Monday, 7 February 2011

Stay Long Precious Metals.

Baltic Dry Index. 1043 -02

LIR Gold Target by 2019: $30,000. Revised due to QE.

My deepest thanks to all who called or emailed over the sudden illness of my mother. At 88 there is no such thing as a good stroke, so we take each day at a time. Another day to enjoy God’s gift of another day of her much valued presence in our family.

"I expect there will be some failures. I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system."

Dr. Bernanke. February 29th, 2008

Having taken a few days off to help deal with the family crisis, we return today focusing on what has/is going wrong in our western economies, much of which is an unintended consequence of adopting fiat currency back in 1971. The benefits of fiat currency are all front loaded and were long since dissipated in wars and conspicuous consumption largely sustained by massive debt. Today’s generation borrowed from the future, making debt slaves of coming generations. At some point they will simply default on that debt. Their own children will take precedence over old obligations that they had no part in making. We already see it in America where States are about to repudiate pensions and employment contracts. That will quickly spread for public employment contracts to private. Little wonder the bailed out banksters are looting everything in sight as fast as the can. Unrepayable debt, and unsustainable unfunded pension obligations, will eventually be defaulted on. Whether by a massive inflation, outright repudiation, or some combination of both, as fiat currency breaks down in the decade ahead, the younger generation will default on the debts of the older generation.

"The paper standard is self-destructive."

Hans F. Sennholz

Egypt's Revolution: Coming to an Economy Near You

4:58 PM Tuesday February 1, 2011 

It was a society in stagnation, if not decline. Despite ostensible stability, its people — especially its young people — faced a future bleaker than the dark side of Pluto. For decades, the richest grew even richer, as national debt mounted, middle-class people tried to make ends meet, and upward mobility fell. Government failed to address these problems, and the governed felt increasingly disenfranchised — and partisan. Mass unemployment metastasized from a temporary illness to a chronic condition. One of its major cities decided to erect a permanent tent city, for a permanently excluded, marginalized underclass.

This isn't Tunisia, or Egypt — but America. Yes, in many ways Egypt and America couldn't be more different. But the broad contours are just a little too similar for comfort.

Consider a tweet that made the rounds this weekend. "Youth unemployment: Yemen 49%, Palestine 38%, Morocco 35%, Egypt 33%, Tunisia 26%". It sounds staggering. But youth unemployment rates are 20-40% across Europe. And in the USA, estimates range from 20-50% depending on how you count, and when. Egypt's youth unemployment crisis — which many seemed to think on Twitter was merely an Arab problem (oh, those Arabs!) is, in point of fact, a global one.

What we're watching is a massive malfunctioning of the global economy. At the root of the problem: dumb growth. Dumb growth is, in many ways, bogus — rather than reflecting enduring wealth creation, it largely reflects the transfer of wealth: from the poor to the rich, the young to the old, tomorrow to today, and human beings to corporate "people." Dumb growth is growth without prosperity. And it's far from an Egyptian problem.


February 1, 2011

Group aims to end collective bargaining for public employees

A Santa Barbara-based organization that wants to end union representation of California government employees has revved up its campaign contribution collection machinery for a run at putting the idea to a statewide vote.

Although Secretary of State records indicate that Californians for Public Union Reform hasn't reported that it has taken in any money yet -- it just filed with the state last week -- it is positioning itself to accept contributions with an aim toward putting an initiative on the ballot next year.

----We spoke to Ebenstein a few weeks ago. His group wants to put up a ballot measure that would end collective bargaining for all city, county, regional and state employees in California. The reason, he says, is that unions have too much influence and the pay and perks their members receive are leeching money from government services, like education.

There is precedent for this: At least 18 states forbid collective bargaining for some categories of government workers, according to the Wall Street Journal. Virginia and North Carolina prohibit it for all public employees. And GOP governors in Wisconsin and Ohio are threatening to change state collective bargaining laws if they don't get union concessions.

Last May’s “Flash Crash” in US stocks was just the start of things to come, fear many experts. High Frequency Trading programs now dominate stock market action. When the next flash crash hits, it’s all too likely to turn into a “Splash Crash”, of widespread proportions, triggering a run on “the next Lehman”. And still there is little effort to reform casino capitalism.

"The history of paper money is an account of abuse, mismanagement, and financial disaster."

Richard M. Ebeling

Ready for 'Splash Crash,' the Ultimate Market Meltdown?

Published: Thursday, 3 Feb 2011

With memories of last May's "Flash Crash" still fresh in investors' minds, now comes warning of a market meltdown that could extend beyond stocks—a possible "Splash Crash" that also would affect currencies, commodities and bonds.

The interconnectedness of high-speed trading platforms is making such an event increasingly possible, says John Bates, chief technology officer at Progress Software in Bedford, Mass.

Geopolitical disturbances such as those in Egypt, Tunisia and elsewhere in the Middle East are just the kind of things that could trigger the "Splash Crash," sapping liquidity from trading systems and causing havoc among various markets.

"The dominos are no longer limited to one asset class," Bates warns in an essay posted on the Tabb Forum, an invitation-only online repository for market research. "Algorithms are becoming increasingly sophisticated, encompassing all of the elements that may impact a trade in a certain instrument."

In the May 6 Flash Crash, the Dow dropped nearly 1,000 points before quickly recovering during one manic swoon in the markets. Studies of the event have pinned the blame on various factors, largely centering on an aggressive sell order that in turn led to a series of other problems.

The plunge happened as global markets grew more concerned over the European debt crisis. The market temporary lost liquidity, causing some large company stocks to trade momentarily at a penny, but the damage was largely limited to the equity markets.

Bates believes should a similar event happen in the future, be it caused by further disturbances in the Middle East or something else that releases market jitters and a shock to the algorithmic programs that drive high-frequency trading, the effects will be more widespread.

"We saw with the flash crash how instability in European economies caused nervousness in the market and then an algorithm did something unexpected—causing a cascading effect across futures and equities markets," he writes. "As the cross-dependencies grow and algorithms become more intertwined, so the risks for a 'splash crash' grow."


Next, this time it’s different for the west. For the next few years it’s no longer about raising living standards but about limiting the decline. Explosive stuff in a western world that’s only known rising living standards since the second world war. Will London become Cairo ahead?

"The first requisite of a sound monetary system is that it put the least possible power over the quantity or quality of money in the hands of the politicians."

Henry Hazlitt

If we're lucky, we'll only be 10 per cent poorer

The world’s economic cycle is no longer moving in the West's favour, argues Jeremy Warner.

By Jeremy Warner 7:48PM GMT 03 Feb 2011

-----After the credit-fuelled excesses of the past decade, a daunting process of transition awaits the British economy, of which the fiscal consolidation is only a part. If, by the end of it, we’ve managed to limit the decline in relative living standards to 10 per cent, we’ll have done well. It’s much more likely to be closer to 20 per cent. And while the amount that the economy grows in the meantime will obviously affect the size of this squeeze, it can’t eradicate it.

Let’s start with prices. According to yesterday’s UN figures, world food prices rose to another record high in January, up 3.4 per cent on December’s. Fed by explosive growth in demand in the developing world, the costs of fuel, metal and other commodities are following a similar trajectory.

The effect is to create what, for the West, is a quite unfamiliar phenomenon. Inflation is rising, even though the “rich” economies remain profoundly weakened, with abundant spare capacity and surplus labour. For the first time in living memory, America no longer determines the nature of the commodities cycle. The West is out of kilter with the rest of the world, and with little ability to force through wage claims that match inflation, many of its citizens are finding that their living standards are deflating accordingly.

Theoretically, we should be able to catch up quite quickly, once growth and past rates of productivity gain have been properly restored. But in practice, the pressure on real wages and disposable incomes is likely to persist for some years. That’s because the productive potential of the UK and many other advanced economies has been badly damaged by the recession.

Big chunks of capacity may have been permanently lost, with the result that today’s elevated levels of unemployment may soon become structural and entrenched. Such high joblessness will put a powerful brake on future wages even as prices rise.

----Some of this adjustment will take place of its own accord, as the economy returns to normal. But the impact of the recession means that quite a bit will have to be surgically removed: we can no longer afford the size of public sector we once had.


Does a surge in food and oil prices mean that it's now time to panic?

"Don't panic – this time it's different." That's the line taken by most Western governments in the face of food prices spiralling upwards and oil jumping above $100 a barrel.

By Liam Halligan 8:30PM GMT 05 Feb 2011

In the short term, the "don't panic" crowd could be right. As the market adjusts, it might be that the price of crude and other commodities abates. Or it might not. In truth, nobody knows.

Ultimately, though, the sanguine view will most definitely be wrong. For the world is in the midst of an unprecedented commodity price super-cycle.

----In January, the United Nations Food and Agriculture Organisation price index rose to 231, some 8pc above its previous peak in June 2008. Until six years ago, this index had never breached 100.

The UN's bellwether measure of food costs looks set to rise a lot more. Supply concerns and expectations of rising inflation are driving food hoarding – not only by unscrupulous farming conglomerates but also Middle Eastern governments fearing their own demise.

In addition, some non-perishable soft commodity inventories look scarce, given the 2010 climatic shocks. This year too, freak weather patterns – like Australia's recent Yasi cyclone – are playing havoc with agricultural production.

Wholesale sugar prices last week hit a 30-year record. Cotton traded at levels, in real terms, not seen since the American Civil War. Thankfully, average global prices of staples like wheat and rice remain some 30pc below their 2008 record. Yet it was still food prices that sparked recent unrest in both Tunisia and then Egypt.

-----Having said all that, while allowing for pullbacks along the way, the oil price trend is up. Politicians will try to blame "speculators" but, in truth, it's largely demand-supply realities that are pushing crude north.

In 2009, at the height of the sub-prime crisis, global oil demand fell rather sharply – as Western economies, in particular, hit the skids.

But by 2010, world oil use, driven almost entirely by the relentless energy needs of China, India and the other large emerging markets, reached yet another all-time high – as these countries shrugged off the Western world's credit crunch and resumed, at full speed, the fastest and broadest industrial revolution the world has ever seen.

This year, too, even though Western economic activity will remain sluggish, we're in for another record year of global oil demand.

The IEA has hiked its 2011 world usage estimate four times in as many months – and is now forecasting almost 89m barrels a day, rising to 93.5m in 2015, with the growth of Asian demand continuing to "dwarf" that of all other regions.

Back in 2001, the world was consuming a mere 76m barrels daily – so oil use has risen 17pc in only 10 years. And while energy consumption per head in the populous emerging markets is growing fast, it's still at only a fraction of Western usage.


We end with the continuing rise in price of copper. As the second electrical revolution gets underway and fiat currency starts to break down, holding vital tangible assets for future use makes more sense than holding pictures of dead American Presidents, which can be instantly be generated out of nothing at the whim of the Fed. Expect more price inflation, and commodities theft ahead.

"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

Copper market continues to soar

Extraordinary things are happening in the world of copper. Last month, the price broke through $10,000 (£6,200) a tonne for the first time. It has continued to soar.

By Harry Wilson and Roland Gribben 6:44PM GMT 06 Feb 2011

The effects of this astonishing rise have rippled across the world. In Britain trains have faced delays as rail companies have struggled to fix power lines that have been attacked by thieves determined to strip them of their valuable copper.

For E.On the problem of copper theft has become so acute that the power company has begun hiring former Gurkhas to guard electricity substations. Even the Church of England has been moved to decry the cost to it of fixing the damage caused when thieves target their buildings.

Behind the price rise are a variety of factors, but by far and away the leading driver is China's economic boom. In 2010, Chinese consumption of copper increased by 38pc, with the country now accounting for about one-third of total global demand.

Asian demand as a whole last year hit 10.7m tons and is expected to exceed 11m tones this year, compared to combined European and North American demand in 2011 of 5.6m tons.

Copper miners have been ramping up production to meet the growing demand, but the International Copper Study Group still expects a global supply deficit this year of 400,000 tones.


Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? 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.

The Bernank. November 21, 2002.

At the Comex silver depositories Friday, final figures were: Registered 43.40 Moz, Eligible 59.11 Moz, Total 102.51 Moz.


Crooks and Scoundrels Corner.

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

Today, back to the Madoff fraud again. Ponzi scamster Madoff played favorites with some very heavy hitters, who now seem keen to hold on to their gain at all the victims expense.

If all the rich men in the world divided up their money amongst themselves, there wouldn't be enough to go round.

Jules Bertillon. A House of All Nations. 1938. Christina Stead.

Mets took $90 million in Madoff money, trustee says

Fred Wilpon, associates alleged to have gotten $300 million from scammer

Feb. 4, 2011, 4:37 p.m. EST

NEW YORK (MarketWatch) — The owners of the New York Mets baseball team used tens of millions of dollars from Bernie Madoff’s firm to fund their franchise, according to a lawsuit made public Friday.

In a complaint filed on Dec. 7, Irving Picard, the trustee acting on behalf of Madoff’s victims, alleged that Fred Wilpon, principal owner of the Mets, was a beneficiary of Madoff’s Ponzi scheme, and that money from Bernard L. Madoff Investment Securities went directly to the team.

Wilpon’s firm, Sterling Equities, and its partners had 483 accounts with Madoff’s firm, the complaint says. Sixteen of those accounts belonged to the Mets, and the lawsuit alleges that these accounts withdrew more than $90 million in “fictitious profits.” Read Picard’s complaint against Wilpon and his partners.

“Much of the approximately $90 million of other people’s money withdrawn from the Mets’ accounts [with Madoff’s firm] helped fund its day-to-day operations,” according to the complaint.

The suit claims that Sterling and related entities received about $300 million in “fictitious profits from Madoff and used the purported equity in their … accounts to, among other things, secure hundreds of millions more in loans and lines of credit.”

The suit states that it’s the trustee’s intention to recover the $300 million, including the $90 million that allegedly was wrongfully withdrawn by the Mets.

Wilpon and Saul Katz, co-founder with Wilpon of Sterling, issued a strongly worded statement Friday afternoon rejecting the claims.

“The plain truth is that not one of the Sterling partners ever knew or suspected that Madoff ran a Ponzi scheme,” they said. “Because the trustee has no evidence to support his claims even after a year-and-a-half review of over 700,000 pages of documents and many, many hours of depositions, he has created a claim that we ‘knew or should have known’ that Madoff was a fraud.”

It remains to be seen the extent to which the release of the lawsuit’s details will affect the Mets. Wilpon said last week that he was considering selling a 20% to 25% stake in the baseball team as a result of financial uncertainty created by the Madoff trustee’s lawsuit.

The suit alleges that Sterling’s partners had “many objective indicia of fraud before them,” but “chose to simply look the other way.”

“There are thousands of victims of Madoff’s Ponzi scheme. But Saul Katz is not one of them. Neither is Fred Wilpon. And neither are the rest of the partners at Sterling Equities,” Picard’s complaint charges.

Among the examples the suit provides as evidence that should have alerted the partners are misgivings about Madoff held by both Merrill Lynch and Ivy Asset Management and relayed to some Sterling partners.

The suit also claims that Sterling Stamos, a hedge-fund partnership between Sterling and Peter Stamos, rejected Madoff.


"We are in a world of irredeemable paper money - a state of affairs unprecedented in history."

John Exter

The monthly Coppock Indicators finished January:

DJIA: +161 Down 10. NASDAQ: +228 Down 10. SP500: +161 Down 4.

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. December is the seventh down month, but the downward momentum has virtually stopped. I would put on (purchased) synthetic double options here for a breakout in either direction. Professional traders would adopt much more risky granted option strategies.

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