International Energy Agency could decide by mid-July whether the release of strategic oil reserves needs to be extended for a month or two, an official said." And there is that transitory word again: "Richard Jones, deputy executive director of the IEA, said he believed the release would be temporary since demand would likely drop in the fourth quarter." Well demand may drop, but the last time demand was actually relevant in price discovery was sometime in the 20th century. Welcome to the era of oil prices defined by monetary policy.

Initial Claims Disappoint Again, Print At 428K On Expectations Of 420K, Prior At 429K 

And the same old show and dance persists as initial claims continue confirming that at its core, the US economy is not improving one bit following the 12th consecutive claims pring over 400K. We still expect the June NFP consensus to be cut. The BLS reported that initial claims in the week ended June 25 were 428K, much higher than the expected 420K. Initial claims also missed expectations of 3,690K, printing at 3,702K. And guess what: this too is a drop from the upward revised 3714K, previously 3,697K. Both numbers this week will be revised higher next week, which will bring the rolling average far higher. 

Guest Post: What Could You Do With $20 Billion? 

It is hard to define how much money Greece is getting. Is it the next tranche of IMF money? Is it the amount of cuts the Greek government agreed to take? Is it future promises of money from the Troika? It's hard to tell, but $20 billion seems to be about the amount that is being provided to get us through another 3 months...Let's assume the Lehman 2.0 and contagion crowd are correct. Is it realistic to assume that $3 per person is enough to save the world's entire economic model? If so, sign me up, I will contribute my $3. But the GDP of the U.S. $14.5 trillion (it is easy to remember since it is the same as the amount of U.S. debt outstanding). The GDP of the European Union is $16 trillion. Add in another $10 trillion for China and Japan and you have GDP of $40 trillion. The doomsayers are telling us that $20 billion is all that it takes to save a $40 trillion system? We have a $40 trillion global economy that hinges on getting $20 billion to Greece so they don't default. 

Initial Results In Allied Irish CDS Settlement Auction: Senior Bonds At 71.375, Subs At 12 

Creditex has just reported the preliminary results in the CDS settlement auction of Allied Irish Banks. According to initial data submitted to ISDA (for more on the mechanics of CDS auctions read here) on behalf of buyers and sellers of CDS into the auction, the AIB senior bonds will see a final recovery value of about 71.375 while the sub will barely recover 10%, or 12 cents on the dollar to be precise. Alas this is likely indicative of market clearing levels on most European bank bond liabilities due to the incestuous circular nature of European bank assets and liabilities where everything is interconnected in one massive closed loop. And yes, one wonders just which regulating central bank allowed this bank's debt to be pledged as collateral for as long as it did. 

More Liquidity Tremors: Overnight EUR Libor Doubles To 1.78%, Highest Since Early 2009 

Whether the move in overnight Libor is due to an end of quarter window dressing scramble by the banks who in a Repo 105 fashion are doing their best to seem healthy, or it is due to the recent evaporation of European money market funds which are going into US securities, leaving Europe high and dry, is unclear; what is clear is that overnight EUR Libor just doubled, exploding by an unprecedented 85.5 bps to 1.78%, the highest it has been since early 2009 (see chart). Why is this troublesome: because the USD overnight Libor is at 0.128%, which is to be expected courtesy of the recent very much expected extension on the Fed's swap lines with European banks. But it does beg the question: instead of the traditional shortage of USD on every risk precipice, is there suddenly a massive black hole in overnight EUR funding, and has Chinese buying of euros by the bushel backfired and is about to further hobble European, and US, liquidity. As a reminder yesterday, General Collateral traded at the lowest rate ever, or -0.002%. Alternatively, this may be a function of the ECB providing less than expected euros in its latest 91 Day Long-Term Refinancing Operation, which saw 265 bidders scramble to secure €132 billion from the ECB. And meanwhile in China, despite all the recent attempt to reestablish liquidity in the market, the 7 and 14 Day SHIBORs both broke their recent downward trend. If this is all simple end of quarter liquidity shoring up, that's fine: thing should get back to normal tomorrow. If, however, the liquidity picture does not change on July 1, it may be time to step away from the keyboard and at least get to know where the nearest emergency exit is. 

Today's Economic Data Docket - Final Greek Austerity Vote And Final POMO 

Once again the world will be watching Greece although with far less interest as the parliament is expected to pass the austerity bill with voting expected to commence on each individual point in the mid-term package at about 8 am Eastern. In the meantime there will be quite a bit economic data, such as Initial Claims, the critical Chicago PMI, the Kansas City Fed Index, as well as various Fed speeches. Most importantly, today is the day when the Fed stops adding net liquidity to the market with the last POMO due at 11:00 am. Expect another window dressing meltup into the afternoon at which point anything goes. 

In The News Today

Jim Sinclair’s Commentary

The international lender of last resort remains the last resort.
Hyperinflation in the form of currency induced cost push inflation is here and growing. That is the reason releasing oil on the market only greases the wheels of energy cost.

Fed Extends Lending Program for Central Banks By LUCA DI LEO
JUNE 29, 2011, 5:50 A.M. ET

WASHINGTON—The Federal Reserve, amid persistent worries about Europe’s sovereign debt crisis, last week quietly approved the extension of a crisis-lending program that allows the European Central Bank to tap the U.S. for dollars, Federal Reserve Bank of St. Louis President James Bullard said.
The Fed’s dollar-lending agreements with the ECB—as well as the central banks of England, Canada, Japan and Switzerland—were scheduled to expire Aug. 1. The Fed and other central banks haven’t yet disclosed renewal of the agreements, known as swap lines.
Fed officials voted to extend the program, which was first launched during the financial crisis, at their latest Federal Open Market Committee meeting June 21-22, Mr. Bullard said in an interview Tuesday.
Under the agreement, the Fed can lend an unlimited amount of dollars to foreign central banks for a fee, and they in turn lend them to local commercial banks. The program was launched during the crisis because many foreign banks, especially those in Europe, had trouble tapping short-term dollar loans in credit markets, yet they needed access to dollars to fund their holdings of mortgage bonds and other U.S.-dollar-denominated debt.
The Fed says it takes no risk in these swap lines because foreign central banks, not the commercial banks, are obligated to return the dollars. At the height of the financial crisis, foreign central banks tapped the Fed for more than $600 billion of these loans.