Weekly Fundamentals - Risky Assets Tumbled amid Concerns on China's Rate Hike, Bailout in Ireland

Market's focus shifted from Fed's QE2 to G20 currency and trade tensions, and then to possible bailouts of peripheral European economies by the EU. Robust macroeconomic data in China initially boosted market sentiment and drove growth asset prices higher. However, speculations that the government will accelerate tightening measures by raising interest rates dampened risk appetite.

The dollar rebounded across the board as financial leaders and economists from around the world criticized US' easing measures. Moreover, CDS and yield spreads between peripheral European bonds and German bunds widened sharply, signaling sovereign concerns in these countries were once again put under the spotlight. G20 leaders' deep discussion about the issue evidenced seriousness of the situation.

In response to US President Obama's criticism that China has spent 'enormous amounts of money intervening in the market' to keep RMB 'undervalued', China's President Hu Jintao reaffirmed that the country will 'continue to improve its currency reform at a steady pace'. It will also balance the trade gap by 'boosting domestic demand'. In our opinion, the G20 meeting failed to resolve international trade imbalances. Despite the pledge to work on 'indicative guidelines' to avoid sustained current-account imbalances that require preventive and corrective actions to be taken, the lack of actionable clarity suggests that individual countries will continue to use their own ways to achieve their goals.

WTI crude oil climbed higher earlier in the week and rallied to a new 2-year high of 88.63 Thursday as a surprising decline in petroleum inventories and stronger-than-expected Chinese macroeconomic data boosted sentiment. Upgrades in global oil consumption by EIA, OPEC and IEA also sent oil prices higher. However, gains were erased amid intensified sovereign concerns in peripheral European economies and increasing possibility of a rate hike in China. The front-month WTI contract tumbled to 84.52, the lowest level in a week, before settling at 84.88 on Friday.

Major oil agencies raised their forecasts on global oil demand for 2010 and 2011, as growth in OECD consumption exceeded expectations after 1Q10. Taking an average from the forecasts made by EIA, OPEC and IEA, global oil demand will increase +2.33% y/y to 86.48M bpd in 2010, followed by a +1.44% gain to 87.72M bpd in 2011. To meet the rises in demand, supplies from both non-OPEC and OPEC countries will have to increase.

OPEC's 11 members bearing quotas produced 26.89M bpd, the highest level since December 2008, with compliance falling to 51.3% in October. While oil ministers have urged member countries to adhere more strictly to quotas (OPEC - 11 to produce no more than 24.845M bpd), many of them produce excessively so as to benefit from recent rally in oil prices. Similarly, IEA also estimated a modest drop in compliance to 55% in October from 56% a month ago.

Among the OPEC-11, Saudi Arabia, UAE and Kuwait produced with highest compliance while Nigeria and Angola exceeded their implicit quotas the most. Nigeria and Angola have argued that their quotas were assigned based on low production levels when the countries were having either operational problems or militant activities.

Although monetary tightening may curb commodity consumptions, other measures from China may help boost oil prices. The Chinese government's control on power supply has led factories to using their own power generations. According to the National Bureau of Statistics, China's oil processing in October rose +12% y/y 8.8 M bpd. Meanwhile, there are increasing expectations that China may return to a net importer of diesel after being a net exporter since October 2008. Indeed, China's net exports of diesel fell for a second consecutive month to 55K bpd in September.

Seasonally, China's demand for liquid fuels is typically the strongest in the second and third quarters. The pickup in demand in coming month as a result of governmental policy may tighten the supply outlook in 4Q which is usually a peak demand season for the US and Europe.

Gas price tumbled as US storage surged to a record high last week. According to the US Energy Department, gas stocks rose +19 bcf to 3840 bcf in the week ended November 5. Supplies were +31 bcf higher the same period last year and +342 bcf, or +9.8%, above the 5-year average of 3498 bcf. Separately, Baker Hughes reported that gas rig counts stayed unchanged at 955 units in the week ended November 12.

In its Short-term Energy Report, the EIA forecast that total natural gas consumption will grow by +4.3% to 65 bcf/day in 2010, followed by a modest rise to 65.4 bcf/day in 2011. The growth in 2010 is largely due to 'increases in industrial and electric power sector consumption of natural gas. Hot weather in the summer and low natural gas prices drove the increased use of natural gas for electric power generation in 2010'. However, natural gas consumption for electric power generation will fall slightly in 2011, even as natural gas prices drop, due to a drop in cooling-degree days. Residential consumption of natural gas, which remains flat from 2009 to 2010, will rise +1.8% in 2011. Commercial and residential consumption will remain flat in 2010 and rise slightly in 2011. Meanwhile, the EIA revised up its production forecasts for 2010 and 2011.However, drilling activities will fall modestly in 2011 because of relatively lower natural gas prices.

Rising inflationary concerns, renewed sovereign concerns and strong Asian buying sent gold to fresh record highs and silver to new 30-year highs. While it takes time for the Fed to bring inflation back to levels that are consistent with its mandate, the return to QE have driven enormous capitals to countries with higher yields. Emerging countries such as China and South Korea are expected to record higher CPI in coming months. Indeed, capital inflows in China have been surging despite Government's tightening measures. China's CPI surged +4.4% y/y in October, beating market expectations of +4% and September's +3.6%, as driven by rental and cotton prices. New lending reached RMB 588B, compared with market expectation of RMB 450 B. It's likely that annual lending will reach RMB 8 trillion, exceeding the government target of RMB 7.5 trillion. Other data, such as IP, fixed asset investment and retail sales, expanded in annual terms but came inline with market forecasts. Stubbornly-high inflation and net loans triggered the PBOC to raise RRR by 50 bps. We expect inflation will rise further in November and the government will need to accelerate measures to curb potential asset bubbles.

Although ease in European sovereign triggered selloff in gold price last Friday, uncertainty remains and should lend support to the metal. As the Fed provide more liquidity to boost economic growth, the more the euro will strengthen against the dollar. Appreciation in the single currency is precarious for growth and prolongs the recovery process. We believe the impact will be more serious on debt-ridden countries.

Gold and silver correlations with EURUSD have fallen sharply over the past week, suggesting euro's weakness because of sovereign concerns may not necessarily weigh on precious metal prices. Indeed, investors may turn to these metals as safe-haven assets as they lose confidence in fiat currencies.

Indian festival Diwali officially began on November 5. The festival typically indicates the seasonal peak in Indian gold buying. According to the Bombay Bullion Association, gold imports jumped +25% y/y during the festival week despite elevated prices.

Similar to others in the commodity sector, base metals soared on strong Chinese industrial production data. Prices tumbled on Friday amid speculations that China's central bank will raise interest rates to curb inflation.

Copper traded with high volatility with the LME contract rising to a new record high of 8966 on Thursday before settling at 8615 on Friday.

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Golden Opportunities & Threats from The Debt Bomb

"Here is the glaring hole in the United States Federal Reserve's approach to what it calls stimulus, and what history will one day categorize as fraud: You can't use your own debt to purchase more debt when you can't repay the original debt. The crime is compounded when you know you're never going to repay the debt. It amounts to treason to intentionally destroy the integrity of the nation's money."

"Buying $600 Billion in Debt with Debt."

James West, lemetropolecafe.com, 11/5/10

“Cui Tiankai, a deputy foreign minister and one of China’s lead negotiators at the G20, said on Friday that the US plan for limiting current account surpluses and deficits to 4 per cent of gross domestic product harked back “to the days of planned economies”.

“We believe a discussion about a current account target misses the whole point,” he added, in the first official comment by a senior Chinese official on the subject. “If you look at the global economy, there are many issues that merit more attention – for example, the question of quantitative easing.”

China’s opposition to the proposal, which had made some progress at a G20 finance ministers’ meeting last month, came amid a continuing rumble of protest from around the world at the US Federal Reserve’s plan to pump an extra $600bn into financial markets.

Officials from China, Germany and South Africa on Friday added their voices to a chorus of complaint that the Fed’s return to so-called quantitative easing would create instability and worsen imbalances by triggering surges of capital into other currencies…

“With all due respect, US policy is clueless,” Wolfgang Schäuble, German finance minister, told reporters. “It’s not that the Americans haven’t pumped enough liquidity into the market,” he said. “Now to say let’s pump more into the market is not going to solve their problems.””

“China tees up G20 showdown with US”

Alan Beattie in Washington, Geoff Dyer in Beijing, Chris Giles in London, The Financial Times, 11/5/10

“$10.2 trillion: The amount of money advanced-nation governments will need to borrow in 2011…

Next year, fifteen major developed-country governments, including the U.S., Japan, the U.K., Spain and Greece, will have to raise some $10.2 trillion to repay maturing bonds and finance their budget deficits, according to estimates from the International Monetary Fund. That’s up 7% from this year, and equals 27% of their combined annual economic output.

Aside from Japan, which has a huge debt hangover from decades of anemic growth, the U.S. is the most extreme case. Next year, the U.S. government will have to find $4.2 trillion.”

“Number of the Week: $10.2 Trillion in Global Borrowing”

Mark Whitehouse, The Wall Street Journal, 11/6/10

“Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today…

The development of a monetary system to succeed Bretton Woods II launched in 1971, will take time. But we need to begin.”

Robert Zoellick, World Bank President & a former US Treasury Official, 11/8/10

It is becoming ever more widely understood, correctly in our view, that the National Debt of the USA (and that of certain other Major Nations as well) can never be repaid without further dramatic Debasement of the Purchasing Power of the U.S. Dollar (and those other Fiat Currencies).

And it is further Dollar Debasement we are almost Surely going to get with Q.E. 2 $75 Billion Increments now in the Pipeline and Q.E. 3, and, perhaps Q.E. 4 looming on the Horizon.

So the Key Question for Investors (Savers/Retirees/Citizens/Small Business People) is: How do I prevent the considerable ongoing loss of Wealth resulting from the seemingly inexorable Present and Prospective Diminishing of the Purchasing Power of the U.S. Dollar (and those other Fiat Currencies)?

The immediate Answer, and no Surprise to regular readers: Gold (and Silver), which has, unsurprisingly, been putting in Record Nominal Highs lately.

But, in the past couple of decades, though the Gold Price has generally trended upward, it has also been subject to PERIODIC violent Takedowns.

The Evidence is Persuasive that The Fed-led Cartel of Central Bankers has repeatedly attempted to Suppress Gold (and Silver) Prices, with some Success, as our Regular Readers are already quite aware.

*We encourage those who doubt the scope and power of Overt and Covert Interventions by a Fed-led Cartel of Key Central Bankers and Favored Financial Institutions to read Deepcaster’s December, 2009, Special Alert containing a summary overview of Intervention entitled “Forecasts and December, 2009 Special Alert: Profiting From The Cartel’s Dark Interventions - III” and Deepcaster’s July, 2010 Letter entitled "Profit from a Weakening Cartel; Buy Reco; Forecasts: Gold, Silver, Equities, Crude Oil, U.S. Dollar & U.S. T-Notes & T-Bonds" in the ‘Alerts Cache’ and ‘Latest Letter’ Cache at Deepcaster’s website. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org, including testimony before the CFTC, for information on precious metals price manipulation. Virtually all of the evidence for Intervention has been gleaned from publicly available records. Deepcaster’s profitable recommendations displayed at Deepcaster’s website have been facilitated by attention to these “Interventionals.” Attention to The Interventionals facilitated Deepcaster’s recommending five short positions prior to the Fall, 2008 Market Crash all of which were subsequently liquidated profitably.

But beginning early this year, Insider Testimony about Market Manipulation plus Revelations that Major Repositories do not have all the Gold they say they do have led to a Surge in the Gold (and Silver) Price and Great Difficulties for The Cartel Price Suppression Scheme.

So what next?

Has The Cartel been defeated once and for all? Will Gold move rapidly past its 1980 (Official) Inflation-adjusted High ($2400/oz approximately) or even past its Real-Inflation adjusted high in excess of $7,000/oz (Shadowstats.com)?

The Globalist (as opposed to Internationalist) for-profit Central Bank Fiat Currency and Treasury Securities Purveyors (and their Allies) are not going to give up without a Fight. So what is likely to happen?

Robert Zoellick, World Bank President and former U.S. Treasury Department Official, provides a Major clue regarding both the Great Opportunities and Great Threats.

Let’s Unspin his Recent Pronouncements:

“Although textbooks may view gold as the old money, markets are using gold as an alternative Monetary asset today.”

Our Unspun Interpretation:

The Purchasing Power of the U.S. Dollar is being destroyed and in the next few years will cease to serve as the World’s Reserve currency. Other Fiat Currencies are being similarly Degraded. Certain Major Sovereign Nations (and certain Private) Debts cannot be repaid without this Currency Degradation…we all know Gold (and Silver) is the only Real Money. Thus the Next Money (i.e. World Reserve Currency) must be linked to Gold.

Quote:

“The development of a monetary system to succeed Bretton Woods II launched in 1971, will take time. But we need to begin.”

Our Unspun Interpretation:

“We Globalists know the Major Fiat Currencies (e.g. U.S. Dollar and Euro) are going to Fail and (Wink, Wink) we may just have planned it that way.” (See Deepcaster’s Article regarding The Cartel’s ‘End Game’ in the ‘Articles by Deepcaster’ Cache at www.deepcaster.com.)

Zoellick Conclusion (summarized):

A new System is needed using 5 Main Currencies with gold as the “reference” point for future currency Values.

Our Unspun Interpretation:

We Globalists are going to Need (to further increase our Power and Wealth) a New Global Currency (printed out of thin air and issued by us Globalists for profit of course) which to start will be an amalgam of 5 main then-devalued currencies including the U.S. Dollar and Euro which will serve as a Transition to our One World Globalist Currency (likely the “Banco”, as Keynes suggested) which, since we Globalists Control it, will be linked to Gold (which of course will have to come from the Main Nations whose Currencies have been devalued), so it will have some lasting Value, mainly for our benefit, but also yours, for you will gain Stability.

But of course in the process of Sovereign Currency Devaluation, you will lose Much of your Wealth, Much of your Economic Freedom, and Much of (if not all) of your Political Freedom…

Our Conclusion:

Therein lies The Threat.

Of course, in the process, which is already occurring, Gold and Silver will soar in Value (subject of course to occasional Cartel-generated Nasty Price Takedowns).

Therein lies The Opportunity.

Or, as we have explained before, we have developed a Strategy designed to Maximize Profit from The Opportunity and Minimize Damage from The Threat.

We Outline the Background for and the Key Points of that Strategy, as well as points made by others, below. For full details, readers should see “Surmounting the Confiscation or Collapse Scenario” (09/09/10) in the ‘Articles by Deepcaster’ Cache at www.deepcaster.com.

“…Only liquidation of the biggest banks can enable a recovery, period!!”

“Gold & Investment in Failure”

Jim Willie CB, GoldenJackass.com, 9/1/10

The Main and Present Problem which we address here is The Issue of how Excessive, and probably unpayable multi-Trillion Dollar (Pound, Euro, etc.), Public and many Private Debts finally gets resolved and how investors can prepare to protect, and profit, NOW, before more Crises and their Toxic Fallout…

And to whom is most of this Public and Private Debt owed? Answer: Mainly to the International Mega-Banks (the same ones who got us into this Financial fix via their pro-bubble credit policies). Hold that important thought…

And there is another Confiscation brewing. The “U.S. Depts. Of Labor and Treasury have Scheduled Hearings on Confiscation of Private Retirement Accounts” P.A…

… such Mandatory Conversion is a de facto Wealth Confiscation.

Investors-Citizens can either submit and allow their Financial future to be determined by the Mega-Bankers (and all the while suffering degradation of the Value of their Assets). OR

They can work to create Political and Financial Structures and Conditions which make a Real Recovery Possible…, as well as investing defensively.

This “Option” of facilitating the U.S. Dollar (Pound, Euro, etc.) Degradation is, we have long maintained, a component of The Cartel’s* End Game for which, evidence increasingly indicates, they have long been planning (see Deepcaster’s articles cited below).

Indeed, The Fed-led Cartel’s* ‘End Game’ Juggernaut is Rallying Profitably Along – “profitably” to the Tune, for example, of a $11.8 Trillion gain for certain Mega-Financial Institutions in the last 6 months of 2008, when Equities Investors worldwide were losing Trillions in the Equities Markets Crash. (See The Central Banker’s Bank’s (The Bank for International Settlements) website www.bis.org (Path:  Statistics>Derivatives>Table 19) and “Opportunities & Threats in Derivatives Shocker” (05/29/2009) in the ‘Articles by Deepcaster’ cache at www.deepcaster.com.)

These Massive Gains were doubtless “facilitated” by The Fed-led Cartel’s Interventional Regime which we describe in detail in the articles noted here.

Fortunately there are Steps which Investors worldwide can take to derail the Juggernaut…

… the Fed-led Cartel’s policies appear to have resulted and to be resulting in a massive Wealth Transfer from Investors/Taxpayers around the world to the Fed-led Cartel and their favored financial institutions.

Of course, a key component of this Wealth Transfer involves debasing the value of the U.S. Dollar…

… Investors… have seen the purchasing power of those dollars dramatically eroded by, for example, over 35% in the last 8 years alone…

… Consider this observation by the eminent Harry Schultz:

“seemingly random monetary mess that multiplies its momentum every day?  The answer, in one word, control.  The elite/insiders already have control of the financial system, but they wanted more, much more…and it was not random, it was planned.”

HS Letter, April 27, 2008

The Cartel* ‘End Game’, as Deepcaster has named it, apparently involves Stealthily transferring ever more Wealth and Power to The Cartel at the expense of Investors/Citizens around the world. (For more details, see “Coping with the Superpower Cartel Threat” (1/30/09) in the ‘Articles by Deepcaster’ cache at www.deepcaster.com.)

In this connection we must consider F. William Engdahl’s contention that the 2008 Credit Crunch and Market Crash were planned: “…in every major U.S. financial panic…the titans of Wall Street…have deliberately triggered bank panics behind the scenes to consolidate their grip on U.S. Banking…”

The Root Cause of The ‘End Game’ Threat lies in the secrecy, structure, functioning and policies of the private-for-profit “U.S.” Federal Reserve…

“This is what the U.S. does - - it issues Treasury Bonds.  The U.S. then sells these bonds to the Fed.  The Fed buys the bonds.  Wait, how does the Fed pay for the bonds?  The Fed simply creates money “out of thin air” (book-keeping entry) with which it buys the bonds.  The money that the Fed creates from nowhere then goes to the U.S.  The Fed holds the U.S. bonds, and the unbelievable irony is that the U.S. then pays interest on the very bonds that the U.S. itself issued.  (With great profit to the private owners of The Fed - - Ed. Note)  The mind boggles.”

As Richard Russell points out the creation of ever-increasing debt and interest payments is unsustainable. Thus there will inevitably be a Day of Reckoning, a Day which is fast approaching… Argentina in 2002 is coming to the USA.

Masking the True State of the Economy and Financial Markets, is another aspect of The Cartel Regime –  Data Manipulation.

Shadowstats.com calculates the Real Numbers for the U.S. the way they were calculated in the 1980’s and 1990’s, before systematic Official Data Distortion and Interventions began in earnest.

Bogus Official Numbers    vs.       Real Numbers (per Shadowstats.com)

Annual U.S. Consumer Price Inflation reported October 15, 2010

1.14%                                     8.48% (annualized September, 2010 Rate)

U.S. Unemployment reported November 5, 2010

9.6%                                      22.5%

U.S. GDP Annual Growth/Decline reported October 29, 2010

3.11%                                     -1.44%

U.S. M3 reported November 7, 2010 (Month of October, Y.O.Y.)

No Official Report               - 3.36%

One antidote (in addition to Gold and Silver) to Real Inflation of 8.48%/yr. is Deepcaster’s High Yield Portfolio with Recent Yields of 18.5%, 10.6%, 26%, 8%, and 15.6% when added to the Portfolio.

Fortunately and in light of all of the foregoing Deepcaster has developed a Strategy for Protecting Wealth as well as Profiting and notwithstanding near-term outcomes of the battle over Fed Power:

The Strategy – Guidelines for Identifying Opportunities for Profit and Protection

1.      Get the Real Data.  

2.      Take Account of both Overt and Covert Cartel Intervention.

3.      “Buy and Hold” strategy rarely succeeds anymore.

4.      Track the Covert Interventionals as well as the Technicals and Fundamentals and Overt Interventionals.

5.      Perhaps most important, be prepared to go both long and short Major Market Sectors.

6.      Be aware of and Active in the overall Geopolitical Landscape.  Become involved in Political Action:

a.      Become involved in the movement to Audit and then abolish the private-for-profit U.S. Federal Reserve

b.      Join the Gold AntiTrust Action Committee

c.      Work to defeat The Cartel ‘End Game.’  

(See the Article cited above for full details.)

If this aforementioned Strategy is employed effectively, it can result both in an increasing Core Position in Gold and Silver, and in considerable Profit along the way.

Best regards,

Deepcaster LLC

Deepcaster.com

Wealth Preservation - Wealth Enhancement

Financial and Geopolitical Intelligence

Gravitas, Pietas, Virtus

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Real Bills and Gold

The Daily Bell published an interview with Dr. Lawrence H. White, Professor of Economics, George Mason University, on October 24, 2010. One of the questions the interviewer asked was this: “Please comment on real bills and how they work.”

            In his answer Professor White gave the following example. Joe the Baker buys flour from Bob the Miller and gives him a bill promising to pay $1000 in 90 days.

1.         There are several problems with this description. In actual fact it is not Joe who issues the bill but Bob. The bill is drawn by Bob on Joe who must accept it before it can have any value. In common parlance Bob bills Joe. Professor White puts the cart before the horse in confusing the concept of a bill with that of a note. A bill originates with the payee, the note originates with the payer. This is no hair-splitting. The difference is important. A note is evidence of debt. A bill is evidence of value to be added. There is no loan, no lending and no borrowing involved in Joe’s purchase and Bob’s sale of the flour. None whatever. The transaction cannot be understood except in the context of merchandise maturing into the gold coin that only the ultimate consumer can release — a process that makes the relationship between Joe and Bob one of coordination rather than one of subordination. If anything, Bob could be considered the subordinate. Joe is one step closer to the boss, the consumer, and he is the one to get the gold coin first. He dispenses bread that is in general demand. Everybody eats bread. Flour that Bob dispenses is only in special demand. It is not as “liquid” as bread, if liquidity of (finished or semifinished) products is defined by how far removed from the consumer’s gold coin they are.

            It is preposterous to suggest that Bob is the lender and Joe is the borrower. The two men are partners in a joint enterprise, made ad hoc, in order to provide the consumer with bread. Their role is like that of the two blades of a pair of scissors: neither can do the job by itself. This is not to deny that Bob extends credit to Joe. But extending credit is not the same as lending. To suggest that Joe is in debt to Bob as a result of borrowing is entirely fallacious. Joe is in a very strong position: the bill he has accepted can circulate as money for 90 days. The note of a mere borrower cannot.

2.         Professor White goes on to say that Bob the Miller can either wait 90 days for his money, or he can go to a bank and sell his bill. The banker will pay Bob something less than $1000 because he takes interest due for 90 days out of the proceeds.

            Again, there are several problems with this description. The main one is the suggestion that banks are necessary for real bills to be effective and useful. This representation makes facts stand on their head. The question whether bills came first or banks is not a “chicken or egg” problem. We have the facts certified by Ludwig von Mises, no friend of the Real Bills Doctrine, that bills did. Moreover, we have it on the authority of Adam Smith that real bills do circulate as money on their own wings and under their own steam. By contrast, legal tender bank notes circulate by virtue of the strong arm of the government.

            It would have been more correct for Professor White to say that Bob, if he wanted cash (read: gold coins) immediately, then he would go to the bill market and discount his bill (read: exchange it for gold coins at a price discounted by the number of days remaining to maturity, at the prevailing discount rate). But the beauty of real bills is seen in the fact that if all Bob wants to do is to pay for the shipment of grain that is being unloaded at his mill, then he does not have to go to the bill market to get gold. He can simply endorse the bill drawn on Joe, and Dick the Grain Merchant will be glad to take it in payment.

            I repeat: the $1000 face value of the bill does not represent debt and the discount does not represent interest on debt. Rather, it represents value to be added to the underlying merchandise and it is incumbent upon Joe the Baker to accomplish this feat. Time preference has nothing to do with it. The height of the discount rate is governed by considerations entirely different from those governing the height of the rate of interest, as we shall presently see. Confusing the two rates is the worst mistake economists have ever made, and are still making.

3.         Professor White condescendingly admits that bills, while they were still tolerated, used to command a low interest rate because of their “low default-risk”. This remark confuses the issue further. Risk of default has nothing to do with the height of the discount rate which is not determined on a case-by-case basis but, rather, across the board. In fact the risk of default is so low that it can be taken to be zero. I ask you: how many bakers go bankrupt for each banker that does?

            To understand what determines the height of the discount rate, as opposed to that of the rate of interest, we have to go not to the saver but to the consumer. The height of the discount rate is determined, not by the propensity to save, but by the propensity to consume. In more details, the discount rate varies inversely with the propensity to consume (whereas the rate of interest varies inversely with the propensity to save).

            A higher propensity to consume means that Joe the Baker experiences increased cash-flow (really, an increased flow of gold coins). It prompts him to get rid of the gold coins by prepaying his bill outstanding. Rather than buying back the bill he has accepted, which may have been endorsed and passed on a dozen times and would be next to impossible to track down, he simply goes into the bill market and buys any bill with three good signatures. The demand for bills has thus increased, making the bill price rise. This means that the discount rate is lower as a direct result of an increase in the propensity to consume. Conversely, a decline in the propensity to consume decreases demand in the bill market as retail merchants have a reduced cash flow and fewer gold coins to get rid of in prepaying their bills outstanding. Decreased demand shows up as a lower bill price or, what is the same, a higher discount rate.

            Our argument clearly shows that the credit represented by real bills has absolutely nothing to do with the propensity to save. The source of commercial credit is not savings, it is consumption.

            The reason why real bills have been and are badly misunderstood by most students of credit is a poor understanding of gold itself, and the “next best thing” to gold. Undoubtedly, the next best thing to gold is the bill of exchange representing merchandise in most urgent demand that is moving apace to the ultimate gold-paying consumer, and will be purchased by him before the season of the year changes (causing fundamental changes in the character of consumer demand) that is, in not more than 90 days. The process of supplying the consumer is a maturation process of merchandise which we figuratively describe as the maturing of the real bill into gold coins.

            The consumer is fickle, and changes in his taste are unpredictable (to say nothing of hers). The army of merchants and producers must stand on their toes to serve consumer demand efficiently and instantaneously. It is the gold coin that makes the consumer king. If you removed gold coins from circulation, as European governments started doing exactly 100 years ago, then merchants and producers would start serving another sovereign. From then on, they would rather serve the issuer of “legal tender” bank notes. This change in the person of the sovereign corrupted the economy and caused an upheaval in the Wealth of Nations.

4.         Professor White says that “real bills were an important source of business credit in the 19th century, and a major category of assets in a typical bank portfolio.” This sounds as if our grandfathers lived in backwater unmindful that there are other, more appropriate sources of commercial credit. The fact is that it was not progress or enlightened thinking but, rather, lust for power, desire to conquer, chicanery, malice, and vindictiveness on the part of certain governments that eliminated real bill circulation.

            Two dates stand out. (1) In 1909 first the French government and then, hard on its heels, the imperial German government introduced legislation making the note issue of their central banks legal tender. This paved the way towards financing the coming war with credits. (2) In 1918 the victorious Entente powers decided to block a spontaneous return of real bill circulation for they were afraid of multilateral trade. They would have liked to continue the wartime blockade of Germany. As there is no such a thing as peacetime blockade, they had to settle for something less: replacing blockade with blocking (real bills circulation, that is). This meant replacing multilateral with bilateral trade. Or, to call a spade a spade, replacing indirect with direct exchange alias barter — a relapse to conditions prevailing during the Stone Age. Through bilateral trade they hoped to monitor and, if need be, control German imports and exports. Under multilateral trade monitoring would be more difficult if not impossible.

            The collapse of the international gold standard was the direct consequence of this malicious and vindictive decision. The gold standard could not survive the destruction of its clearing house: the bill market — its most vital organ.

            The world is still suffering the consequences. “Structural unemployment” was perfectly unknown while real bills were financing multilateral trade. The elimination of real bill circulation has destroyed the wage fund out of which the wages of workers producing consumer goods can be prepaid. Prepaid, to be sure, because the ultimate consumer’s gold coin may not be available to pay wages for up to 90 days. However, the pay envelope must come weekly, rather than quarterly so that the Lord can “give us our daily bread”. Thus, in a real sense, the Lord’s Prayer is also a prayer for a speedy return of real bills circulation.

            Structural unemployment, plus periodic outbursts of a horrendous tide of unemployment was the result of the destruction of the wage fund. The 1930 episode was blamed on the gold standard. This argument has been exploded by events during the present GFC which, in the fullness of times, will be far worse as far as unemployment is concerned than the earlier episode. Real bill circulation has been eliminated along with the gold standard, yet unemployment is still with us. And, curiously, no one is inquiring how it can be that the removal of these two arch-enemies of government omnipotence has not removed the threat of deflation, depression, and unemployment — as promised by Keynes and other false prophets. 

            I shall continue my comments with a concluding article entitled More Real Bill Fallacies.

Antal E. Fekete

DISCLAIMER AND CONFLICTS
THE PUBLICATION OF THIS LETTER IS FOR YOUR INFORMATION AND AMUSEMENT ONLY. THE AUTHOR IS NOT SOLICITING ANY ACTION BASED UPON IT, NOR IS HE SUGGESTING THAT IT REPRESENTS, UNDER ANY CIRCUMSTANCES, A RECOMMENDATION TO BUY OR SELL ANY SECURITY. THE CONTENT OF THIS LETTER IS DERIVED FROM INFORMATION AND SOURCES BELIEVED TO BE RELIABLE, BUT THE AUTHOR MAKES NO REPRESENTATION THAT IT IS COMPLETE OR ERROR-FREE, AND IT SHOULD NOT BE RELIED UPON AS SUCH. IT IS TO BE TAKEN AS THE AUTHORS OPINION AS SHAPED BY HIS EXPERIENCE, RATHER THAN A STATEMENT OF FACTS. THE AUTHOR MAY HAVE INVESTMENT POSITIONS, LONG OR SHORT, IN ANY SECURITIES MENTIONED, WHICH MAY BE CHANGED AT ANY TIME FOR ANY REASON.

Copyright © 2002-2008 by Antal E. Fekete - All rights reserved

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Sentiment Sours ahead of US GDP

ONG Focus | Insights | Written by Oil N' Gold | Fri Oct 29 10 07:07 ET

Investors lightened positions ahead of US GDP report and next week's FOMC meeting. Risk aversion dominates the market as the pace of US recovery is not sufficient to reduce unemployment and bring inflation back to a normal level. USD and JPY are being sought. The euro tumbled as sovereign concerns in peripheral European economies remained worrisome. Commodities fall in European session with WTI crude oil price sliding to as low as 81.4 and gold remaining pressured below 1350.

US GDP probably expanded at a +2.2% annualized pace in 3Q10 as driven by growth in consumer spending, business investment and inventory growth. While this would be an improvement from +1.7% in 2Q10, the pace of recovery remains gradual and unsustainable. It's likely that the unemployment rate will stay around 10% for some period with such slow economic growth.

The market has fully priced in new QE measures - large-scale asset purchases- from the Fed next week. Yet, there have been heated debates on the size and time of the program. There are several possibilities that policymakers will choose to begin the program: 1) To buy $500B or more in longer-term Treasury over a period, say 6 months. 2) To buy $100B per month with re-evaluation of the program on every FOMC meeting. There's an implication that the purchase will continue until some sorts of improvement are seen in the economy. 3) To buy $50B or less every month. Ultimately, total purchase would amount to $1-2 trillion in all 3 scenarios. Apart from the asset-buying program, the Fed may adopt new communication strategies in ensuring the market that exceptionally low interest rates will be kept for an extended period. More importantly, the Fed will give a clearer idea on what ‘extended period' mean.

Euro's decline amid sovereign concerns in debt-ridden European economies weighed on gold in the near-term. The woes resurfaced as the Portuguese government failed to approve a debt-consolidation plan. In other peripheral nations, Greek Finance Minister George Papaconstantinou the country has ‘serious tax compliance issues and a review of Greece's 2009 Budget showed the deficit was above +15% of GDP, exceeding previous projections. In Ireland, note holders of Anglo Irish Bank Corp plan to oppose a debt exchange worth 20% of their 1.6B euro of securities. Spreads between peripheral bonds and German bunds widened.

Economic data released in the 16-nation region failed to alter euro's outlook in the near-term. Unemployment rate stayed flat at 10.1% while flash CPI reading rose +1.9% y/y (consensus: +1.7%) in September from +1.8% a month ago.

 

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Crude Oil Climbs but Remains Below 82 ahead of Inventory Data

Crude oil's recovery was capped below 82 as investors remained cautious about risk-taking. Sovereign crisis in peripheral European economies remains a big concerns, S&P's downgrade of Ireland's ratings indicates a bailout may not be able to solve the country's underlying problems. Meanwhile, the risks of contagion intensified with Portugal the next country expected to seek rescues. Gold price remained firm with the benchmark Comex futures hovering around 1380. Tensions on the Korean Peninsula have remained an overhang in the near-term.

Market sentiment has been dominated by macroeconomic and geopolitical tensions, overshadowing economic data which were rather encouraging. Yesterday, the US government upgraded GDP growth for 3Q10 to an annual rate of +2.5%, beating consensus of +2.4% and initial estimate of +2%. In European session today, IFO reported that Germany's business climate index rose to a record high of 109.3 in November from 107.7 a month ago. 'Current assessment' index and 'expectations' index also improved to 112.3 and 103.3 from 110.2 and 105.2 respectively.

The FOMC minutes for November were published yesterday. Few surprises were delivered so market reactions were not strong. The Fed released latest projections with GDP estimated to rise at 3-3.6% in 2011 versus prior forecast of 3.5-4.2% released in June. Unemployment is projected to be at around 9% by end of 2011, higher than prior projection of 8.5%. Inflation is expected to stay below the informal target of 2% through 2013. Policymakers had diverse opinions on the $600B asset-buying program despite the 10-1 vote. While most members expected the program to 'help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with' Fed's mandate, 'some participants noted concerns that additional expansion of the Federal Reserve's balance sheet could put unwanted downward pressure on the dollar's value in foreign exchange markets'. These comments probably supported the dollar's strength.

As investors await the weekly inventory report from the US Energy Department, the industry-sponsored American Petroleum Institute estimated crude oil inventory rose +5.19 mmb to 357.73 mmb in the week ended November 19.Both gasoline and distillate stockpiles fell -0.50 mmb and -0.31 mmb respectively. The market forecasts the official data today will show drops in crude oil, gasoline and distillate inventories.

Weekly change in inventory as of 19/11/10

Comparison between API and EIA reports: Forecast (using API's inventory level)

API collects stockpile information on a voluntary basis from operators of refineries, 76% of the time, using data in the past 4 years.

Source: Bloomberg, API, EIA

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Natural Gas Daily Technical Outlook

ONG Focus | Technical | Written by Oil N' Gold | Fri Nov 26 10 07:40 ET

Natural gas' rally resumes after brief consolidation and reaches as high as 4.411 so far today. Intraday bias remains on the upside for further rally. Current rise from 3.255 should now be targeting next key resistance at 5.194. On the downside, below 4.115 minor support will turn intraday bias neutral again. But after all, we'd still favor another rise as long as 3.71 support holds, even in case of deep retreat.

In the bigger picture, break of the falling trend line from 6.108 add some credence to the case that decline from there is completed with three waves down to 3.22 already. That is, it's merely a correction to rebound from 2.409. Further rise should be seen to 5.194 resistance for confirmation and break will target another high above 6.108 in medium term.

Nymex Natural Gas Continuous Contract 4 Hours Chart

Nymex Natural Gas Continuous Contract Daily Chart

 

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Is the Unrigged Silver Market Set To Explode?

At long last, a light of truth is shining into the dark corners of the silver market. The results could be explosive.

"The silver market is an inside job."

I'd been hearing that accusation for over ten years -- since my days as a commodity broker in the late 1990s. It was widely believed that the silver market (trading for less than $5 per ounce at the time) was rigged.

It's been a long time coming. But last week, the accusers finally got some satisfaction. As the WSJ reports,

A Commodity Futures Trading Commission regulator is putting pressure on the agency to take action in a high-profile, two-year-old investigation of the silver market.

At a CFTC hearing Tuesday to consider new rules to strengthen its commodity-enforcement powers, commissioner Bart Chilton said market players have made "repeated" and "fraudulent efforts to persuade and deviously control" silver prices.

Mr. Chilton said he believed there have been violations of CFTC rules that should be prosecuted, though he couldn't publicly disclose trader names...

And then came the lawsuits. Quick on the heels of the CFTC news, J.P. Morgan and HSBC were sued for silver manipulation in a New York court of law. (J.P. Morgan is the megabank that swallowed Bear Stearns. HSBC is a behemoth with British Empire roots dating back to 1865.)

The Morgan / HSBC suit alleges that:

...between in or about March 2008 and continuing through the present, Defendants have combined, conspired and agreed to restrain trade in, fix, and manipulate prices of silver futures and options contracts... Also during the Class Period, individual Defendants have intentionally acted to manipulate prices of COMEX silver futures and options contracts...

The two banks are accused of reaping hundreds of millions to billions in illegal profits, by way of bearish collusion that represented as much as 85% of all net short positions in the silver market.

Because the suit seeks class action status -- and because the CFTC commissioner has openly acknowledged shady dealings -- it is unknown how much legal risk this poses to Morgan and HSBC.

But putting that aside, the truly interesting question is this. If the manipulators have been holding silver down all this time, what happens next?

The silver to gold price ratio is a simple way to measure which metal is outperforming.

For much of 2010, silver had been either treading water (relative to gold) or lagging behind a bit. But then suddenly, as you can see from the chart above, the silver market just got up and went...

As the plaintiffs in the Morgan / HSBC lawsuit wryly suggest, this shift in tone might -- just might! -- have something to do with the silver manipulators deciding to lay low, thanks to an uncomfortable spotlight being shone upon them.

(If you would like to read more of my investment commentary on other topics, sign up for Taipan Daily.)

If the crimes of the manipulators are anywhere near what they are made out to be -- if only a fraction of the accusations are true -- then the silver market could arguably be considered one of the greatest "short squeeze" candidates in the history of markets.

As Daniel Drew liked to say (before Commodore Vanderbilt made him eat his own words): "He who sells what isn't his'n / Must buy it back or go to pris'n." If things get truly nutty as the flushed-out banks are forced to cover, there is no telling how high silver could go.

And in addition to the manipulator exposure angle, there is the little manner of China -- the third largest silver producer in the world after Peru and Mexico. As Bloomberg reports,

Silver exports from China, the world's largest, may drop about 40 percent this year as domestic demand from industry and investors climbs, according to Beijing Antaike Information Development Co.

"There is huge demand in China this year and that has affected exports, which were already hurt after the tax rebate was abolished," said Ng Cheng Thye, head of bullion at Standard Bank Asia. "The demand is coming from all areas, including jewelry, investment and fabrication and this has resulted in a physical market shortage in the Far East."

And then, of course, there are the dollar-destroying actions of the "bearded clam," aka Ben S. Bernanke, Chairman of the Federal Reserve.

If the Fed's first "QE" installment (surely you know those initials by now) is deemed a disappointment this week, precious metals could take a hit. But if Ben delivers, or if conviction rises of a likelihood for QE episodes 3 and 4 and 5, the n watch out.

Justice Litle

Taipan Publishing Group

Justice Litle is the Editorial Director of Taipan Publishing Group, Editor of Justice Litle’s Macro Trader, and Managing Editor to the free investing and trading e-letter Taipan Daily. His articles have been featured in Futures magazine, he has been quoted in The Wall Street Journal and has even contributed regular market commentary to Reuters and Dow Jones.

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