By Eldon Mast, on November 6th, 2009
John Chambers ignited markets on Thursday. The Cisco CEO joined other leading firms like Apple, Amazon, Alcoa, Intel, and others by stating that, “the quarter was very strong. The recovery is gaining momentum.” Earlier in the week, the institute for supply management speculated that the US GDP is likely now growing at an annualized rate of 4.5%.
Chambers continued, “what we saw is a clear tipping point as our business continued to reflect strong sequential growth trends that meet or exceed expectations during normal economic times.”
Elsewhere on Thursday the US Labor Department said the output per hour of nonfarm workers rose at an annual rate of 9.5% in the quarter, more than four times the average productivity growth rate of the past quarter-century. When taken together with the second quarter’s 6.9% rise, it was the strongest productivity growth rate over a six-month period since 1961.
While unemployment remains high, initial claims for unemployment continue to fall and corporate profits have bounced back significantly from the strong downturn in Q1. As output keeps climbing, employment gains will follow shortly.
Such large productivity gains are quite common at the end of deep recessions and the beginning of recoveries. A healthy pattern is that productivity grows first, then employment rises, and finally wages increase.
It continues to be clear that this recovery will not be a jobless one. In fact on Thursday the government also reported that jobless claims dropped to a 10-month low raising speculation that the national unemployment rate has peaked will begin to fall as soon as next month.
And as we’ve published here since February (and as was witnessed on Thursday), the stock market will continue its move — swift and steep.
By Ajay Shah, on November 6th, 2009
Jerry Caprio and Ila Patnaik, at two ends of the world, on the same subject.
The UK Special Resolution Regime has excellent documentation on the web.
There is a lot of talk in India about financial stability, where basic ideas are distorted to defend the status quo. Financial stability is, sadly, not interesting to the establishment when achieving it requires undertaking economic reform. One example of this is the problems of closing down failed banks or other financial firms: few things are more important to financial stability than the machinery of the bankruptcy process for financial firms. The best thinking on how to build deposit insurance is found in Chapter 6 of Raghuram Rajan’s report. In the mid 1990s I was member of an RBI committee on reforming deposit insurance. There hasn’t been any movement on this in decades.
By Eldon Mast, on November 5th, 2009
Challenger, Gray & Christmas, Inc. announced on Wednesday that planned layoffs at U.S. firms fell for a third straight month in October to a 19-month low.
As we’ve noted the labor market is continuing to improve as US economic activity rebounds.
Planned job cuts announced by U.S. employers fell to 55,679 in October, down 16 percent from 66,404 in September.
The October job cuts represent the lowest level since March 2008, and are now at or below levels that were normally seen throughout all of 2006 and 2007.
In fact at a 55,679 monthly rate, the cuts are now well below the monthly average cuts for the last three years.
The Challenger report is one more indication that a return to US job growth is just around the corner.
By Claus Vistesen, on November 5th, 2009
It is indeed an old adage that while goods things are to be preferred over bad things it is possible to get too much of the former. Looking at recent comments from the governor of the Reserve Bank of Australia it is not difficult to imagine how these, albeit old and worn, pearls of wisdom may well have inspired Mr. Stevens in his effort to tiptoe the tightrope between signalling the intention to raise rates into an expected economic recovery on the one side and trying to prevent the Aussie shoot of on helium into the sun with wings of wax on the other.
(quote Bloomberg)
Australia’s central bank Governor Glenn Stevens signaled a surge in the nation’s currency to near parity with the U.S. dollar has given him scope to slow the pace of future interest-rate increases.
Stevens, who yesterday became the first central banker in the world to raise borrowing costs twice in 2009, said the 28 percent gain in the currency this year may hurt exports and cool inflation, allowing him to “gradually” raise borrowing costs. Just last month, he warned it may be “imprudent” to keep rates at “emergency levels.” The local currency and bond yields fell as traders slashed bets on another quarter-point boost next month, after Stevens raised the overnight cash rate target to 3.5 percent from 3.25 percent. Investors have been driving the Australian dollar toward parity with the greenback, betting China’s economic growth will boost exports from Australia, the biggest shipper of iron ore used in making steel.
Policy makers “are probably glad for the parity talk as it reduces the amount of work they need to do with monetary policy,” said Matthew Johnson, an interest-rate strategist at UBS AG in Sydney. “A December move is a 50-50 proposition.” Traders are betting there is a 50 percent chance Stevens will increase the key rate by another quarter point on Dec. 1, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 12:22 p.m. today. Prior to Stevens’s comments, they had a 96 percent bet on such a gain.
Mr. Stevens’ comments follows in the heels of the recent push by part of the Aussie towards parity with the US dollar reflected primarily in the fact that the RBA has already raised twice in 2009 (from 3.00 to 3.5%) as well as a growing risk sentiment which is a fundamental prerequistie, in the current market, for observing investors react to (growing) yield differences. In so many words, this is all about carry trade and more specifically about the fact that in a world where the G3 and others are still fiddling with quasi- or outright QE it takes a brave sould to initiate a hiking process since it will mean an immediate reaction in the currency market. This is especially the case when the liquidity anchor effectively constitutes the US and thus; while the US pump priming keeps a floor under risky assets and volatility at low levels it becomes a veritable turkey shoot to gun for those currencies whose central banks are on the hike (see more here).
Following Mr. Stevens’ comments, the Aussie did lose a bit of its steam even if many currency punters still see it racing towards parity over the course of the coming year.
 For example David Forrester who is currency economist at Barclays Capital expects the Aussie to test the parity level in 2010, a call based on the idea that the RBA will have hiked rates to a full 5.5% by the end of next year. Needless to say, in a world where risky assets continue to fly and risk aversion is kept in check this will provide a juicy interest rate differential vis-a-vis the G3 and thus the carry trade flows (be they actual carry trades or simply spot market piggy backing) will be plentiful.
The question is of course; can you blame the RBA for wanting to raise rates?
As it turns out, not really and particularly not in light of global central banks’ new found focus on asset prices in setting the policy rate. You know, it was all Greenspan’s fault and all that jazz. Still, for those worried about a too rapid V-shaped recovery, Australian house prices seem to offer plenty of things to worry about.
From Q3-08 to Q1-09 the house price index (weighted for the 8 biggest cities) fell a modest 5.6%, a drop which has been decisively paired in Q2/Q3-09 with the index rising a cumulative 8%. This picture is repeated if we look at a general gauge for consumer spending in the form of a sector break down of retail sales.
Consequently, the annual as well as monthly flow of retail trade turnover never really went decisively into negative in the context of the financial crisis which has no doubt contributed to the fact that the RBA never really contemplated a move into ZIRP and QE.
What happens next then?
Well as I noted recently, the burden of rebalancing may be tough to carry for those economies who have central banks brave enough to raise interest rates. Ironically of course and if it is really asset prices you are worried about, the risk is naturally that you just end up sucking in liquidity as you which in itself defeats the purpose of the hiking campaign (see Edward’s recent piece on Norway for a Scandinavian perspective on this). Naturally, you can retort to Brazil like capital controls, but in a world where capital flows freely and where the global economies are largely interdependent, this is like trying to stop a freight train with a VW Polo. Also, allow me to finish with a small quibble of mine in relation to the sudden urge by part of central bankers to target asset prices. I mean, this is fine and all and for those who know a little bit about monetary policy this is not something completely new. The problem is merely that targeting asset prices may not only be counterproductive in a world where asymmetric liquidity conditions and carry flows are the norm, by targeting asset prices also entail targeting a price which is considerable more volatile than traditional prices (because I assume that forecasting long term asset prices is not as easy as many believe). In this way, a steady gaze at asset prices may also conflict with central banks’ general propensity to favor incremental and gradual moves.
Whether this is the case in Australia, only time will tell. Yet, from the lovely fjords of Oslo, to the beaches of Rio, and on to the Great Barrier Reef policy makers may soon learn that you can indeed get too much of a good thing.
By Russ Nelson, on November 5th, 2009
There is a major flaw in Soros’ justification for spending $50m on a new think-tank. He derides “unchecked free markets” when in fact no such thing exists. You either have free markets checked by customer behavior, or you have markets which have been hampered by government action so producers are free to ignore customer behavior. An unchecked free market is an oxymoron.
By Rok Spruk, on November 4th, 2009
Here’s a short brief (link) by The Economist on effective tax rates around the world. At a stunning 55 percent effective tax rate on annual gross earning of $100,000, Slovenia is the most heavily taxed country on earth followed by India, Italy, Sweden and Argentina.
Source: The Economist (link)
By Eldon Mast, on November 4th, 2009
On Tuesday major auto manufacturers indicated that their October sales rebounded significantly following a weak September.
The increase to the US annualized sales rate was nearly 20 percent better than September’s measure. Early estimates show the bump adding $5 billion, or roughly 1.5% to October’s retail sales numbers versus September’s readings.
It now appears as though consumers no longer needed cash-for-clunker rebates to commit to new auto acquisitions in October.
GM, Ford and Nissan all reported that their sales are now up from a year ago.
Jessica Caldwell, senior analyst at auto industry tracker Edmunds.com said, “We are trending in the right direction,” and “it should be easier for auto companies to report year-over-year growth from this point on.”
Ford — which reported a strong profit on Monday — claims that increased production in October will help to replenish diminished supplies on dealer lots. Further, Ford sales management points to strong restocking demand through the end of 2009.
By Thersites, on November 4th, 2009
American populist angst has been rising for some time now. The optimist in me hopes that the Tea Party movement, and with it the rekindling within Americans of the vision of the founders and the defense of our Constitution can “fundamentally transform the United States of America” to coin a phrase from our old socialist pal in the Oval Office.
Yet while my heart tells me that there is a chance to turn this ship around, the overwhelming evidence that I have documented in my more sober if not brutally honest moments speaks to just the opposite. The progressives have been hammering away at our freedoms for well over a century, aggressively indoctrinating the citizenry with their perspicacious propaganda campaign. While our ideas are better, we have not adequately defended them. 
Today it occurred to me that the perturbed conservatives I saw on Ailes’ evil news network harping on the blasphemous spendthrift blowhards in Washington were missing the point in blaming our politicians for their actions. Sure I am just as outraged as the next fellow at the spending of taxpayer money on projects fraught with waste and corruption, the sheer arrogance of our leaders in running roughshod over our economic liberty and in general the out of control growth of the nanny state.
But just as it was these political leaders who were the great enablers for the bankers in the financial crisis, through the gobs of cheap government credit provided by the head of the banking cartel – the government’s Federal Reserve, through their implicit guarantees of too-big-too-fail taxpayer protection and through their push along with the ACORN thugs for providing housing for even the least creditworthy among us, so too was it the American people that have enabled this government.
James Madison said of democracies that they “have ever been spectacles of turbulence and contention; have ever been found incompatible with personal security or the rights of property; and have in general been as short in their lives as they have been violent in their deaths.” Perhaps more prescient, Marx posited that “Democracy is the road to socialism.” But alas, this is the system that we allowed to take hold though the Constitution never once mentions it, and we the people, who were supposed to vigilantly defend our liberty, have allowed our government to devolve into an instrument whereby each group plunders each and every other group. And what is this instrument of plunder of government but a representation of the people?
Herein lies the problem with blaming the politicians. It is we that have elected these scallywags. Their sole goal is retaining power in office, future of the nation-be-damned. Like for the bankers, though they know the system to be unsustainable in the long run, what matters to politicians is reaping the rewards before the storm. It is the American public that has let them continue to be irresponsible, leaving us with over $100 trillion in unfunded liabilities. We have condoned the profligacy and pillaging of our rights.
Throughout history in this country there has been a constant battle waged between those who espouse liberty and those who would sooner trade liberty for tyranny than live in a society based on self-reliance, merit and morality. Even if we have voted against the bad apples, we are complicit in having not convinced our fellow citizens to do so. Instead, we allowed the so-called elites, the political entrepreneurs to take over Washington, D.C., promising the people healthcare, housing and the rest of the hogwash spelled out in the Second Bill of Rights. They debauched our great nation by our sanction.
Now let me turn from criticizing us Americans (I am as complicit in this lack of vigilance as all my Libertarian brethren), lest I start to sound like Barack Obama. What we must do as the antidote to the growing Leviathan is to fight the intellectual fight for liberty on every street corner, in every classroom and through every other media possible. We must infiltrate corrupt and destructive institutions and reveal the truth to our fellow countrymen. We must seek out candidates with no interest in political power – no desire to cut deals but a sheer wish to restore America to its rightful place in the world; to serve as honest and capable stewards aiming to leave a better country for their children and children’s children. We must seek people willing to take unpopular positions with a firm and steadfast resolve, equipped with the knowledge of and confidence in the tenets of classical Liberalism. A good start would be to seek out those who have no desire to hold office.
Good government requires a populace that seeks good government. Further, it requires representatives with the courage to fight for prudent policy, not the petty politics of payoffs and plunder. Most importantly, it beckons those who wish to honor the vision of our Founders, in which the liberty of the most important minority, the individual is protected, in which free market capitalism is advanced through the protection of private property and contract rights and in which the defense of our citizenry and by extension the securing of our freedom is the highest priority of government.
Demoralizing as our situation as a nation may be as a result of a government that we have allowed to run amok, I should say that in some ways I am optimistic no matter what direction this country takes. Should we rally to fight the fight against the socialist sophists and begin to roll back the last hundred-plus years of disgraceful governance, we will succeed. On the other hand, if we continue to hurtle towards the day of reckoning of default and/or hyperinflation in von Mises’ “crackup boom,” the welfare state will collapse of its own weight, and those of us armed with the right ideas will be able to step out of the darkness and help lead the country back to peace and prosperity.
Either way, we must fight on every front to advance the ideals of liberty and engage the leftists (many Republicans included) in debate. We can no longer blame our politicians, but must heed our own advice and take the individual initiative and personal responsibility to ourselves battle to make this country once again a shining city upon a hill. Nothing less than the future of the nation depends on it.
By Eldon Mast, on November 3rd, 2009
The economy continues to rebuild itself and the manufacturing sector has now grown for three consecutive months. According to the Institute for Supply Management, their PMI registered 55.7 percent. That is 3.1 percentage points higher than the 52.6 percent reported in September. It was the highest reading for the index in over 3 years and manufacturing output month over month rose at the fastest pace in 63 months.
This year, the PMI has correlated extremely accurately with the growth in the overall economy. When annualized the current reading corresponds to a 4.5 percent GDP growth rate.
In more good news on Monday, the National Association of Realtors said its Pending Home Sales Index, rose 6.1 percent — the index is now at its highest level in nearly three years.
An additional report from the US Commerce Dept showed that U.S. construction spending made its largest gain in a year in September. The report reflected a huge increase in private residential building — the largest increase in more than six years.
In continued positive earnings news: For the first nine months of the year, Ford has now posted a $1.8-billion profit. That’s a $10.6-billion improvement from the same period a year ago. Surprisingly, Ford said that even without Clunkermania, it would have showed a profit. Further, Ford said it “expects to be solidly profitable in 2011, with positive operating-related cash flow.”
On the jobs front, the ISM’s Employment Index registered 53.1 percent in October, which is 6.9 percentage points above the reading reported in September. This indicates the first month of growth in US manufacturing employment in over a year. Eight of the ISM’s 18 manufacturing industries surveyed reported growth in employment in October.
To recap, the overall economy is now growing robustly, the housing market continues to recover steadily, earnings news continues to be extremely positive, and it now appears that we’ve seen the early concrete indications of employment growth.
While there continues to be fallout from the deep recession earlier in the year, it is becoming clearer by the day that upward economic momentum will persist and that this will not be a jobless recovery.
By Trace Mayer, on November 3rd, 2009
Edgar Allen Poe’s most widely circulated story was ‘The Gold Bug‘ where William Legrand appears to go insane after being bitten by a bug he thinks is pure gold and embarks on a search for mythical treasure. Paul T. Jones II of Tudor Investment Corporation has approximately $11.57B under management and has earned $1.22B year-to-date in 2009.
Mr. Jones is a serious money manager who makes serious money. In the 2009 Q3 report he wrote, ‘I have never been a gold bug. It is just an asset that, like everything else in life, has its time and place. And now is that time.’
20% UNDERVALUED
On page 17 he writes,
Our proprietary econometric model, which evaluates the impacts of inflation, M2 growth, and real rates on the price of gold, suggests – under our baseline macro scenario – that gold is 20% undervalued over the next 24 months. Our modeling work highlights the importance of real rates and inflation to the price of gold.
Mr. Jones is not alone with the Ancient Metal of Kings and is flanked by John Paulson with over $4B in gold investments and David Einhorn of Greenlight Capital who understands the risks of GLD and reported to shareholders that ’We made modest changes to our macro hedges. First, after extensive investigation we switched our entire GLD exchanged traded fund position into physical gold’. Interestingly Mr. Jones devotes 9 of 23 pages discussing gold like it is some forgotten mystery of finance. In some sense it is because if you want to learn the truth out money you have to learn it on your own.
Mr. Jones’ valuation of gold is eerily similar to my call of $1,300 earlier on Business News Network of Canada. $1,300 times 80 percent is $1,040. While Mr. Jones does not assume the title of a ‘gold bug’ having such company is encouraging.
GOLD SUPPLY
On page 18 he recites,
Despite a three-fold increase in worldwide metal exploration expenditures, new mine production has remained stagnant at 80 million troy ounces over the last decade. In addition, new mine production is marginal in terms of available supplies. As a result, any incremental demand for gold must be met through sales from current owners. They just aren’t making that much of it anymore. … The recent advent of physically-backed gold ETFs has increased investment demand from a new investor class. … The trailing 12-month ETF accumulation has “bought” the equivalent of 25% of new mine production consistently since the beginning of the year. … This represents a remarkable change of direction for a market that has been accustomed to absorbing substantial volumes of gold sold by central banks over the last decade. … More importantly, there is huge potential for more buy-side interest to emerge from central banks. Total international reserve assets have quadrupled over the last decade, primarily from the accumulation of global money. However, the percent of total reserve assets held in gold has declined markedly [emphasis added].
For reasons stated earlier I appreciate his use of the word ‘equivalent’ and also the ” around the word bought.
GOLD MARKET DISEQUILIBRIUM
Mr. Jones is, like most of us, merely on the prowl for a good investment. But there is no market more out of balance in the history of the world than the gold market. The closing act of this centuries old play began with the fat old lady singing (Bank of England dumping the crown’s reserves). There is even massive fraud alleged. But you do not spend a lot of time swimming with the vampire squids of Wall Street on in private equity without encountering rigged markets. Indeed, a nimble outsider can book some good profits by breaking or riding cartels.
But the more I investigated the gold market the more I learned it is easily distinguished from potash, pork bellies or even oil with OPEC. In this case, the price is being suppressed and not supported and this was being done not by users but by owners.
Dr. Greenspan even testified in 1998 that, ”Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.” Thus, we had a market that was undeniably rigged and that rig was officially sponsored and denied.
But if you own tremendous amounts of an asset then why run a cartel to keep its price down? Like a shark that smelled blood in the water I honed in on GATA’s beacon of gold bleeding central banks.
With books like Dr. Vieira’s masterful and meticulously footnoted 1,700+ page Pieces Of Eight and GATA’s dispatches and conferences I learned the macro picture. Gold is real money, poses a mortal threat to the fiat FRN$ based monetary system, and the bank’s legal monopoly to issue legal tender currency is inifinately more valuable than the price of a portfolio asset.
This legal counterfeit monopoly allows for confiscation through inflation which is a form of taxation without representation and without due process of law and in violation of the United States Constitution. Because this is done only under color of law consequently Federal law has no intelligible answer to What is a Dollar?
As Ludwig von Mises wrote,
It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.
Indeed, fiat currency and fractional reserve banking are the heart of the State and its health is war, carnage and death. Therefore, these centuries old tools of fiat currency and fractional reserve banking are both barbarous and relics that allow special private interests to profit from nefarious activities.
GOLD PRICE SUPPRESSION SCHEME
With meticulous documention by the Gold-Anti Trust Action Committee the environment was clear. The gold market is rigged. The rig is used to prop up a monetary system that is immoral and in conflict with the Supreme law of the United States. The rig is merely a means to that end but it is integral and indispensable. Also, the deeper you dig the more integral it appears to be. The Achilles heel appears to be physical delivery.
Consequently, the worldwide monetary system is a confidence game built on an illusion and if the people lose confidence in the illusion then the system does not collapse but evaporate. The easiest way to undermine the fraudulent illusion is by telling the truth and letting real money run free. As truth will cleave its own way and because of the complex systems we rely on for ordinary life this inevitable event of currency collapse could be very disruptive. It became time to prepare for survivalism in the suburbs. This would likely result in tremendous social, political, geo-politicial and geo-strategic changes.
GOLD BUG FEEDING FRENZY
And so the process that many of us have undergone is happening now to many others. With advances in telecommunications and the Internet the idea of sound money is spreading faster than fabricated H1N1 growth rates. Major money managers like John Paulson, David Einhorn and now Paul Jones are being bitten by the gold bug. As I wrote about over a year ago in The Derivative Illusion,
My strategy is to acquire gold on a consistent regular basis with a constant percentage of proceeds from cash-flowing assets. When you own an unencumbered ounce of gold your wealth is sovereign. Hoard it. Humanity’s gold lust has been dormant for nearly a century and when it awakens it will be extremely vehement and go viral. Those who own gold know of what I speak. The yellow metal seems to call out to the inner conscience and resonate with our DNA. The result will be that the pitiful garrets of the central banks will be overrun as The Great Credit Contraction continues.
What is happening is a sea-change. Fiat currency and fractional reserve banking are going to be replaced by commodity currency with 100% reserves through services like GoldMoney. It is like an iceberg flipping.
While no one knows exactly how this will play out and hopefully the machine does not stop but the transition happens in a rather orderly fashion and without too much chaos, disruption of ordinary life, destruction of property or loss of life. The issue is not that there is not enough gold but that there is too much worthless paper and the first rule of panic is to do it first. While Mr. Jones is late to the feeding frenzy on the central banks’ physical gold he has still arrived before almost everyone else.
DISCLOSURES: Long physical gold and silver and no position in the problematic SLV or GLD ETFs.
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