Andy Sutton's Extemporania

Weekly Commentaries and Occasional Observations

About Sutton & Associates

Archives: July 2011

Palladium Primer – by Andy Sutton

by TwoCentsEditor

Published on: 07/29/2011

Categories: Current Events, My Two Cents

Tags: bob chapman, mining, natural resources, northern miner, palladium, palladium stocks, precious metals

Comments: No Comments

Often lost in the shuffle and the talk about gold and silver as the primary precious metals is another metal, which has uses that rival that of silver, is brilliant in appearance and makes a beautiful coin. Its value has quadrupled since 2003 after seeing an all-time high in 2001, and potentially the best aspect yet is that the supply and demand fundamentals have never been better. Guess it yet? I’m talking about palladium. Over the next several pages, we’ll take a look at the many uses for palladium, who the big producers and consumers are, prices, and most importantly, the future outlook. The purpose of this article is not to form specific recommendations, but rather to raise awareness of another of the semi-precious metals and to act as a primer for familiarizing people on its fundamentals.

By way of introduction, let me say first that palladium does not have a rich heritage as a monetary metal like gold and silver. Rather, it is akin to platinum in that you can buy coins (Maple Leafs and bars) rather easily, but they will not be as recognizable by and large as their gold and silver counterparts. The metal is more of an industrial metal, which one might immediately think is bad because by definition, it is susceptible to swings in economic output. This would be true, however, as is the case with energy and other products, we must keep in mind the interlocking nature of the global economy and that we need to be focused on aggregate demand as in global demand, not aggregate demand as in sub-regional or regional demand. Palladium is also not an effective inflation hedge. Looking at historical prices through 2006, you’ll quickly notice that the peak was in 2001, hardly the pinnacle of dollar destruction. However, over the past several years, palladium, like most other commodities, has trended upwards as the dollar has come under increased attack.

Palladium prices

Palladium’s Uses

Probably the most well known use of palladium is in autocatalysts or catalytic converters. These can be made of platinum as well, however, palladium has several advantages over its top-shelf counterpart. It is more resistant to oxidation, meaning it will last longer in catalytic applications, is softer and more ductile, and is generally cheaper than platinum. Auto-catalysts are by far the biggest use for palladium at the moment and such catalysts are even present in hybrid cars as well, meaning demand is not likely to be adversely affected even as many car owners switch to hybrids in the coming years. One possible risk to palladium demand would be a revolutionary breakthrough on the electric/solar/LNG side, which would make it feasible for a large amount of car owners to affordably switch to the new technology. There are certainly examples of these, but they are by no means a threat at this point and I wouldn’t foresee such developments becoming an issue over the next several years at a minimum. These types of major changes are generally slow to occur. As of 2009, roughly 45% of palladium was used in autocatalysts. This number was down from over 53% in 2003, which bodes well for the diversity of uses for the metal.

A second popular use for palladium is in electronics. Its metallic characteristics make it a very suitable substitute for gold in plating of sensitive electronic components. The fact that it costs roughly half that of gold makes is a shining example of the substitution effect in practice. As of 2009, around 15% of palladium

consumed went into electronic components. Jewelry accounted for roughly 14% of palladium used in 2009. Investment in the metal accounted for 10% of 2009 demand. This is very important because in the earlier part of the decade, investment in palladium was trivial at best despite the fact that the metal had very recently been at a record high. Interest has been multiplying significantly, however, most metals investors still have yet to make their first purchases of palladium.

Palladium Usage

Rounding out the balance of Pd’s uses are dentistry and chemical refining, where it is used to develop raw materials for use in synthetic rubber, polyester, and nylon. It is also utilized in oil refining where it is present in several types of hydrocracking applications, photography, water treatment, hydrogen purification, and medicine. Like silver, there are many diverse uses for palladium and this fact alone bodes well in that it serves to insulate prices somewhat from the stagnating USEconomy.

Palladium Supply and Demand

As of 2003, the situation with regards to palladium was eerily similar to that of the rare earth metals in that much of the globe’s resource base was concentrated into a very small oligopoly of producers. In that year, nearly 80% of global palladium production came either from the Russian Federation or South Africa. By 2010, Russia was largely tapped out of palladium. Its purported massive stockpiles were diminished to nothing and its three biggest mining projects were all in advanced stages of decline. Russia has been supplementing mine production from its Norilsk mining company with sales from Gokhran, the state repository (a stockpile), and the Russian Central Bank – obviously another stockpile. In early 2010 Anton Berlin, a director of Norilsk, stated that there would likely be no sales from the Russian repositories in 2011.

While the exact content of Russia’s stockpiles is not for public consumption, Mr. Berlin did confirm that sales out of the stockpiles have been declining since early in the decade. At this point, the largest palladium deposit on earth exists in South Africa in the form of the Bushveld Complex. Currently, the only other producing nation that has significant upside potential in terms of production is Zimbabwe. However, it is a locale that is loaded with political risk among other things at this stage of the game. There are currently several projects going on in North America, the most promising of which exists at Thunder Bay, which could end up producing nearly 40 million ounces of palladium. It must also be understood that the projects in the Thunder Bay area are for the most part in their infancy and real production is likely several years down the road.

Palladium Fundamentals

The market will need every ounce from these projects because light vehicle production is set to increase through 2016. If you’re worried about a worsening of the US recession killing off demand, consider the fact that China is outpacing America in terms of putting new cars on the road. There are several other jurisdictions like India and Brazil where more stable economic environments will lead to growth in middle classes that will take to the road as well. Remember; consider aggregate demand, not just regional demand. Other factors that will provide upward pressure on palladium usage are increases in investment demand, medical uses, and, in particular, the petroleum industry as shrinking supplies of crude oil demand even more efficient refining techniques. Palladium has also been a part of many of the early work in fuel cell technology and while it is impossible to gauge what the impact will be at this stage, fuel cells will clearly be in focus as the world comes to grips with peak oil and seeks suitable alternatives.

Vehicle Production Forecast

Summary and Outlook

Palladium has several big advantages over many of the other metals in the commodity space. First, it is practical in terms of holding a physical position should one desire. Compare it to copper, for example, where a $1000 position requires you to hold over 200 pounds of metal. Or consider oil where it is not practical for the average investor to hold a physical position at all. As I outlined above, supply and demand dynamics favor higher prices in the future, and while it was not the focus of this article, there are some very significant opportunities in the palladium mining space for those who wish to take advantage in that manner. The obvious risks to palladium are the same as the other industrial metals. Another severe global recession would likely dampen demand enough to keep prices in check. Such a recession/crisis, if it were to impact the capital markets as we saw in 2008, would likely impair mining firms (especially exploration/development types) from getting the necessary capital to fund their continuing operations. Innovation, especially in the automobile space, represents a risk to the current demand profile for palladium, but innovation also presents more potential uses for the metal as well.

The bottom line on palladium is that while it is certainly not the sole answer to protection against dollar destruction, there are some very compelling aspects to the market that make it worthy of serious consideration. It is yet another tool that we can use to operate in a world that is becoming increasingly wary of paper monetary instruments and will likely benefit as the world continues the quiet, but relentless push to ‘get real’ by acquiring tangible assets.

If you haven’t taken an opportunity to download our free report entitled ‘If You Have Paper Assets… There are Three Things You Must Consider’, think about doing so now. As debt contagion swirls in Europe and now on our shores, it is more important than ever to take a protective stance towards the entirety of your assets. Simply Click Here to go to the download page. No obligations, no hassles, just common sense investing wisdom.

Move On, Nothing to See Here?

by TwoCentsEditor

Published on: 07/27/2011

Categories: Current Events, Economics

Tags: bonds, credit rating, debt ceiling, government, infowars, obama, politics, socialism

Comments: No Comments

Editor’s Note: The ratings threats are reaching fever pitch, but buried in this article are two diverging undertones. The first is the (ridiculous) assertion that the US government can meet all of its obligations ad infinitum. If that is the case then why would the ratings agencies even mention a downgrade? The truth is the only way the USGovt can meet obligations is through more borrowing with the destruction of the dollar being the primary ramification. I would encourage anyone who actually cares about this to email the editor and writer of this story and encourage them to engage in some honest presentation of these facts.

David Beers may be the most influential political commentator in the U.S. right now, even though he’s hardly a household name, that isn’t technically his job and he’s only visiting.

As the London-based managing director of sovereign credit ratings at Standard & Poor’s, Beers will help determine whether the U.S. government’s credit rating will be downgraded as a result of the battle over raising the debt limit.

His company has gone beyond competing credit rating agencies to say that it isn’t enough for lawmakers to agree to lift the government’s $14.3 trillion debt ceiling. Congress and the White House also must agree to a deficit-reduction package to avoid a downgrade in the government’s AAA credit rating.

In an interview this week at Union Station, just blocks from the U.S. Capitol, Beers said he views the debt limit fight as a test of lawmakers’ willingness to tackle the deficit.

“For us, the issue is not the debt limit — it’s the underlying fiscal dynamics,” said Beers, who has been rating governments for the company for 20 years. “It’s not obvious to us that this political divide that is proving so difficult to bridge is going to be any more bridgeable three months from now or six months from now or a year from now.”

He said he didn’t know when an S&P committee would decide whether to cut the credit rating. “Depends on events,” he said.

Downgrade Impact

A decision to cut the government’s credit rating would likely increase Treasury rates by 60 to 70 basis points over the “medium term,” raising the nation’s borrowing costs by $100 billion a year, JPMorgan Chase & Co.’s Terry Belton said. It could also hurt the rest of the economy by increasing the cost of mortgages, auto loans and other types of lending tied to the interest rates paid on treasuries.

Yesterday, the markets showed little debt ceiling concerns, as seen in 10-year Treasury note yields hovering around 3 percent, below the average of 4.05 percent over the last decade, and the average of 5.48 percent when the country was running budget surpluses between 1998 and 2001.

On Capitol Hill, House and Senate leaders were trying to advance deficit reduction packages that would clear the way for a vote on the debt ceiling increase that the Treasury Department says must come by Aug 2.

The threat of a downgrade has made Standard & Poor’s a target for critics chafing at demands from a company that blessed the mortgage-backed securities that led to the financial crisis.

S&P Hill Critics

An April report by Senator Carl Levin, a Michigan Democrat, and Senator Tom Coburn, an Oklahoma Republican, concluded the credit agencies “weakened their standards as each competed to provide the most favorable rating to win business and greater market share. The result was a race to the bottom.”

In an interview, Levin said he views those faults as conflicts of interest issues that are separate from the S&P’s sovereign ratings work, which he declined to criticize. “My gut tells me that they’re calling it as they see it and, hopefully, they’re not impacted by their previous failures to call them as they should have seen it,” Levin said.

Senate Majority Leader Harry Reid, a Nevada Democrat, took a different view. “I wish they had made a few demands when Wall Street was collapsing,” said Reid. “They were silent then. Maybe they’re trying to get more energized.”

July Warning

At issue is a warning the company issued July 14 that there is a 50 percent chance S&P would downgrade the government’s credit rating within three months if lawmakers didn’t approve a “credible” deficit reduction package as part of a plan to raise the debt cap.

It was the latest in a series of demands from the company over the past year. In April, S&P said there was a one-in-three chance it would downgrade the government within two years; in October, it said lawmakers had as many as five years to address long-term deficits.

In its July report, the company said, “We believe that an inability to reach an agreement now could indicate that an agreement will not be reached for several more years.”

Critics say the company is misreading the political dynamics in Washington and that it shouldn’t engage in political prognosticating at all.

“If we fail to increase the debt ceiling, they have every right to take the U.S. down as many notches as they want,” said Jared Bernstein, former economic advisor to Vice President Joe Biden. “I don’t look to S&P for political analysis” and “their job is not to try to do political crystal-ball gazing. Their job is to assess the reliability of U.S. debt.”

U.S. Can Meet Obligations

Bernstein said, “Nothing fundamental has changed in the ability of the U.S. government to fully meet its debt obligations.”

IHS Global Insight Chief Economist Nariman Behravesh said S&P has unrealistic demands because lawmakers are unlikely to agree to a major deficit reduction package until after next year’s elections. “If they really think there is going to be a comprehensive solution before 2012, they are grossly mistaken,” he said.

Where Beers sees ominous gridlock over the debt, Behravesh sees progress. “Think about where we were six months ago: We were talking about stimulus,” he said. “The good news is U.S. politicians are talking” about trillion-dollar budget cuts.

He said S&P is “itching to pull the trigger” on a credit downgrade, saying “it’s almost like they’re overreacting in the other direction” in order “to make up for past errors.”

Former Congressional Budget Office Director Doug Holtz- Eakin, who advised the 2010 Republican presidential campaign of John McCain, said S&P is right to question the political will in Congress to address the deficit because it’s the central question surrounding the debt.

Political Wherewithal

“There is no question that the U.S. economy remains the largest, strongest on the globe and it has the financial wherewithal to pay its debts,” he said. “The question is, is that financial wherewithal matched by political wherewithal? And that’s what they’re trying to find out.”

Beers said critics of the company’s record during the housing crisis “know nothing about our sovereign ratings, which have an excellent track record.” He said it’s impossible to assess a government’s credit rating without making judgments about its politics.

“Economic policy is part of a political process,” he said. “Every government has to make choices, and it has to do it in some political context, and we have to look at that and decide how plausible that is.”

‘Sheer Difficulty’

The gridlock over the debt limit “highlights the sheer difficulty” lawmakers are having coming to agreement, he said, which has prompted S&P to shorten the timeframe over which it wants to see major cuts. He is skeptical that next year’s election will be “that decisive on this issue.”

U.S. lawmakers are lagging behind other similarly rated governments that have also faced debt challenges, he said, pointing to countries such as Britain that are implementing plans to tighten budgets.

“This whole issue of finding common ground has been on the table since March and it’s not as if people aren’t trying,” he said. “You have to make judgments about these sorts of things.”

To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

7/20/11 Liberty Talk Radio Appearance

by TwoCentsEditor

Published on: 07/21/2011

Categories: Appearances, Current Events, Economics, Financial Markets

Tags: andy sutton, Economics, government, investment advisor, investment newsletter, liberty talk radio, politics

Comments: No Comments

Andy Sutton’s 7/20 appearance with Joe Cristiano is available for listening. Click Here to hear the discussion on leading economic indicator biases, possible near-term resolutions (Band-Aids) to the debt crisis in America, and caller questions and comments.

Consumers Relying on Credit as Prices Rise

by TwoCentsEditor

Published on: 07/21/2011

Categories: Current Events, Economics

Tags: borrowing, credit, credit cards, credit counseling, credit limit, Economics

Comments: No Comments

Editor’s Note: We’d wondered what proportion of the recent expansion in consumer credit was because of this. Must mean we’ve got a healthy recovery going, right?

Consumers in the U.S. are increasingly using credit cards to pay for basic necessities as income gains fail to keep pace with rising food and fuel prices.

The dollar volume of purchases charged grew 10.7 percent in June from a year ago, while the number of transactions rose 6.8 percent, according to First Data Corp.’s SpendTrend report issued this month. The difference probably represents the increasing cost of gasoline, said Silvio Tavares, senior vice president at First Data, the largest credit card processor.

“Consumers, particularly in the lower-income end, are being forced to use their credit cards for everyday spending like gas and food,” said Tavares, who’s based in Atlanta. “That’s because there’s been no other positive catalyst, like an increase in wages, to offset higher prices. It’s acash-flow problem.”

Rising costs of food and gasoline are leaving Americans less money to spend discretionary items, slowing the pace of the recovery, Tavares said. Household spending accounts for about 70 percent of the world’s largest economy.

After-tax income adjusted for inflation fell 0.1 percent from January through May, according to figures from the Commerce Department. The drop came as Labor Department data showed energy prices rose 8.2 percent and food climbed 2 percent during the same period.

‘Dramatic’ Swings

The swings in purchases of fuel and food have been “dramatic,” Tavares said. The volume of gasoline purchases placed on credit cards jumped 39 percent last month from a year earlier, compared with a 21 percent increase in June 2010, he said. Food shopping increased 5 percent after falling 7 percent last year.

The value of an average transaction on credit cards outpaced the gain for debit cards, showing consumers are increasingly relying on borrowing to pay for gasoline and other necessities, Tavares said.

The figures are in synch with data from the Federal Reserve. Revolving credit, primarily credit card balances, increased by $3.37 billion to $793.1 billion in May from an almost seven-year low of $789.8 billion in April, figures from the central bank showed. The gain was equivalent to a 5.1 percent increase at an annual rate.

The use of credit cards is a “smoking gun” that indicates some consumers, including the long-term unemployed who have lost jobless benefits, are resorting to other sources of cash flow just to “get by,” said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto.

“People on the margin are putting necessities on their credit cards and this is a trend that’s very consistent with what lower-end retailers have been saying about their paycheck cycles,” Rosenberg said.

‘Cash-Strapped’

Core customers of Bentonville, Arkansas-based Wal-Mart Stores Inc. (WMT) are “cash strapped,” William Simon, U.S. stores chief, said at a June 15 conference hosted by William Blair & Co. “The paycheck cycle is severe.”

Similarly, customers of Matthews, North Carolina-based Family Dollar Stores Inc. (FDO) are living “paycheck-to-paycheck,” so when gas or food prices go up, “they don’t have the cushion that many others might have,” Chairman and Chief Executive Howard Levine said on a June 29 conference call.

Changes within the industry may account for some of the recent stabilization in outstanding revolving credit as several banks have ended incentive programs for debit cards, while increasing credit-card solicitations this year, Tavares said.

A possible bright spot is that inflation may moderate as prices of commodities stabilize, Fed Chairman Ben S. Bernanke said July 13 in his semi-annual testimony to Congress. As of July 19, the average price of a gallon of unleaded gas had dropped 7.6 percent from May 4, when it reached an almost three- year high.

Bernanke’s View

“The anticipated pickups in economic activity and job creation, together with the expected easing of price pressures, should bolster realhousehold income, confidence, and spending,” Bernanke said.

Confidence has a long way to climb for those in the lower- income brackets. The sentiment gauge for those making less than $15,000 a year was minus 66 in the week ended July 10 and was minus 69.6 for those earning $15,000 to $24,999, according to the Bloomberg Consumer Comfort Index. The comparable reading for households making more than $100,000 was minus 1.4.

“For people to think that this rebound in credit-card usage is actually a sign of resurging consumer confidence, I think they’re looking at the situation backwards,” Rosenberg said.

Andy’s July Liberty Talk Radio Appearance

by TwoCentsEditor

Published on: 07/19/2011

Categories: Appearances, Centsible Investor Info., Economics

Tags: andy sutton, economy, gold, investment secrets, investment tips, investments, joe cristiano, liberty talk radio, money, silver

Comments: No Comments

Dear Subscribers, Clients, and Friends of the Firm,

This Wednesday, July 20th, I will be appearing again on Liberty Talk Radio. I am determined to get some more folks to call in – so here it is. Anyone who calls in and mentions this email will get a complimentary three-month subscription to The Centsible Investor! How’s that for simple? See below for call-in information.

Among other things, Joe and I will be discussing the idea of leading, coincident, and lagging economic indicators. The Conference Board has been attempting to dazzle the markets and goose consumers with reports of good leading indicators for many months now, but the question remains leading to what?

We’ll take this topic as a follow-up to my August 21, 2009 editorial regarding the various types of indicators and their relevance in terms of forecasting. The rest of the show will be dedicated to your questions, plus some comments and observations I’ve gotten from people on Main Street over the past several months. We’ll be more than happy to take your calls. You can reach the show directly at (646) 652-4620 or toll-free at (888) 773-4496. You can also listen at his Blog Talk Radio Page.

July’s Centsible Investor is Available

by TwoCentsEditor

Published on: 07/14/2011

Categories: Centsible Investor Info., Economics

Tags: andy sutton, bonds, Centsible Investor, gold, investment newsletter, investment secrets, money, portfolio, stocks

Comments: No Comments

This month’s keynote focuses on an alternative measure of economic output: the Cobb-Douglas output function. While its critics cite the simplicity, it is just that which makes it desirable for us to use as a benchmark. We don’t need to worry about hedonics. What Cobb-Douglas is telling us about output is that all the government spending vis a vis borrowing has done very little to affect output; and we’re paying an awful price for precious little. In addition debt service is eating away at the economy’s legitimate capital pool. If we are to have a meaningful recovery, these trends must be reversed. All eyes are on Washington for leadership, but in typical fashion, our politicians are more worried about the next election than doing the right thing.

In energy, we do a reset on the global geopolitical picture. The SPR still has not been tapped as of yesterday’s EIA energy report despite assurances to the markets that it would be done. It is now looking like this announcement was more fluff than substance to knock prices down a few bucks knowing they’d go right up again as soon as Bernanke breathed the possibility of another round of public destruction of the dollar (QE).

Gold has hit another record high on the above news and even silver got into the action this week, rising almost 10% thus far. What damage have the CME margin hikes done and more importantly, cui bono? Who benefitted from the big hit on silver (which did bleed into some other commodities as well)? We lay out the big picture on metals. Summer is generally a slow time for metals, but they’re already heating up and it is only July.

We’ll lay out our unique perspective on our newest additions to the model portfolio. It will be quite surprising to many, but the rationale is simple and easy to follow. We also update on our interest rate model, which hit another home run recently as well as other conditions in the markets as well as an important development in the big picture for equity markets. Don’t miss an issue!

For more information or to subscribe, Click Here

Moody’s Warns US on Debt – AGAIN

by TwoCentsEditor

Published on: 07/14/2011

Categories: Current Events, Economics

Tags: 9/11, bonds, junk bonds, moody's, precious metals, s&p, stocks, treasuries

Comments: No Comments

Editor’s Note: We apologize for the bore, but are chronicling every time any of the ratings agencies cries wolf. This has been going on for YEARS. These agencies are nothing more than extensions of the USGovt/Federal Reserve system, at the whim of the international bankers.

Moody’s Investors Service put the U.S. under review for a credit rating downgrade as talks to raise the government’s $14.3 trillion debt limit stall, adding to concern that political gridlock will lead to a default.

The Aaa ratings of financial institutions directly linked to the U.S. government, including Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks, were also put on review for cuts, Moody’s said in a statement today.

The U.S., rated Aaa since 1917, was put on review for the first time since 1995 on concern the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes even though the risk remains low, Moody’s said. The rating would likely be reduced to the Aa range and there is no assurance that Moody’s would return its top rating even if a default is quickly cured.

“It certainly underscores the importance of passing the debt ceiling and not putting us in default status, and making sure there’s a longer term fiscal plan to contain spending and the deficit we’ve been running up over the last few years,” said Anthony Cronin, a Treasury bond trader at Societe General SA in New York, one of the 20 primary dealers that trade with the Federal Reserve. “Maybe it’s the impetus to say we’ll need more of a concession.”

Dollar, Bonds

The dollar weakened and Treasuries were little changed after the Moody’s statement. IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, including the euro, yen and pound, slid for a second day, shedding 1.1 percent.

The 10-year note yield was little changed at 2.88 percent at 5:31 p.m. in New York, according to Bloomberg Bond Trader prices, after increasing earlier as much as eight basis points to 2.96 percent. The yield dropped to 2.81 percent yesterday, the lowest since Dec. 1. The price of the 3.125 percent security due in May 2021 declined 1/32, or 31 cents per $1,000 face amount, to 102 2/32.

Treasury Secretary Timothy F. Geithner said he has taken steps to prevent a federal default until Aug. 2, using accounting measures that involve two retirement funds. The U.S. reached its borrowing limit on May 16.

The Moody’s announcement is a “timely reminder” and that Congress must “move quickly” to avoid default, the Treasury said in a statement today.

Debt Talks

“What we’re looking for is a raising of the limit. It doesn’t matter the process that they get there,” Steven Hess, the senior credit officer at Moody’s in New York, said in a telephone interview. “The rating outlook will be determined by the longer-term debt trajectory.”

Senate Republican Leader Mitch McConnell proposed a “last choice option” yesterday that effectively would grant President Barack Obama power to raise the debt limit in installments. McConnell’s plan would let the president raise the limit in three stages unless Congress disapproves by a two-thirds majority, while Obama would also be required to propose offsetting spending cuts. The spending reductions would be advisory, and the debt-ceiling increase would occur regardless of whether lawmakers enact the cuts.

“I think it reflects what we all know — that this is a serious time and serious discussions and we can’t continue to have people not contribute to solving this problem,” said Senator Patty Murray of Washington, the No. 4 Democratic leader in the chamber.

Boehner Reaction

“As Speaker Boehner has warned for months, if the White House does not take action soon to address our nation’s debt crisis by reining in spending, the markets may do it for us,” said Michael Steel, spokesman for House Speaker John Boehner, Republican of Ohio. “This action by Moody’s today reinforces the Speaker’s warning.”

Standard & Poor’s put the U.S. government on notice on April 18 that it risks losing its AAA credit rating unless policy makers agree on a plan by 2013 to reduce budget deficits and the national debt. The firm said at the time that there’s a one-in-three chance that the rating might be cut within two years and that its “baseline assumption” is that Congress and the Obama administration will come to terms on a plan to reduce record deficits.

S&P would lower its sovereign top-level AAA ranking to D, the last rung on its scale if the U.S. can’t pay its payments because of a failure to raise the debt ceiling, John Chambers, chairman of the company’s sovereign rating committee, said June 30. Moody’s said it would probably assign a position in the Aa range, or within three steps of its highest level.

Geithner: Tough Times to Continue for Many

by TwoCentsEditor

Published on: 07/11/2011

Categories: Current Events, Economics

Tags: alex jones, doublespeak, hegelian dialectic, management of expectations, money, orwellian, precious metals, stocks, Tim Geithner

Comments: No Comments

Editor’s Note: Where’s the happy talk of 2009 and 2010? This is another soundbyte in the never-ending quest to manage the expectations of the public. America is being played like a two-dollar fiddle.

WASHINGTON (AP) — Treasury Secretary Timothy Geithner (GYT’-nur) says many Americans will face hard times for a long time to come.

He says President Barack Obama rescued the United States from a second Great Depression and will keep working to strengthen the economy. But Geithner says will be some time before many people feel like the country is recovering.

Geithner tells NBC’s “Meet the Press” that it’s a very tough economy. He says that for a lot of people “it’s going to feel very hard, harder than anything they’ve experienced in their lifetime now, for a long time to come.”

A Permanent Crisis – By Andy Sutton

by TwoCentsEditor

Published on: 07/08/2011

Categories: Appearances, Economics, Financial Markets, My Two Cents

Tags: credit repair, eurozone debt, gold, greek debt, jim sinclair, money, peter schiff, stocks

Comments: No Comments

As the financial world breathed a collective sigh of relief as the Greek Parliament voted to impose further austerity measures on the people of Greece, I wondered aloud to no one in particular how many times we’d have to see this movie before people finally realize that this crisis is a permanent one. There are many analogies that we could use to illustrate what has gone on, but probably the best is a trauma patient coming into the hospital with a severed carotid artery. Instead of performing surgery and repairing the wound, doctors throw the unlucky fellow on a gurney with a piece of gauze taped over the incision. Every so often they check back in, throw another piece of gauze on it and walk out, never fixing the problem. That is precisely what is going on with regards to the Eurozone mess. And America’s too. Lots of tape and gauze with precious little in the way of real solutions has been the norm for quite some time now and there is no reason to think that this will change unless it is out of dire necessity.

In my opinion, there are (at least) three overriding macro themes that are driving this crisis, and will continue to do so. Like most other recent economic and financial dislocations, it will go until it doesn’t. Looking at the macro drivers below, it is easy to see why this is the case: old habits die hard and most importantly, this crisis, along with most others, is insanely profitable for a select few.

The Psycho-Moral Problem

When you really tear away at all the media glitz and veneer applied to the global debt mess, you can find several underlying causes. The first is greed. The second, and this one has been a rather recent development, is laziness. I often wonder if America would be able to undergo another industrial revolution similar to the first one in today’s world. I seriously doubt it. We seem to be good at building shopping malls and restaurants, then borrowing money to patronize these establishments. In the aggregate though, we really haven’t built much in the way of productive capacity in a generation, let alone manned and operated it. Do we even remember how? What is really coming to the forefront is that we are by no means alone in this suspiciously insane endeavor; the people of Europe have been doing a mighty fine job of living beyond their means as well. Europe has had its own ‘great society’ upheaval similar to America’s turn down the wrong path in the 1960′s.

This drive to create a social utopia, or in economic terms, a post-scarcity world, has created exactly that which it was supposed to avoid – long-term scarcity. Why did these attempts occur? Gross misunderstandings of economics? Many think so, but when you read the articles, papers, and other correspondence written by many of the players in these movements it becomes rather clear that they were interested more in power accumulation than anything else. And two continents got wrapped up into it to the point where we have no idea how to live without it. Here in the US, over half of the population receives some type of transfer payment from the government. For the purposes of this article, I am not making the distinction between people who paid into programs like social security and Medicare and those who didn’t. The point is governments have become little more than a very expensive conduit between the ‘working’ class and those who are collecting from them. And, it has been this way so long that people cannot fathom a world that is any different. When they are confronted with drastic change, well, you saw what happened in Athens – and is still going on despite the fact that the media has moved on to more pressing and important matters such as Nancy Grace’s newfound popularity.

The bottom line is that the Eurozone and America both need a massive attitude adjustment. 2008 didn’t even put a dent in the entitlement mentality in either locale. Imagine what it will take to change our way of thinking.

Rating Agency Competitive Downgrades

The final two bullet points likely fall under the broad category of financial and economic cannibalism. For years now, I’ve marveled both publicly and privately about the willingness of the major credit rating agencies to maintain the sterling debt rating of the USGovt despite a growing fiscal morass that is now only first being truly recognized. Let’s make the assumption that the people who run these agencies are not illiterate and actually know what is going on. Unfortunately, this logic has proven to be spot on as is evidenced by the constant beatings applied to Eurozone countries by the majors (S&P / Moody’s).

2010 Sovereign Ratings

This strategy of competitive downgrades serves to exacerbate the debt issue at its core, pretty much guaranteeing that none of these countries will ever clear their debts. Of course that is the whole point. The current action dovetails rather well with John Perkins’ assertions in “Confessions of an Economic Hitman.” Keep in mind also that while all these downgrades on PIIGS sovereign debt have taken place, the USGovt has received only ‘stern’ warnings regarding its own fiscal black hole. Clearly Moody’s and S&P are in the business of protecting the status quo. We saw the depths of rating agency fraud beginning in the early part of 2008 when highly rated mortgage tranches suddenly came up lame. We will see this again, this time in USGovt Treasury bonds. The status quo will be protected, even if a company or two takes a dive in the process. Think Lehman Brothers.

2011 Sovereign Ratings

Outrage from the Eurozone has intensified, particularly with yesterday’s severe downgrading of Portugal’s debt by Moody’s. The cut came as a newly elected government had just pushed through an ambitious austerity program. In the past year, Portugal has been cut from Aa2 (two steps below the rating of the USGovt) to Ba2, which is below investment grade and otherwise known as ‘junk’. This has all transpired despite the fact that Portugal has at least been trying to get its house in order. Meanwhile, Washington does zilch and maintains a top rating? These strategic hits on countries that are totally at the whim of the IMF and/or regional central banks reek of foul play. Calls for ‘more responsible behavior’ by Eurozone officials should be replaced with investigations into the ratings agencies themselves, given their duplicitous actions (and lack of action in some cases) regarding credit ratings.

It is also probably a reasonable assumption that both major ratings agencies and the raft of second-tier firms knew going in what was going to happen regarding the Eurozone. Much of the fallout follows the tenets of common sense. The endless bailouts are no different than our own broken system. Whether or not these bailouts are covered by the media is of no consequence. They’ve been going on for years and will continue to go on. The point is, shouldn’t the ratings have gone down sooner? There will be those that will argue that cutting ratings in 2008 or sooner would have precipitated the crisis in and of itself. This is probably precisely why the balloon hasn’t gone up yet on America’s bond ratings. However, it would appear that the ratings have been cut strategically to allow financial entities to game the system, hence my earlier comments regarding financial and economic cannibalism.

Foreign bank exposure to Eurozone debt

Similar to the yield curve, there is a ratings curve in the Eurozone, which creates a multitude of opportunities for trading profits. This goes back to the cardinal rule of large firm investing a la Jim Cramer: when there is no volatility, create some. And if you put a few countries into IMF receivership along the way, well that is just a cost of doing business, right?

Hedge Fund Bets

This probably qualifies as a corollary to my earlier point about parties gaming the system, but I think we need to expound on this just a little bit. My entire point here is that once again, the biggies are playing with fire. And they will get burned. Not maybe. Obviously there are no guarantees in life, but I’d say this one ranks up there with the sun coming up. It is going to happen. This is a continuing testimony to the greed involved in our society and financial system and precisely why I lobbied hard and spoke out against any bailouts in 2008. These people needed to go bankrupt. Instead they were allowed to compromise the financial system and with it, the economy. With the wounds barely healed, if they’ve healed at all, these same folks are right back at it again.

True to form, George Soros has had plenty to say about the Eurozone mess. Remember, he is the same fellow that said ‘I’m having a good crisis’ in 2009 while people were losing homes, jobs, and retirement savings. He added that it was the culmination of his life’s work. Oddly enough, the Daily Mail, which originally posted the story, has since pulled the offensive comments. He said recently,

“We are on the verge of an economic collapse which starts, let’s say, in Greece, but it could easily spread,” billionaire investor George Soros said during a panel discussion in Vienna on June 26. “The financial system remains extremely vulnerable.”

The fact that the self-appointed master of the currency raid has pointed out the fragility of the financial system foreshadows directly to the near certainty that there will in fact be another crisis. Again to my earlier point, it is insanely profitable for a select few. Hedge funds are firmly betting on the extension of the Greek tragedy to the rest of the Eurozone, and some are even betting on the metastasis of the problem across the Atlantic as well.

The major point to understand here is that there is no way to even quantify the risks associated with getting in on the sovereign debt mess. If you had 192 or so standalone countries, each with its own central bank like we used to have, it would be difficult enough just because of the propensity of banks and other financial actors to invest across borders. The idea of the regional currency and central bank was to curtail the risk inherent to the system, but instead, it has done the exact opposite because now there are so many actors gaming the system simultaneously. The idea of having a bunch of Dick Fulds operating on the razor’s edge with the global financial system on the line is a scary proposition. Sooner or later, someone is going to make a mistake and that is going to be it.

Once again, it will come down to the derivatives taking the paper empire to the woodshed. It isn’t even so much the millstone of the hundreds of billions in Eurozone debt that is spread all over the globe. There are bets on that debt, default swaps, options, and a full array of side bets on the debt itself, then bets on the side bets themselves and so on out to the 4th or 5th degree in many cases. The derivative issue was never even really addressed. It was the 800-pound elephant in 2008 and it is still standing there. Why? Because it is insanely profitable for a select few. Which comes back to my original point: we have a true moral crisis at the root of our economic and financial woes. None of the symptoms can be fixed until we get at the real causes and human nature is a tough nut to crack. See why I’m such a pessimist?

We have released a new complimentary report entitled “If You Have Paper Assets.. There are Three Things you MUST Consider”. It is a 10-page report that identifies some logical approaches you can take with regards to your paper investments if you’re one of the many people that still needs them to generate cash flow and income. Bear in mind this is in no way meant to supplant our firm position that each investor needs to have a sizable portion of their portfolio in physical precious metals, however, but is meant to augment the non-metals portion of your overall strategy. The report is available by clicking here.

Who Prints the Money??

by TwoCentsEditor

Published on: 07/06/2011

Categories: Current Events, Economics, Financial Markets

Tags: banking cartel, cashless society, debt, debt default, federal reserve note, G. Edward Griffin

Comments: No Comments

Editor’s Note: WHOA! Time out! The media has always told us the federal reserve had the printing presses. Now it is the Treasury? Pardon the sarcasm. Let’s get this straight once and for all. The Treasury prints the federal reserve’s money. The taxpayer pays for this to be done. Then the money is given to the federal reserve who then LENDS it back to the Treasury. Makes perfect sense in a world gone mad.

WASHINGTON — The number of dollar bills rolling off the great government presses here and in Fort Worth fell to a modern low last year. Production of $5 bills also dropped to the lowest level in 30 years. And for the first time in that period, the Treasury Department did not print any $10 bills.

The meaning seems clear. The future is here. Cash is in decline.

You can’t use it for online purchases, nor on many airplanes to buy snacks or duty-free goods. Last year, 36 percent of taxi fares in New York were paid with plastic. At Commerce, a restaurant in the West Village in Manhattan, the bar menus read, “Credit cards only. No cash please. Thank you.”

There is no definitive data on all of this. Cash transactions are notoriously hard to track, in part because people use cash when they do not want to be tracked. But a simple ratio is illuminating. In 1970, at the dawn of plastic payment, the value of United States currency in domestic circulation equaled about 5 percent of the nation’s economic activity. Last year, the value of currency in domestic circulation equaled about 2.5 percent of economic activity.

“This morning I bought a gallon of milk for $2.50 at a Mobil station, and I paid with my credit card,” said Tony Zazula, co-owner of Commerce restaurant, who spoke with a reporter while traveling in upstate New York. “I do carry a little cash, but only for gratuities.”

It is easy to look down the slope of this trend and predict the end of paper currency. Easy, but probably wrong. Most Americans prefer to use cash at least some of the time, and even those who do not, like Mr. Zazula, grudgingly concede they cannot live without it.

Currency remains the best available technology for paying baby sitters and tipping bellhops. Many small businesses — estimates range from one-third to half — won’t accept plastic. And criminals prefer cash. Whitey Bulger, the Boston gangster who lived in Santa Monica for 15 years, paid his rent in cash, and stashed thousands of dollars in his apartment walls.

Indeed, cash remains so pervasive, and the pace of change so slow, that Ron Shevlin, an analyst with the Boston research firm Aite Group, recently calculated that Americans would still be using paper currency in 200 years.

“Cash works for us,” Mr. Shevlin said. “The downward trend is clear, but change advocates always overestimate how quickly these things will happen.”

Production of paper currency is declining much more quickly than actual currency use because the bills are lasting longer. Thanks to technological advances, the average dollar bill now circulates for 40 months, up from 18 months two decades ago, according to Federal Reserve estimates.

Banks regularly send stacks of old notes to the Fed, which replaces the damaged ones. Until recently, notes were simply stacked facedown and destroyed, as were dog-eared notes, because the Fed’s scanning equipment could not distinguish between creases and tears. Now it can. In 1989, the Fed replaced 46 percent of returned dollar bills. Last year it replaced 21 percent. The rest of the notes were returned to circulation where they may lead longer lives because they are being used less often.

The futurists who have long predicted the end of paper money also underestimated the rise of the $100 bill as one of America’s most popular exports.

For two decades, since the fall of the Soviet Union, demand has exploded for the $100 bill, which is hoarded like gold in unstable places. Last year Treasury printed more $100 bills than dollar bills for the first time. There are now more than seven billion pictures of Benjamin Franklin in circulation — and the Federal Reserve’s best guess is that two-thirds are held by foreigners. American soldiers searching one of Saddam Hussein’s palaces in 2003 found about $650 million in fresh $100 bills.

This is very profitable for the United States. Currency is printed by the Treasury and issued by the Federal Reserve. The central bank pays the Treasury for the cost of production — about 10 cents a note — then exchanges the notes at face value for securities that pay interest. The more money it issues, the more interest it earns. And each year the Fed returns to the Treasury a windfall called a seigniorage payment, which last year exceeded $20 billion.

To meet foreign demand, the Fed has licensed banks to operate currency distribution warehouses in London, Frankfurt, Singapore and other financial centers.

In March, largely because of the boom in $100 notes, the value of all American notes in circulation topped $1 trillion for the first time.

In the United States, research suggests that the spread of electronic payment technologies is steadily reducing the share of payments made in cash. Drivers use E-Z Pass at toll plazas for roads and bridges. Commuters swipe stored-value cards at turnstiles. Christmas stockings are stuffed with gift cards.

Mr. Zazula, the restaurateur, made his decision in 2009, inspired by a flight on American Airlines, which had just introduced a no-cash policy. He said that 85 percent of his customers already paid with credit cards, and taking cash to and from the bank was a nuisance and security risk.

Two years later, Mr. Zazula said he had no regrets.

“You still have some people that are outraged that we won’t accept cash,” he said, “but most of it is a show because they end up having a credit card.”

But Commerce remains a rarity. Experts on payments cannot name another no-cash restaurant. Snap, a cafe in the Georgetown neighborhood of Washington, rejected cash in 2006, then reversed the policy a few years later.

Businesses are not required to take cash. The famous phrase “legal tender for all debts” means that lenders — and only lenders — are required to accept the bills. But most merchants don’t see the point in frustrating customers.

“It’s a rarity for a retailer of any size to go cash only, and it’s a rarity to decline to accept cash at all,” said Brian Dodge of the Retail Industry Leaders Association, a trade group.

Even the financial industry, which has promoted the spread of electronic payments, has moved away from grand predictions.

“There’s always going to be some people, for good or nefarious reasons, who want to use cash,” said Doug Johnson, vice president for risk management policy at the American Bankers Association. “I’m glad I had it yesterday,” Mr. Johnson said. “I blew out a fan belt on my car, and it’s nice to be able to give the tow driver a twenty.”

page 1 of 1

S	M	T	W	T	F	S
« Jun				Aug »
					1	2
3	4	5	6	7	8	9
10	11	12	13	14	15	16
17	18	19	20	21	22	23
24	25	26	27	28	29	30
31