Tuesday, 2 November 2010

The Tipping Point.

Baltic Dry Index. 2648 -30
LIR Gold Target by 2019: $3,000.

“A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him."

John Maynard Keynes 1931

Americans go to the polls today in what promises to go down in history as the tipping point. Will anyone stop for tea? At worst, America gets a gridlocked Congress largely at war with the President, with a horrible stalemate for the next two years. At best, the Republican’s sweep all, and get a majority able to override presidential vetoes. No pollsters are predicting that outcome. Most likely, America gets weakened government, just as the economic crisis needs strong leadership and a united plan of action. Tomorrow, in the light of how America voted, the Fed gets its day in the spotlight to deliver its plan to reach the promised land. At its worst, the election doesn’t settle anything and the Fed’s plan leaves everyone unimpressed. Stay long precious metals. The Fed’s plan is old fashioned Latin American style currency debasement. With QE2, the Fed is intending to put America firmly ahead in the race to Reykjavik again. 2011 has the potential to be the end of the dollar reserve standard. It’s later in the game than many think.

QE2 risks currency wars and the end of dollar hegemony

As the US Federal Reserve meets today to decide whether its next blast of quantitative easing should be $1 trillion or a more cautious $500bn, it does so knowing that China and the emerging world view the policy as an attempt to drive down the dollar.

By Ambrose Evans-Pritchard, International Business Editor Published: 9:56PM GMT 01 Nov 2010

The Fed's "QE2" risks accelerating the demise of the dollar-based currency system, perhaps leading to an unstable tripod with the euro and yuan, or a hybrid gold standard, or a multi-metal "bancor" along lines proposed by John Maynard Keynes in the 1940s.

China's commerce ministry fired an irate broadside against Washington on Monday. "The continued and drastic US dollar depreciation recently has led countries including Japan, South Korea, and Thailand to intervene in the currency market, intensifying a 'currency war'. In the mid-term, the US dollar will continue to weaken and gaming between major currencies will escalate," it said.

David Bloom, currency chief at HSBC, said the root problem is lack of underlying demand in the global economy, leaving Western economies trapped near stalling speed. "There are no policy levers left. Countries are having to tighten fiscal policy, and interest rates are already near zero. The last resort is a weaker currency, so everybody is trying to do it," he said.

Pious words from G20 summit of finance ministers last month calling for the world to "refrain" from pursuing trade advantage through devaluation seem most honoured in the breach.

Taiwan intervened on Monday to cap the rise of its currency, while Korea's central bank chief said his country is eyeing capital controls as part of its "toolkit" to stem the flood of Fed-created money leaking out of the US and sloshing into Asia. Brazil has just imposed a 2pc tax on inflows into both bonds and equities – understandably, since the real has risen by 35pc against the dollar this year and the country has a current account deficit.

----For the 40-odd countries pegged to the dollar or closely linked by a "dirty float", the Fed's lax policy is causing havoc. They are importing a monetary policy that is far too loose for the needs of fast-growing economies. What was intended to be an anchor of stability has become a danger.

Hong Kong's dollar peg, dating back to the 1960s, makes it almost impossible to check a wild credit boom. House prices have risen 50pc since January 2009, despite draconian curbs on mortgages. Barclays Capital said Hong Kong may switch to a yuan peg within two years.



Yesterday, an already jumpy oil market thrust the crude oil price $2 higher. Commodity inflation is back, with money leaving the dollar for tangible assets. Tomorrow could be the day that the Fed lights the commodity inflation touch paper. We are deep in uncharted waters surrounded by icebergs. America’s voters, according to the pollsters, are about to tell the captain to switch to full speed astern.

Oil price jumps $2 as Saudi Arabian energy minister fuels inflation fears

The Saudi Arabian energy minister pushed up oil futures by $2 per barrel, after implying the powerful nation will not do anything to stop prices rising to $90.

By Rowena Mason Published: 8:05PM GMT 01 Nov 2010

The comments will drive further fears of inflation, as transportation costs of consumer goods tends to rise with the oil price.

Brent crude rose $2.06 to $85.21, as any signs about Saudi Arabia's plans for output can have a huge impact on the volatile oil market

Ali al-Naimi, the oil minister, told a conference in Singapore: "Consumers are looking for oil prices around $70, but hopefully less than $90. There's almost an anchor now for the price."

Analysts quickly pointed out that this $70-$90 range is higher than the previous $70-$80 window cited by the Gulf nation as comfortable.

Countries in the OPEC oil-producing cartel, including Saudi Arabia, Nigeria, Venezuela and Iran, have the power to restrict output and push up prices or rein in prices by producing more.

Oil has risen in recent months on the weak US dollar, as investors turn to the commodity as an alternative asset.


Elsewhere in the world, interest rates are starting to rise. Life is getting more complicated for the US-UK operating zero interest rate policies. Were a crisis to force up US-UK interest rates in 2011, the biggest US bond bubble in history will burst, sweeping the Fed and the Bank of England into pages of history. The end of the Great Nixonian Error of fiat currency approaches. Here in the UK at least, not one man in a million is aware, to misquote Keynes.

The market can stay irrational longer than you can stay solvent.

John Maynard Keynes.

Australia and India raise rates to curb inflation

Australia and India have both raised interest rates by a quarter point to fend of rising inflation due to strong growth.
Published: 7:04AM GMT 02 Nov 2010

The surprise move by Australia's central bank to take rates to 4.75pc - the first increase since May - pushed the Australian dollar to within a whisker of parity with the US dollar as investors expect higher interest rates to attract more foreign money into the country.

Growth in the country in booming, driven by strong Asian demand for iron ore and other minerals.

The rate increase by the Reserve Bank of India is the sixth since March as policymakers are caught between a strong domestic economy and a fragile global economy that has pushed a flood of foreign money into emerging Asia as investors seek havens of high-growth.

This has pushed stock markets, dealmaking and currencies to dizzying highs, hurting exports and creating fears of frothy equities, real estate and gold markets.

The Reserve Bank of India said rising global commodity prices, coupled with domestic demand pressures, have made inflation its overriding concern. Inflation in September was 8.6pc, well above its recent trend of 5pc to 5.5pc.

India's central bank raised its repo rate — its short-term bank lending rate — to 6.25pc and the reverse repo rate — which the central bank pays on bank deposits — to 5.25pc.

In raising rates, India has broken ranks with Thailand, South Korea, Indonesia and the Philippines, which have put rates on hold, worried that further hikes would attract even more foreign capital.


"If the financial system goes down, our business is going down and, trust me, yours and everyone else's is going down, too."

Lloyd Blankfein. CEO Goldman Sachs. November 8, 2009

At the Comex silver depositories Monday, final figures were: Registered 51.92 Moz, Eligible 58.81 Moz, Total 110.73 Moz.


Crooks and Scoundrels Corner.

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

Here we go again? Is this going to be a repeat of the Goldman-Paulson Abbacus story? Will JPM just write a check for 550 million to make the whole pesky SEC crawl back to their porn infested offices? When Wall Street calls hang up. Stay long precious metals. What in 2010 constitutes a criminal conspiracy against the clients? Note, no one has been convicted yet and its usual to settle out before trial on the basis of not admitting any wrong doing. Still, would you buy a used car from anyone on Wall Street or a Wall Street bank?

"God, no, we don't club baby seals. We club clients."

With apologies to the Goldmanite, quoted in The Times of London. November 8 2009.

SEC Investigating Deal Between JPMorgan and Hedge Fund Magnetar

by Jesse Eisinger and Jake Bernstein ProPublica, Nov. 1, 2010, 2:20 p.m.

The Securities and Exchange Commission is investigating whether JPMorgan Chase allowed a hedge fund to improperly select assets for a $1.1 billion deal backed by subprime mortgages, according to people familiar with the probe.

Called "Squared" and completed in May 2007, the deal was a collateralized debt obligation, or CDO, made up of pieces of other CDOs. The hedge fund, Magnetar Capital, based in Evanston, Ill., purchased the riskiest slice of Squared as part of a strategy to bet against the mortgage market.

As we reported in April [1], together with Chicago Public Radio’s This American Life [2] and NPR's Planet Money [3], Magnetar often purchased the riskiest portion of CDOs, enabling the banks to complete the deals. Magnetar also frequently bet against those same CDOs, using side bets. Magnetar's purchases ultimately spawned at least $40 billion worth of risky CDOs in 2006 and 2007.

While Magnetar bought the riskiest slices, the CDOs were created and marketed by investment banks. In the case of Squared, the SEC is examining whether JPMorgan adequately disclosed to the investors it marketed Squared to that Magnetar had a role in picking the securities that went into the deal while also betting against segments of the deal. The 294-page Squared prospectus [4], which was created by JPMorgan, has generic language [5] warning that some investors and the CDO manager might have investments that conflict with the interests of other holders of the CDO.


Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

John Maynard Keynes.

The monthly Coppock Indicators finished October:

DJIA: +204 Down. NASDAQ: +289 Down. SP500: +196 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. September is the fourth down month in a row.

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