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12:49 am
May 25, 2009

Trace Mayer


posts 25

The ‘green shoots’ of the economy are really red roots evidenced by a labor market stasis and plummeting earnings.  Chairman Bernanke told ‘60 Minutes’ on Sunday that “green shoots” of economic resurgence are sprouting.  But those perceived green shoots are really red weeds that the Federal Reserve has internally debated for weeks.  The economy is grinding to a halt, the FRN$ is under intense pressure and beginning to buckle again while gold is predictably playing its role.

But the Fed officials do realize Americans want to be lied to about the state of the economy so they spout worthless pablum on national television and bury what remaining facts they decide to release in mostly unread reports.


The 28-29 April 2009 FOMC minutes were released today, 20 May 2009, and with all the blah, blah, blah edited out there is some useful information including:

“Labor market conditions deteriorated further in March. … The civilian unemployment rate climbed to 8.5 percent … Real spending on equipment and software dropped markedly … Business output continued to drop sharply, and credit availability was still tight. … the growth of real gross domestic product (GDP) in China appeared to pick up … investors were apparently surprised by the Committee’s announcement that it would increase significantly further the size of the Federal Reserve’s balance sheet … Poor liquidity in the market for Treasury inflation-protected securities continued to make these readings difficult to interpret. … daily trading volumes for Treasury securities remained low. … The spread between the forward trend earnings-price ratio for S&P 500 firms and an estimate of the real long-run Treasury yield–a rough gauge of the equity risk premium–narrowed during the intermeeting period but was still very high by historical standards. … Commercial bank credit contracted … Commercial real estate loans also fell. … Unemployment claims were exceptionally elevated … The economies of many key trading partners were seen as experiencing quite severe contractions. [emphasis and hyperlinks added]“


Credit is tight because holders of capital are seeking safer more liquid assets and refusing to lend.  Treasuries, the ‘risk-free asset’, has anemic volumes as do the klepto-TIPS.   To compensate the Federal Reserve engages in quantitative easing but will fail.

The value of real estate, both commercial and residential, is a function of the underlying business productivity.  In January when I attended the IMN Real Estate conference it was dead.  Commercial real estate loans are still falling.  Why lend money to buy ghost malls?

I agree with Bespoke Investment Group that Jeremy Siegel of the Wall Street Journal is ‘living in la la land’ regarding his view on the S&P 500 earnings calculations.

The United States economy, a consumption gulag, is fueled by the top lines of individuals.  The labor market is disappearing, unemployment is quickly rising, unemployment claims are probably rising faster and are exceptionally elevated while businesses are not spending or producing.  This downturn is neither comparable nor is the S&P 500 making any money.


The Great Credit Contraction has begun and the system does not collapse but evaporate.  Access to credit has evaporated.  Jobs and earnings evaporate which causes real estate values to evaporate.

Then real wealth is evaporated as bailouts for corporations or individuals toss money into the money hole and light it on fire.  This results in tax revenues evaporating with government spending rising at an greater rate and leads to in an exponential increase in the budget deficit.  Beware if you have a safety deposit box.

As capital flees to the safer and more liquid assets, anemic Treasury volumes result as capital flees into the world markets which, along with the trade deficit, results in a precarious current account deficit; particularly in real terms as Americans are less able to import and purchase foreign goods from real economies like Brazil which I discussed in-depth with Contrary Investors Cafe on 20 May 2009.

Then the budget deficit must be financed but it is the Treasury bubble which will burst.  On 18 January 2009 I wrote how and why the Treasury bubble will burst.  ”When foreign demand for U.S. debt subsides then at least two scenarios can happen:  (1) printing the money with hyperinflation or (2) a default”.

Before a complete collapse there will be inflation through monetization, partial defaults or increased interest rates.  All are negative for business activity.  All reinforce the downward spiral. 


Because the FRN$ is the world reserve currency and because gold is the risk-free asset therefore they are poles apart.  Not paper gold like the problematic GLD ETF or some other flimsy substitute but cold and hard bullion.  Gold will hold its purchasing power during times of fiat currency illusion inflation.  But it is during deflationary credit contractions that gold really performs best.

As I wrote about a couple weeks ago, “While the DOW may continue its rally I highly doubt it will breach 11.5 gold ounces before it resumes its downward destiny and reaching 5-6 ounces sometime this year.  Silver will likely continue its upward ascent and return to a more normal ratio with gold around 55.”

The gold to silver ratio has moved from 72 to 65.8, or about 8.6%.  During this latest bear market rally some of the key ratios have normalized but even with the monstrous move silver is still out of normal with more upside potential.  The next downward phase for the bond and equity markets will be upon us and if during deflation the FRN$ is king then gold is emperor.


‘Green shoots’ are growing in China and the Brazilian Amazon but not in the current American economy and Chairman Bernanke knows it.  Business activity is grinding to a halt with S&P 500 earnings looking like red roots.  Quantitative easing will fail.

The Great Credit Contraction grinds on and capital continues seeking safer and more liquid assets while key ratios continue to normalize.  Physical gold and silver, the ultimate forms of cash, will be prime beneficiaries of this mega-trend.

Disclosures:  Long physical gold and silver and no position in the GLD ETF or US Treasuries.

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