Weekday NEWS to Comfort the Disturbed and Disturb the Comfortable.
Tues 11.25.2008
Deflation, Monetary Velocity, and Why Gold's a Buy Today I want to talk about the concept of monetary velocity. Let’s start with some background. In Wednesday’s Taipan Daily we noted that short-term interest rates have fallen to multi-year lows. The flip side of falling interest rates is rising bond prices. When bond prices rise, interest rates fall and vice versa. This means investors and traders have an impact on interest rates through their buying and selling decisions. When investors pile into bonds, for example, they push bond prices up – and interest rates down.
Meltdown: The Gold Carry Trade dies With yields on government debt at unprecedented lows, it is no longer profitable to borrow gold and exchange it for risk free securities. A gold carry trade has been in effect for over 10 years. Central banks, with hoards of gold, would lease the yellow metal to investors at a paltry 3% per annum. These investors would borrow the gold from the bank and sell it on the open market.
Crucial Gold Test Awaits at $877 After turning in a sizzling performance in recent days, gold faces a crucial test not far above. The precise number to watch is 877.70, an important “Hidden Pivot” resistance that lies exactly $57.30 above yesterday’s Comex settlement price for the December contract. Although 877.70 is our minimum expectation for the near-term, the pivot could also stop the rally cold. On the other hand, if the futures should get past it – and, better yet, do so with relative ease -- that would suggest more strength is coming, perhaps the booster stage of a decisive thrust past $1000.
Gold surges amid deflation concern; silver, platinum rebound Gold was the biggest gainer, followed by silver, among 19 commodities on the Reuters/Jefferies CRB Index. As recessions grip the U.S., Japan and parts of Europe, central banks may be forced to lower interest rates and pump more liquidity into the financial system, devaluing their currencies, analysts said. ""Hard assets for hard times,"" said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. ""Even with all the money central banks have thrown at the financial system, it's not enough to stop systemic risk. People are looking for something that's going to go up, and that's gold.""
'Crisis Only Just Beginning': Right About the Crash, Peter Schiff Sees More Pain Ahead There's a popular YouTube clip called "Peter Schiff Was Right" that shows the president of Euro Pacific Capital engaged in on-air debates with financial luminaries such as Art Laffer and Ben Stein, circa 2006-07. The clips show the wisdom of Schiff's dire forecasts — and, judging from the dismissive reactions, just how far he was outside the mainstream. Ben Stein publicly apologized to Schiff in a New York Times column, but Laffer refuses to admit defeat, recently telling Bill Maher his economic forecasts have a statute of limitations of just nine months.
Peter Schiff Was Right 2006 - 2007
Dow ends up nearly 400 after bailout of Citigroup Dow ends up nearly 400 after government's bailout of Citigroup lifts some worries about banks The government's latest bailout of a big financial company -- this time, Citigroup Inc. -- sent Wall Street soaring Monday for the second straight session as investors bet that the worst of the financial industry's problems might finally be over. The Dow Jones industrials soared nearly 400 points, while all the major indexes jumped more than 4.5 percent. The surge gave the market its first two-day advance since the end of October and the Dow its biggest two-day percentage gain since October 1987, the month of the Black Monday crash. The Dow's 891-point rise over the two sessions also wiped out the 872-point plunge it suffered over the course of Wednesday and Thursday, when investors were anguishing over the fate of Citigroup and financial companies in general, and over the future of the nation's automakers.
Bush: More Bank Bailouts Like Citi May Be Ahead President Bush said there may be more government rescues of financial institutions like the $20 billion bailout late Sunday of Citigroup. "We have made these kind of decisions in the past," Bush said. "We made one last night and if need be, we will make these kind of decisions to safeguard our financial system in the future." Bush spoke outside the Treasury Department after consulting with Secretary Henry Paulson on the economy, the financial crisis and the government's rescue package for Citigroup.
Citibank Is The Third Largest Holder of Derivatives. Do You Know Who Number 1 and 2 Are? Citibank was the biggest, and was considered one of the most stable, banks a little while ago. But its derivatives exposure killed it. However, Citibank was only the third largest holder of derivatives as of June. Who were number 1 and 2? JP Morgan holds around three times more derivatives than Citigroup. And Bank of America is number 2.
That Money Isn't Leaving the Vault So goes the old saw about bankers: they loan you an umbrella when the sun is shining, only to ask for it back when it rains. But with our economy and markets in a world of hurt, the nation's banks were supposed to stow their self-interest and help start lending again. When the Troubled Asset Relief Program of the Treasury Department handed over $125 billion in taxpayer money to nine banks a month ago, they were supposed to lend to small businesses, home buyers and other worthy borrowers to keep the economy's gears in motion. At the time, the Federal Reserve Board and three bank regulatory agencies said: “The agencies expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers." Alas, that admonition wasn't accompanied by any real requirements to lend. When the Treasury gave taxpayer billions to the banks, it attached no strings. So is it any surprise that lending is tight?
Another Crisis, Another Guarantee Guarantees that could not be honored thrust the world financial system into its worst crisis since the Great Depression. Will a guarantee by the United States government finally restore confidence in the American financial system? Only a week after Treasury Secretary Henry M. Paulson Jr. said that the government bailouts had stabilized the most important financial institutions, plunging stock prices forced the government to step in again, both to make another direct investment and to guarantee that losses would be contained from $306 billion in possibly toxic assets on Citigroup’s balance sheet.
Citigroup Is Saved for Now, but Long-Term Anxiety Grows One bailout was not enough for Citigroup. And it may not be enough for other big banks. While Citigroup’s second multibillion-dollar rescue from Washington hit Wall Street like a shot of adrenaline on Monday, many analysts worried that the jolt would soon wear off. Citigroup has been stabilized, but the outlook for the financial industry as a whole is bleak. With the red ink deepening, other banks may eventually turn to the government to soak up some of their losses. Taxpayers could end up guaranteeing hundreds of billions of dollars of banks’ toxic assets. Indeed, Treasury Secretary Henry M. Paulson Jr. is expected to announce a new plan on Tuesday to bolster the consumer-finance market.
Bush Says He's Prepared for More Financial-Rescues President George W. Bush today said he is prepared to make other financial-rescue moves like the one to help Citigroup Inc. and that he'll work closely with President -elect Barack Obama on all major moves to shore up the U.S. economy. "We have made these kinds of decisions in the past, made one last night, and if need be we're going to make these kinds of decisions to safeguard our financial system in the future," Bush said after meeting with Treasury Secretary Henry Paulson.
Paulson May Ask for Remaining $350 Billion of TARP Treasury Secretary Henry Paulson, less than a week after indicating he would let the Obama administration decide how to use the second half of the $700 billion financial fund, is considering asking for the money. Paulson may ask Congress for the remaining $350 billion from the Troubled Asset Relief Program as he puts together plans to boost consumer credit. Treasury and Federal Reserve officials are working on an effort to buttress the market for securities backed by auto, student and credit-card loans, Paulson said last week. He’s also assembling an office to address mortgage foreclosures.
President-elect to step up spending Barack Obama on Monday set out his plans to step up, rather than pull back, government spending in the wake of the financial crisis, underscoring a big shift in the US economic debate in just a few weeks. The record-breaking economic stimulus advocated by the president-elect over the past few days is expected to include investments in health care, education and energy, as well as tax cuts and infrastructure spending, a package whose cost some Democrats have estimated at $700bn and which includes a number of long-standing Democratic commitments. "Not only do I want the stimulus package to deal with the immediate crisis, I want it also to lay the groundwork for long-term sustained economic growth," Mr Obama said at his appearance before the press in Chicago on Monday.
Roasting G-20 Weenies on a Golden Spit The recent G-20 meeting in Washington, D.C. is where the world's 20 biggest and/or most important economies got together to change the world's economic architecture, with everybody promising to spend like maniacs right now, but to one day act honorably and adhere to some future agreement that really isn't worth the paper it will be written on. The problem is that since 1944 the United States had promised to act responsibly and hold the value of the dollar constant, controlling the money supply, and thus preventing inflation and runaway booms like the gold standard did, so that all the other countries could take the easy way out and merely use the dollar as their "gold" reserves against which they could value their own currencies, instead of hassling with all that metal back and forth. As for our adherence to the Bretton Woods agreement, hahahaha! That's why everybody is so angry with us; we are all freaking doomed!
Goldman to sell $2 billion in FDIC-backed bonds Goldman Sachs plans to sell at least $2 billion of new debt that will be guaranteed by the Federal Deposit Insurance Corp, with pricing expected Tuesday, according to a market source familiar with the sale. The debt will mature no later than June 30, 2012, the source said. Goldman Sachs is the sole bookrunner, while Citigroup and Morgan Stanley are joint leads, the source said. The debt is guaranteed under the FDIC's Temporary Liquidity Guarantee Program, and investors are watching the deal as a test case for demand under the new program.
Commercial Real Estate – the Next Shoe to Drop The residential real estate sector is in shambles and, some economists say, will not recover until the end of 2010, at the earliest. Now it looks like commercial real estate may be the next block to fall in our "Jenga economy." On November 19, bonds and stocks backed by commercial real estate loans plummeted on investors’ fears the struggling U.S. economy might lead to a wave of defaults. Big real estate companies suffered big losses: shares of Simon Property Group, the top U.S. mall operator, declined 13%; Boston Properties Inc., owner of skyscrapers and office buildings in key U.S. markets, fell 12.1%
Bank Industry Analysts Fall Prey to the Shrinkage The analysts who make buy and sell recommendations about Wall Street banks have had a front row seat to the financial turmoil. But now, some of the analysts who covered the carnage are starting to fall victim to it. Goldman Sachs, Citigroup and Bank of America have recently dismissed analysts who covered some of their competitors. The analysts were particularly prominent within the industry because they were often quoted in news stories and invited to meetings with bank executives. They were the voices who questioned executives on earnings calls, and they were often the ones who cast most doubt on their field. Now they join a growing pool of bankers and traders losing their jobs just before bonus time.
US house prices suffer record fall The price of previously owned homes in the US fell in October by the biggest amount in at least 40 years and the volume of sales also dropped, in a sign of the still mounting problems in the housing market. The median price of existing homes fell by 11.3 per cent in October to $183,300 (€142,100, £121,200) compared with a year before, the National Association of Realtors reported yesterday – the largest annual drop since records began in 1968. The slump in prices is partly driven by a large number of distressed sales of homes or sales out of foreclosure, which typically sell at a much lower price. Sharply falling prices will contribute to deteriorating consumer confidence and spending as the shoppers head into what is widely expected to be a dismal holiday season for retailers.
U.S. Consumer Confidence to Remain at All-Time Low Economists aren't expecting any improvement in the Conference Board's November survey of U.S. consumer confidence, after it plunged far beyond expectations to hit an all-time low in October. Last month's index fell from 61.4 to 38.0, a level well below the previous all-time low of 47.3. The report indicated that consumers were hit severely by the latest phase of the credit crunch, which caused net job losses in excess of 200k for both September and October. Many economists believe the economy could contract by 4.0% in the fourth quarter, following a relatively modest 0.3% decline in Q3.
U.S. October Home Resales Fall; Price Drop Is Record Home resales in the U.S. dropped in October and prices fell by the most on record, signaling a deepening housing recession going into 2009. Purchases of existing homes declined 3.1 percent last month to an annual rate of 4.98 million units, the National Association of Realtors said today in Washington. The median price fell 11.3 percent to $183,300 from a year earlier, the largest year-over-year decrease since records started in 1968.
U.S. Stocks Rise After Citigroup Gets Government Loan Backing U.S. stocks climbed for a second day after the government said it will guarantee $306 billion of troubled Citigroup Inc. assets and Democratic lawmakers pledged to pass an economic stimulus package by January. Citigroup, which lost more than 60 percent of its market value last week, rebounded 63 percent after the Treasury Department also agreed to inject $20 billion into the bank. JPMorgan Chase & Co. added 12 percent and Bank of America Corp. jumped 17 percent as the guarantee eased concern that a flight of depositors might destabilize Citigroup, which has $2 trillion of assets. Alcoa Inc. and Microsoft Corp. climbed more than 4.4 percent on speculation a new stimulus will spur economic growth.
Fed Pledges Top $7.4 Trillion to Ease Frozen Credit The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago. The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.
A Bridge Too Far Despite recent evidence to the contrary, the global economy is not headed back to the Stone Age. It is also doubtful that China is preparing a new Cultural Revolution to ship hundreds of millions of city dwellers back to work the land, and to get over dreams of new cars and refrigerators. On the contrary, the developing world may pause in its development, but it won’t stop and it won’t settle for the limited dreams of earlier generations. While the ongoing global economic crisis will be very painful, it also may buy a few more precious years before the effects of Peak Oil begin to hit home with a vengeance.
ADJUSTING TO PEAK OIL Future shock Like it or not, the world is moving rapidly to absolute peaks in the capacity to find, prove and extract ever more oil and gas. The oil peak will arrive well before the gas peak. The time needed to reach the maximum possible production rate for 'all liquids', that is including deep offshore oil, heavy oils, and tarsand or bitumin based 'synthetic' oil, as well as cheaper-produced ‘conventional’ crude, is probably less than 4 years from 2007. The extact time required will depend more on how world and regional oil demand profiles evolve, the intensity of global economic growth and recession, and spare capacity of oil exporter countries, than net additions to world oil production capacity which have fallen to average rates far behind annual demand growth.
Automakers Forced to Pay 85- to 95-Percent of Wages to Union Members Who Are Not Working The Big Three automakers are forced to pay 85- to 95-percent of union wages and benefits to members of the United Auto Workers union who aren’t working – even if their plants have been closed. Industry analysts say union labor agreements that obligate the Big Three to pay millions of dollars to workers who are no longer working are a major reason why the automakers are in trouble – a problem that no short-term bailout can fix.
Struggling GM Terminates Multi-Million-Dollar Endorsement Deal with Tiger Woods GM Ends 9-year Endorsement Deal with Tiger Woods General Motors is bailing out on Tiger Woods. Woods, a global icon in sports with his 14 major championships, has been carrying the Buick logo on his golf bag for the last nine years and still had one year left on his contract. But General Motors Corp. was looking to cut costs and hoard cash while trying to survive the worst sales downturn in a quarter-century. And it said Monday the world's No. 1 golfer wanted more time for himself, especially with a second child on the way
Will "Black Friday" be Just a "Black" Friday for Retailers as the Holiday Shopping Season Begins? As Thanksgiving approaches, the American people should be thankful for the declining gasoline prices that help enable many of them to afford holiday travel this year. Speaking of the holiday, after the traditional bird has been devoured, one additional time honored tradition remains – shopping. The Friday after Thanksgiving, known as “Black Friday,” represents the official start of the holiday shopping season. Historically, it is the day that retailers moved out of the "red" (losses) and into the "black" (profits). Unfortunately, this year’s retail projections remain bleak and Nov. 28, 2008 may be known as "Black" Friday.
Hannity to Go It Alone, Without Colmes "Hannity & Colmes"” the longest-running program on the Fox News Channel, will soon be without Colmes. Alan Colmes, 58, the liberal half of the 9 p.m. show, will leave his daily hosting duties at the end of the year, the network announced Monday. While the network remained quiet about its plans for the political debate program, two people close to the network said that Sean Hannity, 46, Mr. Colmes’s conservative counterpart for the last 12 years, would become the sole host of the hour. The people requested anonymity while speaking about private deliberations.
Bush grants pardons to 14, but no big names President George W. Bush on Monday granted 14 pardons and commuted two sentences but there were no high-profile names on a list released by the Justice Department. The pardons were given for offenses ranging from distribution of marijuana to unauthorized use of a registered pesticide, a Justice Department statement said. Under the U.S. Constitution, the president can grant pardons and shorten sentences. Former media baron Conrad Black is among the high-profile offenders who have requested clemency before Bush leaves office on January 20, according to Canadian media reports.
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