Monday, 14 October 2013

Your Throat Or Mine?

Baltic Dry Index. 1985 -26

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

You can always count on Americans to do the right thing - after they've tried everything else.

Winston Churchill.

The big week has finally arrived. Will America commit national suicide or do the right thing at the last moment? Complacently, everyone is betting on doing the right thing at the last moment. President Obama and the Democrat Party hitting the jackpot. A wipe-out for many Republicans in next year’s mid-term elections. It would seem the obvious way to bet is on common sense prevailing. Would the Republican Party really want to flirt with a new recession or worse? How many votes would that gain them? And yet, this crisis has called into question America’s economic leadership role in the world. Europe may be a basket case but it doesn’t threaten everyone else’s prosperity by being a basket case. Unfortunately America does. If the American’s decide to slit their own throat, in effect they slit everyone else’s throat too. In Washington this week, it comes down to the Republican’s slitting their own throat by capitulating, or slitting everyone else’s throat by forcing a technical default on the federal government. While the US would find ways to pay off on its debts whatever happens, the only gainers will be the US tort bar. Everyone else will become losers as the global economy grows slower.

"When paper money systems begin to crack at the seams, the run to gold could be explosive."

Harry Browne

US default threat will not go away, even if the can is kicked down the road

With a temporary increase to the debt ceiling, though, we risk going through this crisis all over again quite soon

By the time you read this, the US fiscal crisis may appear to be over. But beware. Even if a deal is patched up soon, you can be fairly sure that the crisis will reappear in some form or other.

There are two parts to the current episode. The first is the shutdown of large parts of the American government because of Congress’s failure to pass a Budget. The second is its refusal to raise the debt ceiling. Congress regularly reviews the ceiling and usually increases it without incident, thereby allowing the US Treasury to go on borrowing. But this is what the Republican majority in the House of Representatives has been refusing to do now as they are in a dispute with the Democrats (and President Obama) over a healthcare bill popularly known as Obamacare.

In fact, brief shutdowns were commonplace in the 1970s and 1980s. And the government shut up shop for a total of 21 days in 1995-96. If this shutdown continues, then it could cause the fledgling American recovery to falter for all the usual Keynesian reasons. Essentially, the shutdown deprives people of revenue and income from all those activities that the government has now suspended. Yet, provided the disruption does not continue for long then, as in 1995-96, the economy will probably bounce back as deferred spending occurs.

----A default is such a big deal because US government debt is the bedrock of the financial system, not just in the US but globally. Treasury bonds are widely regarded as the ultimate safe asset. A failure to make due payments on these assets could trigger a liquidity crisis. Some people have suggested that the resulting chaos and damage to the financial system and the economy could rival, or even exceed, the Lehman’s crisis five years ago.

Some while back, the US Treasury said that October 17 was when it would run out of money. That is this Thursday. Large social security payments are due on November 1 and a big interest payment is due on November 15. Crunch time is uncomfortably close. Now it seems that there is likely to be a stay of execution. With a temporary increase to the debt ceiling, though, we risk going through this crisis all over again quite soon.

Yet somehow I cannot believe that the US government is ever going to default. If the politicians in the House of Representatives cannot come up with a permanent deal, then there is still a way of avoiding disaster. The Treasury simply goes on borrowing and honouring its obligations. Naturally, that would mean that debt would exceed the current ceiling, but the Treasury would plead the 14th amendment to the US Constitution. This states that the “validity of the public debt of the United States… shall not be questioned”.

Now, of course, this would create a legal nightmare, and doubtless the lawyers would drag out proceedings for years. But it would prevent a default and perhaps by the time the judgment appeared the crisis would be resolved.

----For the past 70 years and more the US has been regarded as the mainstay of the world’s financial system. It is well known that it has been losing its share of world GDP as its economy has grown moderately while the economies of east Asia have steamed ahead. People have for years now debated when the size of China’s economy will surpass America’s and when China might assume the mantle of global leadership. Even if default is avoided, many will see a clear sign that America’s days of unquestioned supremacy are numbered.

Doubtless those in charge of China’s huge investments in US Treasury bonds have had anxious times. But among the Chinese leadership, surely some are rubbing their hands with glee at what America has been doing to itself.

Lew Vow Not to Shift on Debt Frustrates Incredulous Republicans

By Ian Katz & Chris Strohm - Oct 14, 2013 5:01 AM GMT
When Treasury Secretary Jacob J. Lew told the Senate Finance Committee last week that the Obama administration would never bargain over raising the nation’s debt limit, it was a declaration the lawmakers had heard before.

Lew, the administration’s point man for pressing Congress to raise the $16.7 trillion debt ceiling, has been making the same case privately on Capitol Hill for months, lawmakers say, as he has publicly in speeches and on Sunday talk shows. His determination to stay on message has frustrated Republicans hungry for a deal.

He’s “an implacable negotiator” who is “ideologically committed to protecting every big-government gain,” Senator Jeff Sessions, an Alabama Republican, said in an interview. Administration officials “can all go and play a round of golf, and they know he’s not going to agree to anything.”

----The administration is concerned that protracted negotiations on raising the debt limit to pay bills already approved by Congress will undermine the economy and raise investor doubts about U.S. creditworthiness.
“The full faith and credit of the United States is not a bargaining chip,” Lew told the Senate finance panel at the Oct. 10 hearing in which his testimony varied little from the arguments he’s made over the past two months.

Lew, who said the administration is willing to negotiate on “the future direction of fiscal policy,” reiterated that so-called extraordinary measures -- the accounting moves he’s been using since May to stay below the debt limit -- will expire by Oct. 17. That would leave the Treasury with about $30 billion on hand. Expenditures can be as high as $60 billion some days.

While America is the obvious focus of the week ahead, globally the world economic wobble seems to be growing. America doing the right thing at the last moment may not be enough to avoid a big winter stumble. With global central banks almost out of ammo, and QE forever and ZIRP delivering hardly any bang for each buck anymore, winter 2013-2014 looks to be a big challenge. The world economy badly needs a boost from seriously lower oil prices.

China's September export growth in surprise slide

BEIJING | Sat Oct 12, 2013 2:35am EDT
(Reuters) - China's export growth fizzled in September to post a surprise fall as sales to Southeast Asia tumbled, data showed, a disappointing break to a recent run of indicators that had signaled its economy gaining strength.

China's exports dropped 0.3 percent in September from a year earlier, the Customs Administration said on Saturday, sharply confounding market expectations for a rise of 6 percent, and marking the worst performance in three months.

Imports fared better, rising 7.4 percent in September from a year ago, better than forecasts for a 7 percent increase, shrinking China's monthly trade surplus to $15.2 billion.

Analysts said weak exports underscored worries about flagging global demand, which may crumble further in coming months - especially in emerging markets - when tighter U.S. monetary policy pushes investors away from developing economies.

Indeed, the data showed Chinese exports to Southeast Asia, China's fastest-growing export market in the past year, dived to a 17-month low in September. Capital outflows from the region on bets that the U.S. central bank will cut its bond purchases had hit demand, said Louis Kuijs, an economist at RBS in Hong Kong.

"Looking ahead, export data may be quite weak in the coming months," Kuijs said, adding that financial turmoil in several emerging markets had dragged on global demand.

China inflation at 7-month high, limits room for easing despite export tumble

BEIJING | Mon Oct 14, 2013 12:58am EDT
(Reuters) - China's annual consumer inflation rate rose to a seven-month high of 3.1 percent in September as poor weather drove up food prices, limiting the scope for the central bank to maneuver to support the economy even as exports showed a surprise decline.

But few analysts expect a further sharp rise in inflation or policy tightening in coming months as the world's second-largest economy still faces a weak global environment and Beijing tries to tap the brake on credit-fuelled investment.

The inflation rate was higher than a median forecast of 2.9 percent in a Reuters poll and August's 2.6 percent, but was still below the official target of 3.5 percent for 2013.

"We expect CPI inflation to rise further in Q4 and see rising risks that it may rise above 3.5 percent for some months in 2014," said Zhiwei Zhang, China economist at Nomura in Hong Kong.

"The rise of CPI inflation leaves little room for policy easing as benchmark deposit rate is only 3 percent."

----Food prices gained 1.5 percent in September from August due to droughts and floods in some areas, pushing up the CPI by 0.51 percentage points, Yu Qiumei, a senior statistician at the bureau, said in a statement.

In annual terms, food prices jumped 6.1 percent.

And in Europe, don’t ask. Can Europe’s catastrophic banksters live in a world without rigging?

Analysis: Italy's reform list reflects tough test for euro zone

LONDON | Sun Oct 13, 2013 7:10am EDT
(Reuters) - From its high labour taxes to its low literacy scores, Italy's entrenched obstacles to growth point up the enduring failure of some euro zone economies to adapt to the demands of life with no currency flexibility.

Protected by the European Central Bank's pledge to buy member states' bonds in an emergency, Italy has escaped market punishment for the political gridlock that has hampered reforms.

Nor is Italy the only reform sinner. France has been pilloried for its timidity in reining in pension and welfare spending. Germany has been under fire for years for not liberalizing its services sector.

But Italy stands out for many as the euro zone's weak link because of a toxic combination of high debt, low growth, fragile government and choking red tape.

Prime Minister Enrico Letta's coalition survived an attempt by former prime minister Silvio Berlusconi to wreck it, but he has little room for maneuver to tackle structural economic weaknesses.

"All the political ructions have done is thrown Italy's chronic economic and structural problems ... into sharp relief," said Nicholas Spiro with Spiro Sovereign Strategy in London.

At 133 percent of GDP and rising, Italy's debt stock is second only to Greece's in the euro zone, while growth has averaged just 0.7 percent a year in the past 20 years.

----With Italy ranked 30 out of 31 advanced economies by the World Bank in the ease of doing business, the IMF said in its latest health check on Italy that priority should be given to injecting competition into product markets and improving public services.

The Fund also urged cuts in taxes on capital and income to boost employment and growth.

Marine Le Pen’s National Front Wins French Local By-Election

By Gregory Viscusi - Oct 13, 2013 11:01 PM GMT
France’s anti-euro National Front won a local by-election in the country’s south, riding on the discontent with Francois Hollande’s Socialist presidency and the disarray in the Opposition UMP party.

The National Front candidate Laurent Lopez took 53.9 percent of the vote in the town of Brignoles yesterday to win a seat on the local department’s council. Catherine Delzers, the candidate of former President Nicolas Sarkozy’s UMP party, won 46.1 percent, according to France 2 television.

Although a relatively minor election, the victory is a warning to both the Socialists and the UMP that Marine Le Pen’s National Front may be turning into a party that speaks for the dissatisfaction of a population grappling with the highest unemployment in about 14 years and an economy that has struggled to grow over the last two years.

“This vote shows that the French have a wish for change, that we bring solutions for the questions the French are asking,” Le Pen said on LCI television yesterday.

With major municipal elections in France coming up in March and European parliamentary ballots in May, the victory puts both the Socialists and the UMP on notice to find ways to stem the rising popularity of the National Front.

In the first round of the Brignoles election on Oct. 6, Lopez led with 40.4 percent. Delzers got 20.8 percent, while the candidate of Hollande’s party was eliminated.

"Gold bears the confidence of the world's millions, who value it far above the promises of politicians, far above the unbacked paper issued by governments as money substitutes. It has been that way through all recorded history. There is no reason to believe it will lose the confidence of people in the future."

Oakley R. Bramble

At the Comex silver depositories Friday final figures were: Registered 43.15 Moz, Eligible 122.32 Moz, Total 165.47 Moz.  

Crooks and Scoundrels Corner
The bent, the seriously bent, and the totally doubled over.

Euros anyone? Is it any wonder that both America’s NSA and Britain’s GCHQ both make spying on Euroland a top priority. Who knows what new disaster Europe’s old bureaucratic socialists are ready to drop on the world tomorrow.  The free lunch still thrives in Euroland.

"Never have the world's moneys been so long cut off from their metallic roots."

Murray M. Rothbard

Europe prepares to come clean on hidden bank losses

LUXEMBOURG | Sun Oct 13, 2013 9:22am EDT
(Reuters) - Euro zone countries will consider on Monday how to pay for the repair of their broken banks after health checks next year that are expected to uncover problems that have festered since the financial crisis.

Nobody knows the true scale of potential losses at Europe's banks, but the International Monetary Fund hinted at the enormity of the problem this month, saying that Spanish and Italian banks face 230 billion euros ($310 billion) of losses alone on credit to companies in the next two years.

Yet five years after the United States demanded its big banks take on new capital to reassure investors, Europe is still struggling to impose order on its financial system, having given emergency aid to five countries.
Finance ministers from the 17-nation currency area meeting in Luxembourg will tackle the issue of plugging
holes expected to be revealed by the European Central Bank's health checks next year.

The president of the European Central Bank underscored the need for action in Washington at the meetings of the International Monetary Fund and the World Bank.

"The effectiveness of this exercise will depend on the availability of necessary arrangements for recapitalizing banks ... including through the provision of a public backstop," Mario Draghi said on Friday. "These arrangements must be in place before we conclude our assessment," he said.

But the ministers' talks face an additional hindrance because Germany's finance minister, Wolfgang Schaeuble, is not expected to attend the two-day Luxembourg meeting. Germany, Europe's biggest economy, in talks to form a new government.

Spanish banks fear new capital hit in European review

Sun Oct 13, 2013 4:45am EDT
(Reuters) - Spanish banks are considering ways to boost their capital amid fears the euro zone's imminent review of their balance sheets will force them to set aside even more cash for potential losses on restructured loans, banking sources in Madrid said.

The country's banks last year made steep provisions for average losses of up to 60 percent on property lending where payment problems have already meant they are classed as bad loans. They may now face scrutiny over the coverage levels for defaults in other parts of their books, the sources said.

In particular, Spanish banks' provisions to cover refinanced loans are likely to be examined, after the Bank of Spain earlier this year told lenders to treat more of the 208 billion euros ($281 billion) of such deals as having gone bad again.

This was to address the risk that banks were rolling over or restructuring debts to struggling companies to conceal problems.


"The gold standard sooner or later will return with the force and inevitability of natural law, for it is the money of freedom and honesty."

Hans F. Sennholz

The monthly Coppock Indicators finished September:
DJIA: +167 Up. NASDAQ: +213 Up. SP500: +203 Up. All three are back positive again, thanks to continued Fed QE.  High risk speculators will now use any stocks sell-off to go long. After the last Fed meeting and QE U-turn, the Bernocchio put is back on.

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