The Strong Hand of Silver

Toby Connor has an essay posted at goldseek.com with a title that I find very intriguing, namely “The Strong Hand Theory” because it sounds like it could be all sorts of terrific things, ranging from a new Sherlock Holmes mystery to “How to destroy brick buildings with a karate chop with your bare hand and impress girls!”

Unfortunately, Mr. Connor does not offer either any help in impressing girls by demolishing random commercial property, or entertainment with a story of the famous detective noticing the strength of a man’s handshake and goes brilliantly on from there to cleverly solving a murder mystery using mere wisps of clues, unlike the Securities and Exchange Commission that can’t even recognize blatant frauds even when they are repeatedly pointed out and the evidence is dumped on their desks.

It reminds me of how that little snot Arnold, from the accounting department, keeps showing my boss his stupid charts and stupid printouts that prove, so he says, that I am the worst employee the company has ever had, and my stupid boss wants to know if I can explain any of that, and I say, “Of course I can explain it! Arnold hates me, and he is a lying piece of crap that likes to hang around playgrounds and talk to cute little boys about joining the Nazi Party!” and of course Arnold, all flustered and upset, says, “That’s not true! None of it!”

Naturally, my back is against the wall, afraid to go home to face my wife and tell her that I have been fired from yet another job, I pressed the attack by replying, “That’s just what you filthy Nazi pedophile bastards always say! Fire him! Castrate him! Kill him!” which must have been a better retort than I thought, because he never brought it up again when I was in the room!

Anyway, this is not about Arnold, but that you, as an American, should be buying gold, silver and oil in response to the governments of the world, especially that of the USA, deficit-spending double-digit percentages of GDP, all financed by the central banks of the world creating the huge expansions in money, and how inflation in prices will soar in response to all of this new money, making gold, silver and oil go up in a huge, multi-decade hell of roaring inflation, starvation and murderous social discord, worse and worse, misery upon misery, until a Strong Hand arises to seize control of the world, and all people fall to their knees to worship The Mighty Mogambo (TMM)!

Okay, Mr. Connor did not say that, but since I am sure that gold, silver and oil will be worth whole multiples of their current prices, “the only way to lose money in a secular bull market is by trading” which is, as funny as it seems, pretty much exactly right!

And if you want to know the one investing strategy that always comes out best over the long-term when investing with a secular trend, it is Dollar Cost Averaging, a mindless system where you invest the same number of dollars each month, regardless of price.

And that is only part of the reason why I extol the virtues of the Mogambo Can’t Miss Portfolio (MCMP), loaded to the gunwales with gold, silver and oil, and, bristling with all the firepower that the Second Amendment allows, gives one the courage to say, “Whee! This investing stuff is easy!”

The Strong Hand of Silver originally appeared in the Daily Reckoning.

Economic Events on April 30, 2010

At 8:30 AM EDT, the Employment Cost Index for the first quarter of 2010 will be announced.  The consensus is an increase of 0.4%, which would be a decline of 0.1% compared to the last quarter of 2009.

Also at 8:30 AM EDT, the advance GDP report for the first quarter of 2010 will be announced.  The consensus is an increase of 3.4% in real GDP and an increase of 1.0% in the GDP price index.  These estimates are lower than the actuals from the previous quarter, but still indicate moderate growth.

At 9:45 AM EDT, the Chicago PMI Index for April will be announced.  The consensus index value is 60.0, which would be a slight increase from March as the economy continues to improve in the Chicago area.

At 9:55 AM EDT, Consumer Sentiment for the second half of April will be announced.  The consensus is that the index will be at 71, which would be an increase of 1.5 points from the first half of April, which had an unexpected decline.

At 3:00 PM EDT, the Farm Prices report for April will be released, giving investors and economists an indication of the direction of food prices in the coming months.

Join the forum discussion on this post - (1) Posts

China’s Exchange Rate and American Jobs

Here’s a brief reading list on the issue of China’s exchange rate and US manufacturing jobs:

Simon J. Evenett and Joseph Francois on whether Chinese currency revaluation will create net jobs for the US economy (link).

William R. Cline’s discussion of estimating the effect of renmimbi appreciation on American jobs (link).

Abdul Abiad, Daniel Leigh and Marco E. Terrones’s analysis of cost of reducing large current account surplus (link).

Paul Krugman’s discussion of Chinese exchange rate policy (link) (link).

Economic Events on April 29, 2010

At 8:30 AM EDT, the U.S. government will release its weekly Jobless Claims report.  The consensus is that there were 447,000 new jobless claims last week, which would be slightly less than the higher than expected number reported last week, and would continue the trend of slightly improving employment statistics.

At 10:00 AM EDT, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.

At 2:30 PM EDT, Treasury Secretary Timothy Geithner will testify before the Senate Appropriations Financial Services subcommittee about the Treasury budget for 2010.

At 4:30 PM EDT, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.

Also at 4:30 PM EDT, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.

Join the forum discussion on this post - (1) Posts

Liquidity Giveth, Liquidity Taketh – The IMF on International Capital Flows

To be an economist these days is a rare privilege and especially; it is a privilege to be a blogging economist since there is just so much good material to write about at the moment. On the one hand, there is the unfolding unravelling of Goldman Sachs (loads of material out there already, but just read Felix and you will be fine) and on the other there is the increasingly ominous signs that the Eurozone as we know it is about to become a thing of the past [1].

I hope that I will get to deal with these specific topics at a later time, but for now I would like to point,  in the most obscure of all directions, to chapter 4 [2]of the IMF’s part released Global Financial Stability Report which deals with the transmission of global monetary supply to international capital flows and global asset prices as well as inflation (hat tip: Tracy Alloway at FT Alphaville). Essentially the IMF report takes up the baton of some fundamental issues of global capital markets and issues which I have discussed on numerous occasions. The issue can be summarize through the two following questions;

1 – Can increasing nominal interest rates to quell domestic inflationary pressures be counterproductive and actually lead to overheating?

2 – What is the global effect of near ZIRP policies in a number of big developed economies and what will the effect be if this persists?

My own answer to the questions above is yes to the first with the qualifying remark that this implies a relative loss over the domestic monetary transmission mechanism both from the point of view of receiving (high interest rate) as well as sending (low interest rate) economies. And as for the second question I tend to see it as an externality to the global economy and crucially so, an externality which adds considerable volatility to global asset prices [3] since implied risk aversion in the market will determine whether the open taps by the G4 are used (or not) to build carry trade positions [4].

In their recent analysis on global capital flows (see link above), the IMF produces quantitative results and a well tailored methodology to boot to support these claims:

The global liquidity cycle started in 2003 and accelerated from the second half of 2007 when country authorities began to undertake unprecedented liquidity-easing measures to mitigate the effects of the crisis (Figure 4.1). While helping stabilize the financial system and support the return to growth, current easy global liquidity conditions and the accompanying surge in capital flows pose policy challenges to a number of countries where the crisis did not originate, with the primary challenge being an upside risk of inflation expectations in goods and asset markets. Such “liquidity-receiving” countries have had to ease domestic monetary conditions in response to both the slowdown in global demand and the acceleration in global liquidity, adding further pressure to asset prices. The policy challenge posed by easy monetary conditions is greater in economies—primarily emerging markets—that, in addition to strong growth prospects, have fixed or managed exchange rate regimes.1 The associated surges in capital inflows also raise early concerns about vulnerabilities to sudden stops once the global liquidity is unwound, with implications for financial stability.

Thus, what the IMF coins as liquidity receives are those economies subject to carry trade inflows (e.g. Brazil, Australia, New Zealand, South Africa etc) and liquidity senders on the other are developed economies with low interest rates. Recently, these were confined to Switzerland and Japan, but in the context of the financial crisis the UK, Europe (to some extent), and the US have also move short term interest rates to the floor and flooded their banking systems with cheap money for the wholesale market. This has even led some to dub it as the mother of all carry trades.

Now, I am tinkering at the moment with a model of international capital flows and global liquidity transmission which exactly seeks to incorporate this effect. In this sense, I think IMF’s results are very welcome. I am of course including demographics which I see as the missing link here since while I suspect the US (and the UK) may ultimately succeed in creating inflation which would force them to pull back liquidity provision others will not. Japan is the famous example here, but as the world ages there will be more and more.

In the jargon of the IMF; old age makes economies structurally prone to being a liquidity sender [5] and as the world ages we will have relatively more liquidity senders than receivers. This poses an externality to the global system and also adds to volatility of asset returns and growth over time.

[1] – Please note that I am in no way favor of this as I am personally a big believer in the European project but Germany has neither the capacity nor willingness to keep paying for others regardless of the fact that Germany’s economy is also, itself, an integral part of the problem.

[2] – See a web cast of the conclusions here

[3] – Which, by the way, is why I see great risks from the policy advice that central banks should target asset prices since there is a hidden volatility multiplier in the works here from tinkering too much with short term nominal interest rates.

[4] – I have even made my own humble contribution to a growing body of literature on this.

[5] – C.f. My master’s thesis I think this can be explained through intertemporal preference, but I am open to other interpretations.

Case Shiller: More Signs of Housing Price Recovery

U.S. housing prices are showing more signs of recovery. On Tuesday Case-Shiller released their index of home prices in 20 cities and it rose 0.6 percent in February from last year. The National Association of Realtors reported last week that existing-home prices advanced 0.4 percent in March as sales climbed for the first time in four months.

An abundance of inexpensive homes and a stabilizing job market are helping support housing demand, according to Dean Maki, chief U.S. economist for Barclays Capital:

Affordable home prices and the improving economy are doing more to lift sales than the tax credit. Consumers are becoming more confident about a major purchase such as a house. We’ll see a surge as buyers rush to close before the deadline, followed by a subsequent falloff. After that dip, we expect home sales to increase for the rest of the year.

“We’ve turned a corner with housing,” said economist Karl Case, who with Robert Shiller created the index. “As long as mortgage rates don’t jump and employment continues to improve, we should see housing play a key role in preventing a double-dip recession.”

The Case-Shiller Home Price Index is based on repeat transactions and measures the appreciation or depreciation for same the houses as they are resold over time. Many agree that this index is probably one of the best measures of changes in home prices.

The performance of home prices obviously continues to vary widely around the country. During February, the 12-month gain in prices was strongest in the West while prices in Washington D.C. and Dallas rose moderately.

The data continues to point to an extended price recovery, a trend that the index first highlighted back in February.

Economic Events on April 28, 2010

The Mortgage Bankers’ purchase index was released at 7:00 AM EDT, and there was a week to week increase of 7.4% last week, which is the second week of gains in a row, and was attributed to the end of the second federal stimulus program and low interest rates.

At 10:30 AM EDT, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update after a sharp drop in oil prices yesterday.

At 2:15 PM EDT, the FOMC Meeting Announcement will be made, which will provide insight into how long the Federal Reserve plans to keep rates at 0%.  It is assumed that there will be no immediate change in the Fed funds target rate, but any hint that rates could rise in the futurecould have an impact on the bond market and stock market.

Join the forum discussion on this post - (1) Posts

Euro Gold And The Euro Zone

I had a conference to attend in Southern California last week but the true capstone was a Sunday evening dinner with several readers. Although ‘gold bugs’ may be perceived in their writing as cranky I have found them to be among the most considerate and cultured company. Perhaps it stems from their respect for individual rights. Either way the grilled chicken was fabulous and I brought delicious creations from Extraordinary Desserts.

But we had serious and complicated legal, financial and economic discussions. Fiat currency, fractional reserve banking and derivatives have completely broken the pricing mechanism. A tiny volcano burps and entire transportation systems grind to a halt. We addressed tough questions about survivalism in the suburbs. And then focus turned to the timing of the evaporation of the FRN$.

euro gold april 2010

EURO GOLD

But the FRN$ is below the Euro in the liquidity pyramid. The FRN$ has deeper capital pools, more economic underpinning, greater liquidity, a stronger economic union and more thoroughly self-deceived owners of colored coupons and imaginary digits. Therefore, the Euro will evaporate before the FRN$. And that is precisely what is happening.

Fiat currencies represent the common stocks of nations, or in the Euro’s case the common stock of a weak coalition of nations. Since gold is the numaire par excellence then lets take a view at the Euro zone’s stock through that lens.

A few weeks ago when I was around Doug Casey he remarked that the Euro will be gone in about five years. As the above chart shows, the Euro has lost about 75% of its value in the last 10 years. Mr. Casey may be slightly optimistic about this particular intrinsically worthless colored coupon that represents the common stock of that monetary union.

EURO ZONE

So what has happened in the Euro zone as its common stock has been evaporating? Government budgets have exploded, economic output has slowed, individuals are rioting and causing material amounts of damage, governments are being toppled and armed forces, despite being prohibited by the law that they ultimately enforce, are striking.

For example, on 26 April 2010 King Albert II of Belgium accepted Prime Minister Yve Leterme’s colation government’s resignation after futile blathering to resuscitate the government dissipated. This highlights one of the common themes in Europe as Belgium is a prototype of cultural differences with French and Dutch speaking communities disputing while the government debt as a percentage of GDP is over 100%. These giant parasitical vampire squids cannot be supported by the underlying livestock base. But a friendly tip, if you are in Bruges be sure to get a waffle as they are delectable.

Another fun example, also on 26 April 2010, hundreds of Greek air force pilots called in sick. Sure, these armed services members are not legally allowed to strike but such civil disobedience happens when members of the enforcer and brutalizing class do not get their paychecks or those paychecks are reduced due to ‘austerity measures’.

Sure, Greek Finance Minister George Papaconstantinou incoherently babbles about cutting the budget deficit through structural reforms instead of salaries but the truth of the matter is that government, like the vampires in Daybreakers, would rather suck the humans dry and then die than curb their appetite and coexist. It is economic law, not voluntary restraint by the vampire squids, through undulating waves of mass psychology that forces limited government.

Despite what Merkel and Germany do the die is already cast with regards to the Euro and Euro zone. Interest rates must go up and the market is already forcing this with rises in debt default insurance rates. Additionally, the European banking system is still in terrible condition. On 23 April 2010 Moody’s lowered National Bank of Greece’s credit rating one grade to A3/A. Other Greek banks will likely be downgraded such as Emporiki, Agrotiki Bank, Piraeaus Bank, Eurobank, and Alpha Bank. Plus, Belgium banks need to be cleansed along with plenty of other banks throughout Europe from England to Austria and France to Norway.

THE EURO IS BROKEN

The Euro is broken. This was its destiny. This is the destiny of all fiat currencies. These bureau-rats cannot stop this anymore than Cnut the Great could command the tide to halt. If these impotent bureau-rats are so powerful then why did they fail to pass legislation commanding the ash cloud to disperse?

So what will a post Euro Europe look like? Hopefully, the Europeans do not go back to doing what they have been doing for thousands of years. But those are some of the ominous clouds on the horizon.

CONCLUSION

Gold has hit record highs around €860. The Euro is the only possible fiat contender as the world reserve currency and for rational investors it fails muster. Like the Euro the FRN$ is destined to evaporate but this will likely happen later and over a longer period of time.

As the political situation continues deteriorating in Europe holders of capital will continue turning towards the precious metals to protect and preserve their wealth. Europe has a rich culture, delicious foods and fine art. Hopefully I will be enjoying it next month and at a lower cost because of the evaporating Euro.

But Europe also has a savage past that only the vampire squids desire to see again. After all, luring countries to increase their debt load while destroying the production and productive capacity is bad for everyone but the sociopathic bankers. And I should be gone before that happens.

83% Beat The Street; Revenues Also Top Forecasts

All last week we pointed to the strong earnings numbers released by U.S. corporations. The overall results are in and point to a measure that confirms our sector by sector reports.

Expected growth in first-quarter earnings for companies in the S&P 500 index has now jumped to 50% from 39% in the prior week according to Thomson Reuters.

As we reported last week many companies like Citigroup Inc. (C), Bank of America Corp. (BAC) and Goldman Sachs Group Inc. (GS) each reported earnings growth far above analysts’ estimates.

In this coming week the Q1 earnings season culminates with six of the 30 Dow Jones Industrial Average components and a third of the S&P 500 companies scheduled to post their operating results.

In the S&P 500 through Friday, 83% have already posted results above analysts’ expectations. In an average quarter only 61% of companies beat the street estimates.

And companies are not sacrificing revenue growth in order to improve their bottom lines. Revenue too has also bested most analyst estimates. Thomson Reuters said 69% of those companies that have reported thus far have topped their revenue views.

Q1 will now mark two quarters in a row where the S&P 500 has recorded earnings growth. It adds additional evidence that when the government reports overall GDP growth estimates next Friday, those initial measurements will register stronger than Q4.

Economic Events on April 27, 2010

The weekly ICSC-Goldman Store Sales report will be released at 7:45 AM EDT, and another strong week of sales is expected.

At 8:55 AM EDT, the weekly Redbook report will be released, giving us more information about consumer spending.

The monthly S&P/Case-Shiller home price index report will be released at 9:00 AM EDT.  Given that most economists don’t expect the overall U.S. economy to improve until housing prices end their decline, the market will be watching this number closely.

The monthly report on Consumer Confidence for April will be released at 10:00 AM EDT.  The consensus index level is 53.5, which would be a slight increase over March, and this report will be watched closely by the market because of the drop in consumer sentiment reported earlier this month.

Join the forum discussion on this post - (1) Posts