Saturday 31 July 2010

Weekend Update – July 31, 2010

Baltic Dry Index. 1967 +25
LIR Gold Target by 2019: $3,000.

Looking at the components of GDP, it appears as though the economy is set to slow even further and a flattening in Q3 and perhaps even contraction by Q4, barring some positive exogenous shock, cannot be ruled out.

David Rosenberg. Gluskin Sheff.

Friday brought the latest US GDP figures, and with them the reality that all the previous figures released were much worse that previously stated. The gang that couldn’t shoot straight and never saw a recession coming, nor a bubble they didn’t like, still can’t shoot straight and are as helplessly out of touch as ever. Now after the inventory rebuilding phase is coming to an end, and most of the trillion dollar stimulation effect has passed what happens next is likely to be a serious double dip recession early next year. Perhaps even starting in Q4. What happens next at the Fed is likely to be a panicky return to quantitative easing. Stay long gold and silver, now comes the part where the Fed and US Treasury break the US currency as they desperately try to recreate inflation. Don’t worry, they won’t label it as such, and they’ll all keep pretending that they’re in charge and know what they are doing. Trust me, I’m a Princeton economics professor and Time Magazine’s man of the year. Sorry, “person” of the year.

Recession in U.S. Was Even Worse Than Estimated, Revisions Show

July 30 (Bloomberg) -- The worst U.S. recession since the 1930s was even deeper than previously estimated, reflecting bigger slumps in consumer spending and housing, according to revised figures.

The world’s largest economy shrank 4.1 percent from the fourth quarter of 2007 to the second quarter of 2009, compared with the 3.7 percent drop previously on the books, the Commerce Department said today in Washington. Household spending fell 1.2 percent in 2009, twice as much as previously projected and the biggest decline since 1942.

Double-dip feared as US economic growth loses pace

Fears that the world's biggest economy could be heading into a double-dip recession took hold on Friday after US growth was shown to have contracted sharply in the second quarter.

By James Quinn, US Business Editor Published: 8:55PM BST 30 Jul 2010

The US Commerce Department also revised downwards GDP figures all the way back to the beginning of 2007.

The second-quarter slowdown led economists to question whether the US might be poised to enter a period of negative growth later in the year, leading to a much-feared double-dip recession. The Dow Jones fell sharply after the release of the GDP data before recovering ground to settle down 40.72 at 10,426.44 in lunchtime trading.

"The post-recession rebound is history," said Bart van Ark, chief economist for the Conference Board, an economic think-tank.

Economists had predicted second-quarter growth of 2.5pc, but their disappointment was compounded by the revised data for the first three months of 2010.

Consumer spending – which accounts for two-thirds of US GDP and is seen as a lead indicator of economic recovery – slowed, rising by 1.6pc in the quarter, compared with 1.9pc in the prior three months. The savings rate rose to 6.2pc as consumers instead put money to one side.

The biggest factor in the slowdown was the US's widening trade deficit, following a 28.8pc surge in imports – the sharpest rise in 26 years – against a 10.3pc rise in exports.

It was the size of the downward revisions to previous years' growth which most concerned economists. In 2009 the economy was previously estimated to have declined by 2.4pc, but the figure was revised to a drop of 2.6pc. In 2008, the revision was from 0.4pc to no growth, while 2007's 2.1pc growth rate was revised to 1.9pc.

-----The disappointing growth numbers were compounded by the International Monetary Fund's (IMF) annual report on the US economy. The IMF said there may be a need for the Obama administration to increase the amount of fiscal stimulus in order to boost the recovery, warning the "outlook remains uncertain".

"Anytime you don't want anything, you get it."

Calvin Coolidge, 30th President of the United States.

Mr. Coolidge was all to correct, while America gets ready to lead Europe into a double dip recession, new boy China is out cruising for respect. As “Daddy Warbucks with ten zillion dollars” to Bernie Madoff like Uncle Sam, Beijing probably thinks it has a pretty good case, but all year long Washington seems to have a different agenda. The latest being last week’s slap at China in last week’s regional security conference in Hanoi. Below the People’s Daily ripostes back. Below that, China becomes the world’s second largest national economy, and ups the ante with news on the yuan the Washington Senators doesn’t want to hear. In a US election year, you can bet on Washington’s finest huffing and puffing and probably in the end blowing down Uncle Sam’s house of cards. A legend in their own minds, in the Senate in Washington DC, the clock is stopped at 1949.

Is US ready to recognize China as world power?

July 29, 2010

The U.S. government has repeatedly made it clear that it would welcome China’s entrance into the world arena as a power. However, a series of issues since the beginning of this year, particularly Washington's stance on the U.S.-South Korean joint military exercises and the South China Sea issue, have made the world think: Is the United States ready to recognize China as a power on the world stage?
It is easier said than done for the United States to adapt itself to China's development. Lip service is far from enough to boost the development of Sino-U.S. relations. If Washington cannot find a way to recognize and accept China's peaceful rise onto the world stage, bilateral ties will be like a roller coaster full of ups and downs. However, no one would like to see the negative effects rocky relations would bring to China, the United States and possibly to the world as a whole.
U.S. Secretary of State Hillary Clinton has urged China to play a greater role in solving the world's economic, environmental and political problems. She said global issues could not be solved by the United States or China alone, but without participation of the two countries, no problems would likely be solved. Washington has realized that the United States’ global interest can be maintained only through changing the way it deals with China.
The Obama administration released positive signals in its relations with China, which have been interpreted as the United States showing its intention to change the traditional strategy of engagement and containment. As a matter of fact, the general direction of Sino-U.S. relations provides a foundation on which the United States can base its foreign policies and is more complicated than an adjustment in real conditions. Issues such as arms sales to Taiwan, Google censorship, RMB exchange rates as well as finger-pointing about economic responsibility show Washington still seems confused and inpatient about relations with China.
The relationship between China and the United States is the most important and complicated bilateral relationship in the world this century. The development of Sino-U.S. relations will affect world peace and stability, especially in the Asia-Pacific region. Ian Bremmer, an American political scientist specializing in U.S. foreign policy, said, "America and China will have more than ever to gain from closer political and commercial ties, and must take steps to avoid a Cold War, or worse."
In that circumstance, the United States needs both wisdom and determination to recognize and accept China, a country that is totally different from its own, as a power on the world stage.
Author: Zhong Sheng People’s Daily, July 29, 2010 Translator: Zhang Xinyi

China Becomes Second Biggest World Economy

Published: Friday, 30 Jul 2010 | 6:03 AM ET

China has overtaken Japan to become the world's second-largest economy, the fruit of three decades of rapid growth that has lifted hundreds of millions of people out of poverty.

Depending on how fast its exchange rate rises, China is on course to overtake the United States and vault into the No.1 spot sometime around 2025, according to projections by the World Bank, Goldman Sachs and others.

China came close to surpassing Japan in 2009 and the disclosure by a senior official that it had now done so comes as no surprise. Indeed, Yi Gang, China's chief currency regulator, mentioned the milestone in passing in remarks published on Friday.

"China, in fact, is now already the world's second-largest economy," he said in an interview with China Reform magazine posted on the website of his agency, the State Administration of Foreign Exchange.

Cruising past Japan might give China bragging rights, but its per-capita income of about $3,800 a year is a fraction of Japan's or America's.

"China is still a developing country, and we should be wise enough to know ourselves," Yi said, when asked whether the time was ripe for the yuan to become an international currency.

Can It Be Sustained?

China's economy expanded 11.1 percent in the first half of 2010, from a year earlier, and is likely to log growth of more than 9 percent for the whole year, according to Yi.

China has averaged more than 9.5 percent growth annually since it embarked on market reforms in 1978. But that pace was bound to slow over time as a matter of arithmetic, Yi said.

-----If China can keep up a clip of 5-6 percent a year in the 2020s, it will have maintained rapid growth for 50 years, which Yi said would be unprecedented in human history.

The uninterrupted economic ascent, which saw China overtake Britain and France in 2005 and then Germany in 2007, is gradually translating into clout on the world stage.

China is a leading member of the Group of 20 rich and emerging nations, which since the 2008 financial crisis has become the world's premier economic policy-setting forum.

-----In the same vein, China was in no rush to turn the yuan into a global currency.

"We must be modest and we still have to keep a low profile. If other people choose the yuan as a reserve currency, we won't stop that as it is the demand of the market. However, we will not push hard to promote it," he added.

No Big Rise in Yuan

China has been encouraging the use of the yuan beyond its borders, allowing more trade to be settled in renminbi and taking a series of measures to establish Hong Kong as an offshore center where the currency can circulate freely.

But Yi said: "Don't think that since people are talking about it, the yuan is close to becoming a reserve currency

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Dr. Ben Bernanke.

Have a great weekend everyone.


Friday 30 July 2010

China Blasts Back.

Baltic Dry Index. 1942 +41
LIR Gold Target by 2019: $3,000.

"It's strange that men should take up crime when there are so many legal ways to be dishonest. “

Al Capone

We open today with China’s riposte to Mrs Clinton’s slap at China in last week’s regional security conference in Hanoi. A clash of navies lies ahead if both parties hold their present course. But it’s hard to see how either can now back down without losing prestige and face. Presumably the US military see some advantage in pressing the issue now rather than later. Presumably the US State Department sees the chance to form some sort of local strategic alliance to contain China and force them out of the South China Sea. As the world’s largest debtor to creditor China, the US is now stomping on eggshells. Stay long precious metals. Is China really going to finance the US Navy and Airforce against itself?

If they want peace, nations should avoid the pin-pricks that precede cannonshots.


China Says Its South Sea Claims Are ‘Indisputable’

July 30 (Bloomberg) -- China declared its “indisputable sovereignty” over the South China Sea and held naval drills in the waters, pushing back against a U.S. role in resolving disputes in one of the world’s busiest shipping lanes.

“China has indisputable sovereignty of the South Sea and China has sufficient historical and legal backing” to underpin its claims, Geng Yansheng, a Ministry of Defense spokesman, told reporters at a military compound outside Beijing today. It opposes efforts to “internationalize” the issue and will resolve differences through “friendly negotiation,” he said.

U.S. Secretary of State Hillary Clinton last week called the sovereignty issue “a leading diplomatic priority.” Chinese Foreign Minister Yang Jiechi subsequently called her comments “virtually an attack on China” and said U.S. involvement “can only make matters worse and more difficult to solve.”

The Chinese government considers the entire South China Sea as its own, dismissing claims from Southeast Asian countries to islands such as the Spratlys, and is building an ocean-going fleet to project power beyond its borders. China told Exxon Mobil Corp. and BP Plc to halt exploration in areas that Vietnam considers part of its territory, according to U.S. government agencies.

China’s military recently held a large-scale naval exercise in the sea using “real weaponry,” Geng said. The exercise, involving warships from three naval fleets, included missile launches at long-range targets and practicing against jet fighters, the state-run China Daily reported today.

North Korea

The exercises coincided with joint U.S.-South Korea naval drills earlier this week in the Sea of Japan designed to deter North Korea. Further drills are planned in the Yellow Sea, off China’s eastern coast, and South Korea plans to hold an anti- submarine drill there next week, Yonhap reported today, citing army spokesman Lee Bung-woo.

“China opposes any planes or warships that engage in activities that will compromise China’s security either in the Yellow Sea or other seas near China,” Geng said today.

In other US news, the President of the St Louis Fed wants BOE style quantitative easing to prevent US deflation. The death of fiat currency as we know it gets closer by the day.

"All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in the presence of an agent of the I.R.S."

President F.D. Roosevelt, 1933

U.S. close to Japan-style deflation, Bullard says

Expanding purchases of Treasury securities best defense if needed

July 29, 2010, 2:45 p.m. EDT

WASHINGTON (MarketWatch) -- The U.S. is in danger of being pushed into the same price-shrinking economy that has been termed the "lost decade" in Japan, a voting member of the Federal Reserve said Thursday.

"The U.S. is closer to a Japanese-style outcome today than at any time in recent history," said James Bullard, the president of the St. Louis Federal Reserve Bank, in a research paper.

Bullard stressed that the Japan-style deflation was not a done deal. It would take more negative shocks to tip inflation lower.

But the St. Louis Fed president spoke of the risks with more clarity than is customary from Fed officials.

"Bullard touched upon the third rail of economics, that the U.S. is in the vicinity of Japan with respect to the recovery," said Dan Greenhaus, chief economic strategist at Miller Tabak.

In his paper, Bullard argued that the best policy option for the Fed to counter the deflation threat is to buy more Treasurys.

He said the Bank of England's recent policy to buy gilts, or British government bonds, has served to push inflation expectations higher.

The Bank of England has purchased 200 billion pounds, or over $300 billion, of assets, and overwhelmingly those purchases have been gilts. The Fed has purchased over $1.4 trillion in housing-related assets. It bought $300 billion in Treasurys in a program completed last fall.

Bullard argued against another policy option, namely lengthening its existing promise to keep rates low for an extended period.

To respond to the deflation threat with a revised promise to keep rates "low for longer" may be counterproductive because it might simply encourage permanent low interest rates, he said.

In corporate news, and rare metals news, Molycorp’s IPO was less than stellar. China mines and exports most of the rare metals the world consumes, about 95% is the usual figure cited. A one country monopoly that Saudi Arabia can only dream about. Another complication for Mrs Clinton to think about.

Cleantech IPOs still fail to impress as Molycorp misses its goal

July 29, 2010 Camille Ricketts

With the exception of Tesla Motors’ blockbuster public sale last month, clean technology IPOs have been disappointing this year. And the trend continues today with Molycorp Minerals, miner of many of the rare metals used in green technologies, debuting at $13.25 a share — down from the anticipated range of $15 to $17.

All told, the Greenwood, Colo. company raised $394 million, pricing its shares at $14. The stock has performed weakly since this morning, dipping as low as $12.

While it’s not exactly a traditional green technology company, Molycorp does provide the raw materials for advanced batteries (for plug-in vehicles, primarily), wind turbines, and energy-efficient light bulbs. More and more demand for its products is coming from the sector, which means its success relies largely on the shaky and uncertain growth of other green technologies.

This may be a major reason its IPO followed in the footsteps of similar sales by biofuel maker Codexis and solar cell maker Jinko Solar, both of which sold for less and raised less on the public markets than expected. Cylindrical solar module maker Solyndra couldn’t even get its IPO out the door.

Investors just don’t seem to be hot on cleantech stocks. There’s a lot of risk involved in green plays, and returns sometimes don’t come for years.

Molycorp, in particular, is in a sticky spot. The company plans to use the money raised in the offering to jumpstart its mine in Mountain Pass, Calif. that has been defunct since 2002, when radioactive waste from the site contaminated a local lake. The project is more vital than ever, considering China’s growing dominance in the rare earth elements market (it owns 95 percent of global production), and Molycorp’s dependence on its own operations in China.

Molycorp Slumps 8.2% on 1st Day After Rare-Earth IPO

July 29, 2010, 4:16 PM EDT

July 29 (Bloomberg) -- Molycorp Inc., owner of the world’s largest non-Chinese deposit of rare-earth metals, declined in its first day of trading after chopping the size of its initial public offering by 18 percent.

Shares of the Greenwood Village, Colorado-based company lost 8.2 percent to $12.85 in U.S. composite trading. Molycorp sold 28.13 million shares at $14 each after its underwriters failed to attract enough buyers at $15 to $17 apiece, according to Bloomberg data. The mining company’s owners purchased about 8.9 percent of the shares available in the IPO.

Molycorp will use the $394 million in IPO proceeds to fund plans to restart operations at a mine that holds deposits of rare-earth metals used to make magnets for everything from smart bombs to hybrid cars. The producer, which hasn’t made a profit since acquiring the site two years ago, will compete with Chinese companies that currently supply 97 percent of the metals globally, according to its regulatory filing.

“It seems like a lot of money to ask,” said Robert Auer, a manager at Indianapolis-based SBAuer Funds LLC, which oversees about $200 million. “It’s a bet on something so unknown, and in this market where there’s fierce competition for dollars, there may be better buys.”

Morgan Stanley and JPMorgan Chase & Co. in New York led the company’s offering, while Molycorp turned to Jones Day in Cleveland for legal advice.

We end the week with a Canadian corporate success story. Long time readers of the LIR know that I have liked SEMAFO from the first time I read up about its involvement in West Africa almost a decade ago. With the Quebecer’s can-do attitude, they opened up much of North America, readily available mining expertise, and the added benefit of speaking French, the local language of business in the region, successfully developing their gold mines never seemed an issue to me. It also seemed to me that the price of gold had nowhere to go but up. From the mid 90s G-7 governments were pursuing policies all too likely to ruin their currencies. Sadly they still are. Below, Canada’s Financial Post covers a company I still like and expect even more great things from ahead. Best of all, SEMAFO is a mining company with a conscience that besides providing employment in a region that desperately needs employment, works to improve the quality of life in the region too.

The benefactor turns a profit

Peter Koven, Financial Post · Thursday, Jul. 29, 2010

Benoit La Salle built his gold mining powerhouse in the least likely of ways: Through a charitable foundation.

Mr. La Salle, 55, is the chief executive of Montreal-based SEMAFO Inc., a leading mining company in francophone West Africa that leverages the skilled workforce and mining culture of francophone Quebec. But as recently as the early 1990s, he was a self-employed chartered accountant and did not give a second thought to the gold industry.

"I knew nothing about it at all," he says today with a laugh.

The turning point that would change his life came in 1994. He was doing some pro bono work for a charity called Plan that was focused on developing countries, and ended up travelling to West Africa as a francophone spokesperson.

He met with a number of high-level government officials while he was there, including Burkina Faso President Blaise Compaore (who still holds the office today). Mr. Compaore asked Mr. La Salle if he could return to Burkina with a team of people from Canada to study how to develop the country's gold industry.

At the time, there was almost zero activity by foreign mining companies in West Africa. That dated back to the 1950s and 1960s, when those countries were still under French or British colonial rule, and little exploration was being done.

Mr. La Salle saw an opportunity. He soon returned to West Africa with a small team of experts, who starting looking over the land with the best gold potential.

In 1995, he and geologist Jack Gunter obtained permits for some of the most promising land in West Africa through a public shell company. It was renamed SEMAFO, an acronym that stands for Societe d'exploitation miniere d'Afrique de l'Ouest (or West African Mining Company).

Benoit La Salle built his gold mining powerhouse in the least likely of ways: Through a charitable foundation.

Mr. La Salle, 55, is the chief executive of Montreal-based SEMAFO Inc., a leading mining company in francophone West Africa that leverages the skilled workforce and mining culture of francophone Quebec. But as recently as the early 1990s, he was a self-employed chartered accountant and did not give a second thought to the gold industry.

"I knew nothing about it at all," he says today with a laugh.

The turning point that would change his life came in 1994. He was doing some pro bono work for a charity called Plan that was focused on developing countries, and ended up travelling to West Africa as a francophone spokesperson.

He met with a number of high-level government officials while he was there, including Burkina Faso President Blaise Compaore (who still holds the office today). Mr. Compaore asked Mr. La Salle if he could return to Burkina with a team of people from Canada to study how to develop the country's gold industry.

At the time, there was almost zero activity by foreign mining companies in West Africa. That dated back to the 1950s and 1960s, when those countries were still under French or British colonial rule, and little exploration was being done.

Mr. La Salle saw an opportunity. He soon returned to West Africa with a small team of experts, who starting looking over the land with the best gold potential.

In 1995, he and geologist Jack Gunter obtained permits for some of the most promising land in West Africa through a public shell company. It was renamed SEMAFO, an acronym that stands for Societe d'exploitation miniere d'Afrique de l'Ouest (or West African Mining Company).

Read more:

SEMAFO: Corporate Social Responsibility Remains Top Priority

Fondation SEMAFO: Making an Important Difference in West Africa

----During the past year, initiatives in our West African host countries included:

• Construction of 5 schools

• Construction of a health centre

• Establishment of 2 school lunch programs benefitting more than 600 children

• Donation of medical supplies, educational material, clothing, house wares, miscellaneous items

(shipment of 2,600 boxes)

• Donation of agricultural equipment and irrigation systems

• Provided the village of Bossey Bangou, Niger with access to electricity

• Installation and repair of fresh water wells

• Provided financial and moral support to flood victims in Burkina Faso and Niger

• Provided support and guidance in the establishment of shea butter soap manufacturing project

At the Comex silver depositories Thursday, final figures were: Registered 51.98 Moz, Eligible 58.24 Moz, Total 110.23 Moz.


Crooks and Scoundrels Corner.

The bent, the seriously bent, and the totally doubled over.

Today, the NY Times covers the scandal of the Gulf of Mexico. No not BP, bad though their blowout was, The Times covers the scandal of how America looked away and turned the Gulf into a sort of toxic backyard cesspit. Below that, Time Magazine says where’s the oil disaster? Was BP the target of a great vampire squid plot?

Why did I take up stealing? To live better, to own things I couldn't afford, to acquire this good taste that you now enjoy and which I should be very reluctant to give up.

Cary Grant. To Catch A Thief.

Gulf of Mexico Has Long Been a Sink of Pollution

By CAMPBELL ROBERTSON Published: July 29, 2010

-----The BP oil spill has sent millions of barrels gushing into the Gulf of Mexico, focusing international attention on America’s third coast and prompting questions about whether it will ever fully recover from the spill.

Now that the oil on the surface appears to be dissipating, the notion of a recovery from the spill, repeated by politicians, strikes some here as short-sighted. The gulf had been suffering for decades before the explosion of the Deepwater Horizon rig on April 20.

“There’s a tremendous amount of outrage with the oil spill, and rightfully so,” said Felicia Coleman, director of Florida State University’s Coastal and Marine Laboratory. “But where’s the outrage at the thousands and millions of little cuts we’ve made on a daily basis?”

The gulf is one of the most diverse ecosystems in the hemisphere, a stopping point for migratory birds from South America to the Arctic, home to abundant wildlife and natural resources.

But like no other American body of water, the gulf bears the environmental consequences of the country’s economic pursuits and appetites, including oil and corn.

There are around 4,000 offshore oil and gas platforms and tens of thousands of miles of pipeline in the central and western Gulf of Mexico, where 90 percent of the country’s offshore drilling takes place.

At least half a million barrels of oil and drilling fluids had been spilled offshore before the gusher that began after the April 20 explosion, according to government records.

Much more than that has been spilled from pipelines, vessel traffic and wells in state waters — including hundreds of spills in Louisiana alone — records show, some of it since April 20.

Runoff and waste from cornfields, sewage plants, golf courses and oil-stained parking lots drain into the Mississippi River from vast swaths of the United States, and then flow down to the gulf, creating a zone of lifeless water the size of Lake Ontario just off the coast of Louisiana.

The gulf’s floor is littered with bombs, chemical weapons and other ordnance dumped in the middle of last century, even in areas busy with drilling, and miles outside of designated dumping zones, according to experts who work on deepwater hazard surveys.

The likelihood of an accident is low, experts said, but they added that federal hazard mitigation requirements are not strong enough to guarantee the safety of drillers working in the gulf.

Even the coast itself — overdeveloped, strip-mined and battered by storms — is falling apart. The wildlife-rich coastal wetlands of Louisiana, sliced up and drastically engineered for oil and gas exploration, shipping and flood control, have lost an area larger than Delaware since 1930.

----All along the coast, people speak of a lack of regulatory commitment and investment in scientific research on the gulf by state and federal lawmakers.

They note, for example, that over the last decade, the Environmental Protection Agency’s financing for the Chesapeake Bay Program, a regional and federal partnership, was nearly five times the amount for a similar Gulf of Mexico program, and a Great Lakes program was given more than four times as much.


The BP Spill: Has the Damage Been Exaggerated?

By Michael Grunwald / Port Fourchon, La. Thursday, Jul. 29, 2010

-----The Deepwater Horizon explosion was an awful tragedy for the 11 workers who died on the rig, and it's no leak; it's the biggest oil spill in U.S. history. It's also inflicting serious economic and psychological damage on coastal communities that depend on tourism, fishing and drilling. But so far — while it's important to acknowledge that the long-term potential danger is simply unknowable for an underwater event that took place just three months ago — it does not seem to be inflicting severe environmental damage. "The impacts have been much, much less than everyone feared," says geochemist Jacqueline Michel, a federal contractor who is coordinating shoreline assessments in Louisiana.

Read more:,8599,2007202,00.html#ixzz0v9EziDz7

We do not err because truth is difficult to see. It is visible at a glance. We err because this is more comfortable.

Alexander Solzhenitsyn

We end for the weekend with Australia. As national costumes go, Australia’s Sheila’s really dress up for their Bruce. Have a great weekend everyone.

Miss Australia's national costume is a 'travesty'

An outlandish outfit designed to represent Australia at the Miss Universe beauty contest has been branded "a national joke" and "a travesty".

Published: 10:48AM BST 29 Jul 2010


The costume, which will be worn by Jesinta Campbell at the competition in Las Vegas next month, features high-heeled Ugg boots, a brown one piece swimming costume hand-painted by an Aboriginal artist and a lamb's wool shrug. The ensemble is topped off by a voluminous flamenco-inspired rainbow skirt.

While Miss Campbell, 18, has said that she thinks the costume is "incredible", the pastiche of styles has failed to win many fans in Australia, and has been called eye-catching, but for all the wrong reasons.

Melbourne's Herald Sun newspaper said the costume was "a national joke" and members of the fashion industry have agreed.

A man may be a tough, concentrated, successful money-maker and never contribute to his country anything more than a horrible example

Robert Menzies. Australian Prime Minister

The monthly Coppock Indicators finished June:

DJIA: +269 Down. NASDAQ: +460 Down. SP500: +290 Down.

The bull market (or bear market rally) that commenced on Nasdaq on 30/4/09 at 1717 has ended. (30/5/09 SP 500 at 919, 30/5/09 DJIA 8500.) While the indicators can flip flop at market turns, this action is rare on the slow monthly indicators.

Thursday 29 July 2010

Negative Outlook.

Baltic Dry Index. 1901 +32
LIR Gold Target by 2019: $3,000.

“For the authorities, [excessive risk-taking by the financial sector] poses a dilemma. Ex-ante, they may well say “never again.” But the ex-post costs of crisis mean such a statement lacks credibility. Knowing this, the rational response by market participants is to double their bets. This adds to the cost of future crises. And the larger these costs, the lower the credibility of “never again” announcements. This is a doom loop.”

Banking On The State

Piergiorgio Alessandri & Andrew G Haldane. Bank of England. November 2009

Today I only have time for a short update, so this morning we cover the banks going negative again. The west’s banks went bust, got bailed out by dumping much of the rubbish on their balance sheets on the central banksters that aided them in going broke, and got a pass on the rest of their balance sheet rubbish by being allowed to value it to the fantasy model rather than to reality. Below, Moody’s gets cold feet on the banks. Unlike Messrs Alessandri and Haldane at the Bank of England, Moody’s obviously thinks that next bankruptcy round at these three banks at least, “too big to fail” support will be limited. Better line up the Squids over at Morgan Chase and Goldie, it looks like one or both will be getting some more “Bear Stearns.” Actually I think Messrs A&H have it right, I see no sign in America or Britain that “never again” is anything more than an empty slogan. When the next Lehman hits, I think the Squids will hit the Fed and BOE’s panic button again.

BofA, Citi, Wells Fargo Outlook Negative: Moody's

Published: Tuesday, 27 Jul 2010 | 5:54 PM ET

Moody's on Tuesday changed its outlook on Bank of America, Citigroup and Wells Fargo to negative, from stable, citing lessened government support for the institutions under new U.S. regulations.

A negative outlook indicates the banks are more likely to be downgraded over the next 12 to 18 months. The credit ratings agency also said it may cut its ratings on ten regional banks on reduced government support.

---- The new financial reform bill, however, is intended "clearly to eliminate government—i.e. taxpayer-support to creditors," Moody's said. Some support, however, is likely to remain for large institutions as regulators work to implement new laws, it added.

"Over the next 12 to 24 months ... we expect that our support assumptions for systemically important banks will likely revert to pre-crisis, or even lower, levels—though we do not anticipate that we would completely eliminate support from these firms' senior debt and deposit ratings," Moody's said.

Below, just when you thought Europe had gone away and that Europe’s banks had passed their “stress tests,” The Telegraph goes and ruins everyone’s breakfasts again. Is a Europe run by Brussels bunglers really worth 30 trillion euros after all.

Europe's €30 trillion headache

European banks have amassed €30 trillion in liabilities and face a serious funding threat over the next two years as authorities withdraw emergency support, according to a new report by Standard & Poor's.

By Ambrose Evans-Pritchard, International Business Editor
Published: 6:00AM BST 29 Jul 2010

The rating agency said banks are at risk of a vicious circle as sovereign debt fears and financial stress feed off each other. "Banking sector woes are eroding sovereign credit-worthiness, which is in turn reducing the real and perceived capacity of governments to support weak banks," said S&P.

"The collective funding needs of Europe's banks are vast. The industry is much larger than America's or Asia's. Most of their mortgages and other personal loans stay on their balance sheets and require funding. This contrasts with the US, where financial institutions securitize (these) loans and which do not require balance sheet funding," said Scott Bugie, S&P's credit strategist. Total liabilities are €23 trillion for the eurozone and €8 trillion for the UK, Sweden, and Denmark.

S&P said the European Central Bank's emergency lending had inadvertently created a snare. Its three-month loans have had the effect of concentrating roll-over risk for large amounts of debt. Banks will eventually have to refund these loans in a crowded market, competing with debt-hungry states. "ECB loans have contributed to a shortening of liability maturities. The result is a growing funding mismatch for the European banking industry. This is happening as regulators prepare to introduce tougher liquidity standards. This is one of the greatest vulnerabilities of the industry," it said.

The Netherlands has already ended state debt guarantees, forcing its banks to go the market as bonds fall due. Others are following suit. Roughly €1 trillion of such debt in the eurozone and Britain will come due by 2012. "The need to refinance the maturing guaranteed-debt looms over many banks," said the agency. Stronger banks can cope: weaker ones will be left floundering in "a two-tier funding market".

S&P said Greek banks have seen a leakage of €10bn to €20bn in customer deposits since the crisis began, or 5pc to 10pc of the total. They are shut out of the capital markets. The ECB is propping up the country with €140bn of exposure to Greek debt in one form or another. It has €126bn of exposure to Spain and €71bn to Ireland, mostly in loans to weaker lender such as Spain's cajas. The exit from this will be a minefield.

The EU's €750bn "shock and awe" rescue has gained time but not conjured away underlying concerns about the fiscal health of the EU states themselves. The report came as the ECB's latest bank survey showed that credit conditions had tightened sharply in the second quarter, with a net 11pc of lenders restricting loans. The survey was carried out in late June, after the €750bn rescue but before the stress tests for banks.


Greece orders striking lorry drivers back to work

29 July 2010 Last updated at 02:31

The Greek government has used a rare emergency order to force lorry drivers back to work after a three-day strike.

The drivers have until later on Thursday to return to the roads or face arrest and the loss of their licenses.

Most petrol stations in Athens are out of fuel and shops and factories are running low on supplies.

The drivers oppose government plans to open the industry to more competition as part of austerity measures agreed with the IMF and the EU.

The reform is a key part of the multi-billion dollar EU-IMF package intended to pull Greece out of its debt crisis.

Members of the drivers' union said they would not back down and dared the government to seize their lorries.

"Leonidas with his 300 warriors said 'Come and get it'. We say the same: come and get it," said one of the organisers of the strike, Spyros Kapetanios.

Finance Minister George Papaconstantinou said the drivers would not be allowed to hold "Greek society hostage".

He added: "No one has the right to paralyse the country - no one."

The back to work order was issued hours after negotiations between the government and the drivers broke down.

The national emergency provision is usually reserved for times of war or natural disaster.

We end for today, with Belgium. For how much longer will Belgium exist? Not too much longer think the lads at Bedlam Asset Management. There goes the euro, stay long gold.

Belgium is a country invented by the British to annoy the French.

Charles de Gaulle.

Running through a minefield, backwards

Part II - farewell Flanonia?

----On the numbers alone, the most likely casualties are the UK and US in that order, but both

have good odds of escaping. Many hard issues help. In America, one such is the dollar’s

currently irreplaceable role as the world’s reserve currency. In the UK, the relatively

excellent debt duration (i.e. it is spread over many years rather than near-term) is a plus.

Each also has good soft issues: the market likes the new British government’s tax and slash

policies so is a willing buyer of UK debt, whilst the Asian central banks have so many US

bonds they simply self destruct if they refuse to keep buying.

The standout surprise candidate for sovereign default by end-2012 is Belgium. A decent

country; civilised, at peace, wealthy and globally competitive in several areas. Moreover, first

glance at the numbers gives no particular reason to expect Belgium to default. Its potential

financial problems have been on the radar screen for so long that we have grown used to

them, rather like those many parents who fail to recognise the repulsiveness of their offspring.

With net government debt of €400bn, it is hardly a huge world borrower in absolute terms.

Yet default could occur almost entirely by accident and the ripples be far greater than its size

warrants, because of its position as the de facto federal capital of the EU. Belgium’s

hastening car crash is not in current bond prices or exchange rates.

The glue has dissolved

There are five reasons why Belgium has hung together for the last 180 years: Britain, God, the

King, fear and most importantly, money. Before addressing these, it is necessary to

understand why Belgium exists at all.


"The most puzzling development in politics during the last decade is the apparent determination of Western European leaders to re-create the Soviet Union in Western Europe."

Mikhail Gorbachev

At the Comex silver depositories Wednesday, final figures were: Registered 52.43 Moz, Eligible 58.12 Moz, Total 110.55 Moz.


Crooks and Scoundrels Corner.

The bent, the seriously bent, and the totally doubled over.

No scoundrels or crooks today, just a link to some interesting weekend reading.

How the Great Recession Was Brought to an End


Writing at the time of the 1825 banking crisis, Jeremiah Harman, Director of the Bank, described it thus:

“We lent [money] by every possible means and in modes we have never adopted before; we took in stock on security, we purchased Exchequer bills, we made advances on Exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank…Seeing the dreadful state in which the public were, we rendered every assistance in our power.”


The monthly Coppock Indicators finished June:

DJIA: +269 Down. NASDAQ: +460 Down. SP500: +290 Down.

The bull market (or bear market rally) that commenced on Nasdaq on 30/4/09 at 1717 has ended. (30/5/09 SP 500 at 919, 30/5/09 DJIA 8500.) While the indicators can flip flop at market turns, this action is rare on the slow monthly indicators.

Help the LIR fight Banksterism, the EU, and for sound money.

If you can, help the LIR stay around and make a difference. Please make a donation at the PayPal link on the website or better still become a sponsor for what looks like an exciting 2010. Capitalism not banksterism. Many thanks to all who have helped.


Sunspots – A 22 year colder world? (From 2004?)

Spotless Days July 28
Current Stretch:0 days

2010 total: 35 days (17%)
2009 total: 260 days (71%)
Since 2004: 803 days
Typical Solar Min: 485 days

A new powerful sunspot is just coming into view. Will we get a new “Carrington Event?”

The “Carrington Event,” September 1, 1859.

Wednesday 28 July 2010

Stepping off the Pavement.

Baltic Dry Index. 1869 +28
LIR Gold Target by 2019: $3,000.

Leading active members of today’s economics profession…have formed themselves into a kind of Politburo for correct economic thinking. As a general rule—as one might generally expect from a gentleman’s club—this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They predict disaster where none occurs. They deny the possibility of events that then happen.… They oppose the most basic, decent and sensible reforms, while offering placebos instead. They are always surprised when something untoward (like a recession) actually occurs. And when finally they sense that some position cannot be sustained, they do not re-examine their ideas. They do not consider the possibility of a flaw in logic or theory. Rather, they simply change the subject. No one loses face, in this club, for having been wrong.

J. K. Galbraith.

Is it a case of darkest before the dawn or have we just stepped off the pavement into the path of a bus? We open below with the Telegraph’s best economics editor covering recent developments.

Drip after drip of deflation data

By Ambrose Evans-Pritchard Last updated: July 27th, 2010

Today’s release on manufacturing activity by the Richmond Fed is pretty ghastly, as you would expect given that the effects of fiscal stimulus are now wearing off at accelerating pace – before the happy handover to the private sector is safely consummated – and given that the structural East-West imbalances that lay behind the global crisis are getting worse again.

The expectations index for the US 5th District is crumbling:

----- This follows yesterday’s horrendous fall in the Texas business activity index from the Dallas Fed, which fell from -4 in June to -21 in July. “Thirty-one percent of firms reported a worsening of activity, up from 22 percent in June,” said the bank.

Texas New Orders were -9.6 in July, -8.2 in June, and +15.8 in May.

Capacity Utilization was -0.6 in July, +2.7 in June, and +18.7 in May.

This of course is why Fed chair Ben Bernanke has been giving strong hints of QE2 (helicopters again) if necessary.

Forgive me if I am becoming a “leading indicator” bore but these turning points in the cycle are fascinating. The US Conference Board’s index of consumer confidence fell again in July to 50.4 after plunging in June.

“Concerns about business conditions and the labour market are casting a dark cloud over consumers that is not likely to lift until the job market improves. Given consumers’ heightened level of anxiety, along with their pessimistic income outlook and lackluster job growth, retailers are very likely to face a challenging back-to-school season,” said the Board.

This follows the fall in the ECRI leading indicator for last week to -10.5, a level that has always been followed by recession in the post-war era. The Economic Cycle Research Institute is careful not to jump the gun, waiting for further confirming data before issuing a formal recession call that would hurt its credibility if proved wrong by events.

All of this squares with the fall in truck shipments and rail car loadings over recent weeks.

---- But here is a note I received today from Tom Porcelli at RBC Captial Markets that puts uber-bullish earnings rhetoric in a proper context.

It seems like on a daily basis the headlines point to yet another company beating earnings expectations. The tally thus far shows 142 companies out of 172 have surprised to the upside for a significant 8pc beat-rate. On the face of it this seems promising.

But the sales figures (i.e. the part that measures organic growth) have been less than stellar. Thus far, they have shown just over 9pc growth versus last year’s figures. But sales were down nearly -14pc in 2Q09 – hardly a tough comp to best!

While 68pc of companies have beaten sales estimates, this is hardly anything to get overly excited about. Back in 2Q08, 69pc of companies had beaten sales estimates. We all know where the economy headed shortly thereafter.

The numbers should be taken with a grain of salt. Below the surface, the earnings reports continue to confirm what we have been saying – that this recovery is anaemic at best.

Ian in Toronto has sent along a couple of articles too good not to share. Up first, as America rushes into debt at 1.5 trillion a year forever, and the UK is already up to £200 billion of quantitative easing, with more to come, up in Canada, someone has dared to ask the unthinkable, was it all worth it to turn the treasury and collective national wealth over to the banksters?Below, the Globe and Mail gets on the banksters’ case. Below that, righteous comeuppance for the dismal scientists. The whole article is well worth the read.

"We need only take our heads out of the sand to see clearly that interventionism not only has failed to provide the promised something-for-nothing, but has led to all sorts of undesirable consequences. Indeed, many are just beginning to realize that we are moving towards disaster even though we have been on a wrong heading for decades."

Leonard Read

Was the boom worth it?

Doug Saunders

Broken Europe: In countries that kept a lid on consumer and mortgage lending, the good times were worth the hype. Everywhere else, it was like a bad dream

From Saturday's Globe and Mail Published on Saturday, Jul. 24, 2010 5:00AM EDT Last updated on Saturday, Jul. 24, 2010 9:36AM

It was Liam Corrigan, a 51-year-old heating technician I met in Dublin, who made the point: “In the end, you really do have to ask yourself whether it was worth all the hype.”

He made good money in the 15-year boom and bought a five-bedroom house, only to watch the work dry up and his house disappear. Now he’s living in a rented apartment, earning what he did in 1994, as if the whole thing had been an odd and very Irish sort of dream.

Was it all worth it? Or are we all like Liam Corrigan? As the economy begins to recover, we ought to be asking whether the crash of ’08 wiped out all the gains, national and personal, that were created in the long boom. Or are people still better off than they were when it all began?

What the Western world did in the 1990s was essentially try an experiment: We expanded loose money and easy credit more widely than ever before, allowing even poor people to borrow against future earnings, in hopes that this would create a sustainable improvement in living standards.

If we do it all over again, should we avoid that risk – or were there sustainable gains that made the volatility worth it? To formulate an answer, I enlisted the assistance of economic researcher Allison Martell, who spent the week scouring the latest economic statistics for North America and Europe.

First, we looked at earnings (in terms of actual purchasing power) of poor and lower-middle-class people. If you were in the bottom 20 per cent of the population, did the boom give you more purchasing power? And did you keep it?

In Canada, the answer is an unambiguous yes. The after-tax incomes of the bottom 20 per cent of Canadians had fallen slightly during the crisis of the 1990s, from $21,000 to $19,000 (in constant 2008 dollars); beginning in 1997, they rose steadily, to just shy of $24,000. Among the next highest 20 per cent, they rose from $32,000 to 40,000 – and, with both groups, the purchasing power of their earnings seems to have levelled off but not fallen.

The same was somewhat true in Britain, though incomes have fallen in recent years. In the United States, it’s a different picture: After-tax earnings peaked in 2000, fell somewhat throughout the 2000s, and went off a cliff after 2008, dropping to 1997 levels (though not yet to pre-boom 1994 levels).

Another important index is home ownership: Did the boom allow more people to own their own property – and did the crash wipe out that important step into middle-class stability?

Statistics Canada’s General Social Survey shows that home ownership rose from 65 per cent in 1993 to somewhere above 75 per cent in 2008 with a slight dip, of 4 percentage points, at the end. In the U.S., it rose from 64 per cent in the 1990s to 69 per cent in 2005, then slumped every year after that, back to 1999 levels in 2009. European rates have generally held steady, except in Ireland, where they have plummeted to pre-boom levels (some European figures aren’t yet available).

But we should be wary: A study by the U.S. Federal Reserve last month looked at “real” homeownership, by discounting people who owe more than their homes are worth (and thus are unlikely to own them forever). That cuts the rate by 5.6 percentage points, killing most boom-period gains. We don’t know these figures for other countries, but Britain, Spain and Ireland all have plenty of “underwater” mortgages, and Canada generally doesn’t.

Indeed, the debt that made possible all those gains could end up undermining them completely. We looked at total consumer debt compared with income and, in almost every Western country, it rose sharply – even during the boom years, when incomes were rising. In the U.S. and Britain, debt went from 65 per cent of income in 1994 to almost 100 per cent in 2009; in Spain, from 40 per cent to 90 per cent; and in Ireland, from 60 per cent to 130 per cent.

The outliers were France and Canada, which saw debt rise less sharply, and Germany, where consumer debt has fallen since 1999. The answer is hard to avoid: In the countries that kept a lid on consumer and mortgage lending, the economic boom was worth all the hype. Everywhere else, it was like a bad dream.

The Great Mortification: Economists’ Responses to the Crisis of 2007–(and counting)1

Philip Mirowski

Economists have not comported themselves with much dignity of late. Normally so quick off the mark to ferret out and expose irrationality in others, currently they have been distinctly loathe to recognize a pandemic within their own ranks. I refer here to the outpourings spewn forth by the economists themselves, provoked by the numerous embarrassments that have been visited upon them consequent to the onset of the world economic crisis.

The figure of the economist has more often than not served as a butt for jokes or the template for an unsympathetic protagonist in the larger culture; economists make for lousy celebrities.2 Yet something novel and not a little creepy has happened since 2008. General interest magazines, from Business Week to The Economist to The New York Times—previously cheerleaders for the economics profession—turned openly hostile in 2008, hectoring whole schools of thought for their failures, grasping randomly for “new paradigms,” rooting around for sixth-round draft picks and telegenic wicked rebels to replace their prior stable of catallactic pundits. Lusting for scapegoats, journalists initially scoured the landscape for miscreants like Bernie Madoff, Dick Fuld, and Joseph Cassano, and then instinctively sought to find their counterparts inside the economics profession. There was even an online ballot for receipt of the Ignoble (or “Dynamite”) Prize, to be awarded to the three economists deemed to have contributed the most to the global financial collapse.3


In China news this morning, the People’s Bank of China says no double dip. Just in case China’s Finance Minister intends to continue China’s “proactive fiscal policy.” The BDI suggests both will be wrong.

China sees no double dip, but will keep spending

July 27, 2010, 7:51 p.m. EDT

LOS ANGELES (MarketWatch) - Chinese authorities feel confident that the current economic slowdown won't turn into a "double dip," but they will maintain stimulus spending to support the economy, according to government statements Tuesday.

The People's Bank of China said that while the nation's economy is definitely slowing, it will continue to grow and its fundamentals remain strong, according to the central bank's quarterly report, as cited by the official Xinhua news agency.

The PBOC pointed to the slowing in China's manufacturing purchasing managers' index, which slowed to 52.1 in June, down from a May reading of 53.9.

---- The central bank said the current slowdown was a correction after earlier "excessive expansion" - as well as policy to stop steep real-estate price inflation and cutting loans to local governments - and added that the easing was "good for rebalancing the economic structure and achieving a sustainable economic growth," according to the Xinhua report.

Despite the central bank's apparent peace with the slowing economy, Finance Minister Xie Xuren said Tuesday that China's "proactive fiscal policy" will continue for the rest of the year.

Xie said the spending would focus on supporting agriculture and technological innovation, as well as environmental projects, according to comments carried in a separate Xinhua report.

He was also quoted as saying regulations and other policy initiatives would continue to try to boost domestic demand, through moves such as continuing a subsidy for rural residents buying home appliances, the report said.

We end for today with the latest news on electric cars. Like it or not, our governments intend to make cleaner motoring the next “big thing.” Time to brush up on rare metals.

27 July 2010 Last updated at 00:01

Electric car subsidy spared cuts by government

By Richard Scott Transport correspondent, BBC News

Motorists who buy an electric plug-in car from January next year will get a grant worth up to £5,000 from the government.

The project was announced by Labour but placed on hold by the coalition until the autumn spending review.

Now the Treasury has taken the highly unusual step of agreeing to ring fence the money from any cuts.

Carmakers had been putting pressure on the new government to announce what was happening to the electric car subsidy.

----- The sheer scale of budget cuts needed across government departments - with the distinct possibility that transport might fare worse than most - had placed the scheme in doubt.

Now the government says the £43m earmarked for the scheme will be protected.

It means that anyone who buys an electric plug-in car from next year will get a 25% discount up to a maximum of £5,000.

"The coalition government is absolutely committed to low carbon growth, tackling climate change and making our energy supply more secure," said Transport Secretary, Philip Hammond.

---- The extra help is not expected to make up for the extra cost of the vehicle - which could be about £10,000 more expensive than its petrol equivalent.

However owners could save hundreds of pounds a year in running costs.

First mainstream electric cars on track for 2010-11 launch

July 27, 2010, 2:05 p.m. EDT

NEW YORK (MarketWatch) -- General Motors and Nissan on Tuesday said they're on target to roll out some of the first mainstream electric cars in U.S. history late this year, as the auto makers seek to attract buyers who want to cut their carbon footprint.

General Motors said its new Chevrolet Volt, a plug-in hybrid electric vehicle that uses a gasoline-powered motor to charge the battery once it's been driven about 40 miles, will carry a manufacturer's suggested retail price of $41,000.

The auto maker is quick to point out that the car is eligible for a federal tax credit of up to $7,500, bringing the possible cost of the car down to $33,500.

General Motors said Chevrolet dealers are now taking orders for the Volt, which will be offered first in California, New York, Michigan, Connecticut, Texas, New Jersey and the Washington, D.C., area. Deliveries of the car will start late this year.

Meanwhile, Nissan begins rolling out its all-electric car, the Leaf, in December.

The car will be available in California, Washington, Oregon, Arizona and Tennessee, states representing about 55% of reserved vehicles.

Nissan said customers can make firm orders in August.

In January, the car will hit markets in Texas and Hawaii. In April, the Leaf will be available in North Carolina, Florida, Georgia, Washington, D.C., Virginia, Maryland, South Carolina and Alabama, Nissan said.

Rare metals blog.

At the Comex silver depositories Tuesday, final figures were: Registered 52.58 Moz, Eligible 57.77 Moz, Total 110.35 Moz.


Crooks and Scoundrels Corner.

The bent, the seriously bent, and the totally doubled over.

Today it’s BP and BP’s executive and owners dumping the cost of their Gulf of Mexico disaster on the taxpayers. They really have little choice, pursuing any other policy is against the best interests of the owners and would leave them liable to lawsuits from pension trustees, etc. Still the US taxpayers, at least will probably get it back through fines and penalties, the UK taxpayers will then get hit a second time, as BP offsets against UK tax. Oh well, it’s all only fiat money and dodgy accounting after all, and anyway only little people pay taxes.

“Well, sometimes you just step off the pavement and you get hit by a bus.”

Tony Haywood. CEO of BP (until October.)

BP offsets spill costs to save $10 billion in tax

'If you make a loss you don't pay tax,' analyst says

LONDON — Oil giant BP said it plans to offset the entire cost of its Gulf of Mexico oil spill against its tax bill, reducing future contributions to U.S. tax coffers by almost $10 billion.

BP took a pretax provision of $32.2 billion in its accounts for the period, for the cost of capping the well, cleaning up the spill, compensating victims and paying government fines.

However, the net impact on BP's bottom line will only be $22 billion, with the company recording a $10 billion tax credit, most of which will be borne by the U.S. taxpayer, a spokesman said.

BP's U.K. tax bill will also be reduced, BP added.

Analysts told Reuters that BP could prompt more public and political anger in the United States by deducting all the costs, and especially the expected fines BP will face.

In 2006, Boeing Co decided to forego seeking a tax deduction for any of a $615 million settlement with the government over ethics charges, under pressure from lawmakers.

BP spokesman Toby Odone told "This is just normal practice. If you declare an income, you have to pay tax on it — it's the way tax laws are set up. We will pay less in tax because we are earning less, as you would as an individual if you were earning less.

This is the accounting process," he added. "We are going by U.S. laws, we're following the accounting laws of the country. We are a business and we have shareholders we are responsible to."

He said the Boeing decision was different, adding that BP would not be allowed to offset taxes against any fines or settlements with the government over the spill.

Oil analyst Dougie Youngson, of London-based Arbuthnot Securities, also told that BP's decision to offset the spill costs was normal procedure.

On the Surface, Gulf Oil Spill Is Vanishing Fast; Concerns Stay

By JUSTIN GILLIS and CAMPBELL ROBERTSON Published: July 27, 2010

The oil slick in the Gulf of Mexico appears to be dissolving far more rapidly than anyone expected, a piece of good news that raises tricky new questions about how fast the government should scale back its response to the Deepwater Horizon disaster.

The immense patches of surface oil that covered thousands of square miles of the gulf after the April 20 oil rig explosion are largely gone, though sightings of tar balls and emulsified oil continue here and there.

Reporters flying over the area Sunday spotted only a few patches of sheen and an occasional streak of thicker oil, and radar images taken since then suggest that these few remaining patches are quickly breaking down in the warm surface waters of the gulf.

---- After 86 days of oil gushing into the gulf, the leak was finally stopped on July 15, when BP managed to install a tight-fitting cap on the well a mile below the sea floor, then gradually closed a series of valves. Still, the well has not been permanently sealed. Until that step is completed in several weeks, the risk remains that the leak will resume.

Scientists said the rapid dissipation of the surface oil was probably due to a combination of factors. The gulf has an immense natural capacity to break down oil, which leaks into it at a steady rate from thousands of natural seeps. Though none of the seeps is anywhere near the size of the Deepwater Horizon leak, they do mean that the gulf is swarming with bacteria that can eat oil.

"With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people."

F.A. von Hayek

The monthly Coppock Indicators finished June:

DJIA: +269 Down. NASDAQ: +460 Down. SP500: +290 Down.

The bull market (or bear market rally) that commenced on Nasdaq on 30/4/09 at 1717 has ended. (30/5/09 SP 500 at 919, 30/5/09 DJIA 8500.) While the indicators can flip flop at market turns, this action is rare on the slow monthly indicators.

Tuesday 27 July 2010


Baltic Dry Index. 1841 +15
LIR Gold Target by 2019: $3,000.

Most of the poverty and misery in the world is due to bad government, lack of democracy, weak states, internal strife, and so on.

George Soros.

We open today with China and the Wall Street Journal reporting on yet another attack on China’s “undervalued” currency. Someone has an agenda in play in taking on China, it seems, domestic US politics or a sign of something else. Eerily like 1987, when then US Treasury Secretary Baker took on Germany, and the result was the stock market crash of October 1987. Stay long precious metals. History doesn’t have to repeat, but this looks uncomfortably close.

IMF says yuan substantially undervalued

Published on Tue, Jul 27, 2010 at 08:35

The International Monetary Fund believes that the Chinese yuan is "substantially undervalued", the Wall Street Journal reported on Tuesday, citing two unidentified IMF officials.

The newspaper said the IMF's opinion, in a review of the world's third-largest economy, was backed by the United States, Germany, France and Britain among others.

A full analysis would likely be released in September unless China withholds its permission.

A US Treasury official also said on Monday that the yuan remained clearly undervalued and that the Treasury Department was closely monitoring it.

The yuan has risen 0.7% since the People's Bank of China announced its depegging from the dollar on June 19.

JULY 26, 2010

China Fuels Trade Tension With Policies, Report Says

BEIJING—China's drive to support domestic technologies—which has already resulted in high-profile complaints by foreign businesses over government purchasing policies—is likely to continue to cause trade disputes and political tensions with the U.S., says a new report from the U.S. Chamber of Commerce.

"Indigenous innovation is a massive and complicated plan to turn the Chinese economy into a technology powerhouse by 2020 and a global leader by 2050," says the report, to be released this week. "What is worrisome for the business community is that these indigenous innovation industrial policies are headed toward triggering contentious trade disputes and inflamed political rhetoric on both sides."

The report, which was commissioned by the U.S. Chamber and written by James McGregor, a longtime journalist and executive in China who is now senior counselor for APCO Worldwide, says China is becoming increasingly aggressive in using its vast market to push foreign companies to transfer leading-edge technologies. That tactic, it says, is "forcing foreign technology companies to anguish over balancing today's profits with tomorrow's survival."

The report, from one of the world's biggest business groups, adds to the increasingly vocal concerns of foreign companies and governments about the business environment in China, including top executives from firms such as Siemens AG, General Electric Co., and Microsoft Corp.

Executives and officials have raised particular complaint about indigenous-innovation policies that they fear are designed to discriminate against foreign companies or to force them to transfer their intellectual property to China.

Beijing's handling of those concerns "has become a litmus test for many companies, particularly in the IT sector, for how China is currently treating investment and how it might treat investment in these sectors going forward," Myron Brilliant, the U.S. Chamber's senior vice president for international affairs, said in an interview.

Chinese officials have strongly defended the indigenous-innovation policies, saying they don't discriminate against foreign companies and noting that investment continues to pour into the country.

"Currently, there is an allegation that China's investment environment is worsening. I think it is untrue," Premier Wen Jiabao said this month in a meeting with German executives and officials.

China's leaders began emphasizing what they call "indigenous innovation" in 2006, but it emerged as a major issue for foreign businesses after the publication in November of rules for creating a national list of products containing indigenous innovation. Foreign companies feared that would shut them out of tens of billions of dollars in government procurement contracts.

We end on China with more on a growing problem we’ve touched on several times before. Much of China’s bubble rests on a foundation of sand. Below Bloomberg carries another red flag on the state of China’s bubble. It’s mid summer and all news is good news in our stock markets, complacently focused on anything other than the reality of our increasingly unstable world. Will 2010 end differently to 1987. Is High Frequency Trading the new portfolio insurance all set to trigger another spectacular crash?

Dagong Says China Ratings Miss Local Government Risks

July 27 (Bloomberg) -- Credit ratings assigned to yuan- denominated bonds issued on behalf of local governments in China are misleading and don’t reflect risks investors face, Dagong Global Credit Rating Co.’s chairman said.

Local government-backed borrowers shop around for the best rankings from Chinese ratings companies and “whoever gives them a better rating gets the business,” Guan Jianzhong, chairman of privately owned Dagong, one of China’s five official ratings agencies, said in a Bloomberg Television interview in Beijing yesterday. “This is very dangerous.”

Guan’s comments show growing concern at credit risks stemming from a record borrowing binge spurred by China’s efforts to revive economic growth during the global recession. Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) lent to finance local infrastructure projects, according to a person with knowledge of data collected by the China Banking Regulatory Commission.

“It reflects the lack of transparency in local-government finance,” Tom Orlik, a Beijing-based China economist at Stone & McCarthy Research Associates, said in a telephone interview. “It’s very difficult to get an accurate gauge of the repayment capacity either of the local government financing vehicles or of the local governments themselves.”

------ “In China most companies can’t issue junk bonds, they have to be at least AA to apply for debt issuance,” Guan said. Local governments set up financing vehicles to fund projects such as highways and airports with bonds and loans, due to limits on their ability to directly borrow money.

According to China Lianhe Credit Rating Co., 43 urban construction companies affiliated with municipalities, provincial and prefecture-level cities, as well as counties, issued bonds totaling 59.2 billion yuan ($8.7 billion) in the first half of 2010. Of the 72 corporate bonds sold in the first half, 70 were rated AA or above, Lianhe said.

China has more than 1,000 county-level governments and hundreds of city and municipal councils that get revenue from local taxes, land sales and central-government transfers. Premier Wen Jiabao’s crackdown to prevent a real-estate bubble has left cities such as Tianjin, southeast of Beijing, reeling as revenues slump from land sales, which made up 41 percent of income in 2009.

We end with this incredible news from America in today’s WSJ. Not content with a hidden mountain of unsold foreclosed homes hidden in the books of US banks, the FHA rescued US real estate industry is now ramping up to build even more homes. I doubt that this ends well for anyone, at some point a few months ahead.

JULY 27, 2010

Supply of Homes Set to Grow

Sales of new homes are near 47-year lows, yet the supply of new and existing homes is expected to grow in the months ahead as construction ramps up and a wave of foreclosed homes hits the market.

In June, new-home sales were running at a seasonally adjusted annual rate of 330,000 units, the Commerce Department said Monday. While that was up 23.6% from the all-time low of 267,000 in May, the June figures were the second lowest on record.

"What we're really seeing here is that new-home sales are at what I'd call rock bottom," said Steve Blitz, an economist at Majestic Research in New York. "The last time we were running these kinds of numbers was the 1982-1983 recession, when we had 100 million less people."

LPS Applied Analytics, a firm that tracks mortgage data, said Monday that there were 4.56 million loans in default or in some stage of foreclosure in June, down slightly from May. But the number of new foreclosures initiated on properties backed by Fannie Mae and Freddie Mac increased sharply, rising 21% in June from May.

The rise in foreclosures on Fannie and Freddie properties reflects the failure of many troubled borrowers to receive permanent loan modifications plans, analysts said. Having exhausted all options to rescue their homes, many troubled borrowers may now be giving up.

"Looking at the numbers you're seeing about this pickup in foreclosure starts, it's hard to see how it's not going to translate into elevated levels of [properties taken over by banks] down the road," said Herb Blecher, an analyst at LPS.

Home builders, which began buying up land lots late last year in anticipation of an economic and housing rebound, are stuck with thousands of acres that are prone to lose value as the market struggles. Many will build homes on the land, rather than write off its value and wait for the market to improve.

"Builders are willing to pay a premium to not have that risk on their hands. They're still facing a tremendous amount of stress," said Brad Hunter, chief economist at Metrostudy, a housing-market research firm based in Houston. "They're discounting the homes, they're making very small profit margins, but they're building homes. They're very interested in securing market share."

Several former bubble markets are seeing the biggest increase in home construction. According to Metrostudy, new-home starts in the second quarter show signs of rising 68.1% in South Florida, 83.7% in Naples/Ft. Myers, 65.1% in Las Vegas and 59.7% in Denver from the same period in 2009.

Why Are Banks Withholding Highend Repossessions Over $300,000 From the Market?

Posted by Keith Jurow 07/20/10 8:00 AM EST

Author Bio | Archives

With the expiration of the first-time buyer tax credit on April 30, there are now two main props keeping the housing market afloat.  One is the growing percentage of home sales financed by Federal Housing Administration (FHA) loan guarantees.  The other is the refusal of banks to put on the market foreclosed homes over $300,000.
In this article, we will take a look at the second factor.  A future report will examine the role of the FHA in keeping the market from collapsing

Let's begin with Chicago.  Cook County is comprised of Chicago and its contiguous suburbs and has a population of roughly 5.3 million residents.  It experienced a huge bubble during 2004-2006 and has suffered a substantial drop in both prices and home sales. has the most comprehensive database on foreclosures.  It claims to have specifics on over 1.5 million defaulted, auction-ready, and bank-owned properties.  The information is updated daily.  You can organize listings of defaulted properties; those scheduled for auction, and repossessed homes (REO) by date as well as by amount.  The website also provides a separate listing of those properties which have been put up for sale by the lender.
As of July 15, RealtyTrac listed 28,829 properties which had been foreclosed and repossessed by lenders.  Some have been owned by the bank as long as 2½ years without having been placed on the market.  Roughly half have been repossessed by the lender since late January 2010.
This year, banks in the Chicago area have foreclosed on a huge number of expensive homes.  RealtyTrac lists 2,650 repossessed homes for more than $300,000 and 169 for more than $1 million.
Here is where it gets really interesting.  Out of 28,829 repossessed properties, there were only 1,292 listed by lenders as "for sale."  The vast majority of these available homes were inexpensive.  A mere 29 homes over $300,000 were for sale.  In other words, the banks have withheld from the market 2,621 properties listed at $300,000 or higher.
There are probably two important reasons why banks have pursued this strategy.  First, they are concerned that placing these more expensive homes on the market will severely weaken an already thin upper tier market.
Even more crucial is that selling substantial numbers of expensive homes at discounts of 50% or more would compel the lenders to take substantial losses which have been avoided by keeping them off the market.
To give you an example, one repossessed home in the upper income suburb of Glencoe was purchased in January 2004 for $850,000.  Though not listed for sale yet, its opening bid price is $2,819,000.  This suggests that the foreclosed owner had refinanced the property to the tune of $2.8 million.  If the holder of the first lien put a home like this on the market, it could be forced to swallow a loss approaching $2 million or perhaps even more.
One big problem with this strategy is that the banks have also ramped up their placing of seriously delinquent borrowers into default - the first step in the foreclosure process.  RealtyTrac listed 39,963 defaulted properties in Cook County as of July 15.  All of them have been placed into default since August 2009 and half of them since early February of this year.  That is nearly 4,000 per month for the past five months and nearly 10,000 in the last two months alone.  Of these defaulted properties, there are 7,550 listed over $300,000.  Sooner or later, these homes are coming on to the market either as foreclosures or short sales.
What does the market for non-foreclosed properties in Cook County look like now?  As of July 15, posted 38,877 properties for sale of which 14,866 were listed for $300,000 or more.
Sales of all new and existing homes and condos totaled only 9,057 in the first quarter of 2010 according to DataQuick.  That is an average of slightly more than 3,000 per month for a county with over one million owner-occupied units.  Since the peak in early 2006, home sales in the Chicago area have plunged by nearly 75%.  Median sale prices for Cook County slid to only $175,000 in the first quarter, down 10% from a year earlier according to DataQuick.
With so many homes listed for more than $300,000 now languishing on the Cook County market, it is somewhat understandable that the banks would be reluctant to add their foreclosed homes in this price range to a weak market.  When you add in the 7,550 defaulted properties in this price range which have not yet been repossessed by the banks, you can get a sense of the soaring number of homes that is ready to inundate an already glutted market.  When these homes come onto the market, as they eventually must, prices will inevitably plunge.
Current home sellers may have been taken in by all those reports lately which have been claiming that the housing market is "stabilizing."  Only 35% of all the homes listed for more than $300,000 have had their asking price reduced since posting on Trulia.  So these homes just sit ... and sit.


“This asymmetry in the treatment of lenders and borrowers is a major source of instability in the global capitalist system and it needs to be corrected,”

George Soros.

At the Comex silver depositories Monday, final figures were: Registered 52.58 Moz, Eligible 57.77 Moz, Total 110.35 Moz.


Crooks and Scoundrels Corner.

The bent, the seriously bent, and the totally doubled over.

Today, more on one of Wall Street’s finest, the infamous Bernie Madoff late of New York’s “lipstick building” now the star attraction at the Federal prison in Butner North Carolina. The top Ponzi specialist of the world’s capitalist system, he pales into insignificance compared to Uncle Sam’s Ponzi specialists slaving away in the cause of international crime in the depths of the Fed and US Treasury. Uncle Sam’s gargantuan debts will one day be “restructured” away. For now though, they are advancing at an official rate of about 1.5 trillion a year. The 300 million Americans, most of them legal, must wonder what’s in store for themselves as our brave new century unfolds. As with the swindler Bernie, nothing good is the answer I suspect. Below, even those who thought they’d won are about to find out just how costly winning was.

'The situations that men define as true, become true for them.'

William Thomas.

Madoff Trustee Plans More Lawsuits: Report

By REUTERS Published: July 26, 2010

BANGALORE (Reuters) - Irving Picard, the court-appointed trustee overseeing the liquidation of Bernard Madoff's investment firm, is preparing to file new lawsuits to recover funds from investors who were also duped by the Ponzi scheme, the Wall Street Journal said.

Picard told the Journal in an interview that he could end up suing about half the estimated 2,000 individual investors he has called "net winners" from their dealings with Madoff.

Investors categorized as "net winners" withdrew more money from Madoff's firm than the amount of principal they invested, the Journal said.

"The people who made money, who got more, have made money at the expense of the people who did not," Picard told the newspaper.

On July 21, Picard demanded more than $3.6 billion in damages in an expanded lawsuit against a hedge fund firm and individuals whom he said had helped Madoff run a massive Ponzi scheme.

Picard, a partner at law firm Baker & Hostetler LLP, has said that through March 31 he had recovered more than $1.5 billion of assets for Madoff victims.

Madoff was arrested on December 11, 2008, and pleaded guilty three months later to orchestrating the $65 billion Ponzi scheme.

“We have come to realize that a large hedge fund like Quantum Fund is no longer the best way to manage money, ... Markets have become extremely unstable and historical measures of value at risk no longer apply.”

George Soros.

The monthly Coppock Indicators finished June:

DJIA: +269 Down. NASDAQ: +460 Down. SP500: +290 Down.

The bull market (or bear market rally) that commenced on Nasdaq on 30/4/09 at 1717 has ended. (30/5/09 SP 500 at 919, 30/5/09 DJIA 8500.) While the indicators can flip flop at market turns, this action is rare on the slow monthly indicators.