Fears of a deepening of Europe‘s debt crisis have prompted the world’s leading central banks to pump US dollars into the financial system, in a co-ordinated action designed to boost market confidence.

The Bank of England joined the US Federal Reserve, the European Central Bank, the Swiss National Bank and the Bank of Japan on Thursday to announce that they would flood money markets with dollars over the coming months.

The move, on the third anniversary of the collapse of the US investment bank Lehman Brothers, sent shares soaring in banks heavily exposed to debt default by Greece and the other struggling members of the 17-nation eurozone. The euro, which had been falling in recent days, rebounded, rising roughly 1% in European trading on Thursday.

Speaking in Washington, Christine Lagarde, the president of the International Monetary Fund, said: “They [the banks] are getting together and acting together. To me, that is the most important message.”

Lagarde warned that more action was needed.

“We have entered into a dangerous phase of the crisis,” she said. There is still a path to recovery, Lagarde said, but it is a “narrow” one.

Under the terms of the deal, banks will be able to bid for unlimited amounts of US dollars at fixed interest rates in three separate auctions. The first of these will be on 12 October.

Nick Parsons, head of strategy at National Australia Bank, said the decision to provide unlimited liquidity well into 2012 was a big show of support to the global banking system.

But he added: “If Greece were to default, an announcement that there would be unlimited liquidity available from central banks is one of the things you would want to have in place beforehand.”

The move comes as Europe’s finance ministers gather in Wroclaw, Poland, for a meeting of the Economic and Financial Affairs Council, known as Ecofin. US Treasury secretary Tim Geithner is set to address the meeting for the first time, and is expected to call for decisive action.

Putting further pressure on Europe’s finance ministers, the European Commission cut its growth forecast for the euro area for the rest of they year.

The commission predicted Europe would barely avoid a double-dip recession, and that growth would come to a “virtual standstill” towards the end of the year.

Gus Faucher, director of macroeconomics at Moody’s Analytics, said the move to pump dollars into the system would help in the short term, but all eyes were still on the meeting of European finance ministers.

“It’s not a cure; it’s a temporary palliative,” said Faucher. “The big question is: is this enough in the short term to get us to a longer term solution? There is a potential for a really huge financial crisis in Europe. Things are bad now, but they could get a lot worse.”

Hedge fund billionaire George Soros said the Euro crisis looked “more intractable” than the 2008 financial crisis. Writing in the New York Review of Books, Soros said it was “imperative to prepare for the possibility of default and defection from the eurozone in the case of Greece, Portugal, and perhaps Ireland.”

He said massive political changes were needed in Europe, including the establshment of a European Treasury, ” to forestall a possible financial meltdown and another Great Depression.”

In London, the FTSE 100 index closed up 110 points at 5337, over 2%. On Wall Street, the Dow Jones index gained even in the face of poor economic figures.

Gold fell, heading for the biggest three-day drop in almost three years, as demand for riskier assets eroded the appeal of the precious metal as a haven.

Gold futures rose as much as 18 percent this month, touching an all-time high of $1,917.90 an ounce on Aug. 23 before erasing most of the gains. The value of a 100-ounce futures contract in New York plunged $10,400 yesterday, more than the $7,425 margin requirement that day, prompting exchange owner CME Group Inc. to increase the minimum cash deposit on trades. The Standard & Poor’s 500 Index headed for a weekly gain after a 16 percent decline in the previous four weeks.

“It looks nasty, but this is a normal correction given the magnitude of the move,” Matt Zeman, a strategist at Kingsview Financial in Chicago, said in a telephone interview. “The parabolic move finally collapsed. You’ve got a return to risk appetite, and that’s taken the wind out of gold’s sails.”

Gold futures for December delivery fell $20.40, or 1.2 percent, to $1,736.90 at 10:58 a.m. on the Comex in New York. A close at that price would leave the most-active contract down 8.2 percent in the past three sessions, the biggest slump since October 2008. In London, gold for immediate deliver was down $23, or 1.3 percent, at $1,736.32.

The metal is in the 11th year of a bull market, the longest winning streak since at least 1920 in London, as investors seek to diversify away from equities and some currencies. Central banks are adding to reserves for the first time in a generation, joining billionaire investors including John Paulson in hoarding bullion. The Federal Reserve has taken the unprecedented step of saying it will keep borrowing costs at almost zero percent at least through mid-2013 to support the economy.

‘Not Safe’

“Gold is a trade, gold is a position, gold is volatile, but gold is not safe,” Dennis Gartman, an economist, wrote today in his Suffolk, Virginia-based Gartman Letter. “The public is involved in gold, and the cab drivers of the world have bought into it. Now they are being taken out, at high cost.”

The Chicago-based CME raised margin requirements after gold futures surged to a record this month and then plunged the most since March 2008. The minimum cash deposit required to trade Comex futures will rise 27 percent to $9,450 per contract in the speculative Tier 1 category at the close of trading today, CME said late yesterday. The maintenance margin will rise to $7,000 from $5,500. The Shanghai Gold Exchange said Aug. 23 it will hike margins from settlement today.

“In our opinion, the margin is not nearly high enough yet,” Gartman said. “Proper margining would seem to be closer to $15,000 per contract.” Given the volatility in trading, “the exchange needs to protect itself and its clients” from the possibility of a large speculator or two putting “the exchange into jeopardy,” he said.

Speculator Holdings

Speculators held a net 218,403 futures and options contracts by Aug. 16, U.S. Commodity Futures Trading Commission data show. Positions reached 253,653 contracts by Aug. 2, the most since at least 2006, the data show. The CFTC will update its tally tomorrow.

The 10-day historical volatility for gold futures jumped to 41 percent, the highest level since March 2009, data compiled by Bloomberg show.

Following CME’s margin increases, silver slumped as much as 35 percent in about three weeks from April 25, when the metal touched a 31-year high of $49.845 an ounce on the Comex.

Gold’s surge and decline is similar to silver’s earlier this year, John Roque, WJB Capital Group’s senior technical analyst, said in a note to clients.

“Gold has some support at $1,700, but it wouldn’t surprise us to see the metal retest its last breakout level at $1,580,” Roque said.

Gold is still trading above its 200-, 100- and 50-day moving averages. The price is below the 20-day moving average of $1,743.50.

Silver futures for December delivery rose $1.004, or 2.6 percent, to $40.205 on the Comex.

Speaking at the Asia Society dinner in Sydney, Robert Zoellick also said the global economy was going through a multi-speed recovery, with developing countries now the source of growth and opportunity.

“What’s happened in the past couple of weeks is there is a convergence of some events in Europe and the United States that has led many market participants to lose confidence in economic leadership of some of the key countries,” he said.

“I think those events combined with some of the other fragilities in the nature of recovery have pushed us into a new danger zone. I don’t say those words lightly … so that policymakers recognize and take it seriously for what it is.”

Zoellick said the process of dealing with the sovereign debt problem and some of the competitive issues in the euro zone have tended to be done “a day late,” leaving markets worried that authorities may not be ahead of the problem or moving in the right direction.

“That (worry) has accumulated and so we’re moving from drama to trauma for a lot of the euro zone countries,” he said.

On the United States, Zoellick said it wasn’t fears the world’s biggest economy faced an imminent problem, but “frankly that markets are used to the United States playing a key role in the economic system and leadership.”

He said efforts to cut U.S. government spending have so far been focused on discretionary spending as opposed to the entitlement program such as social security. “Until they make an effort on those programs, there is going to be continued skepticism about dealing with long-term spending.”

Zoellick said while market confidence has been hit, the real issue was whether this will spread to business and consumer confidence, something that was still unclear.

“What is different from the world of the past is now emerging markets are sources of growth and opportunity. About half of global growth is represented by the developing world … so this is a very rapid change in a relatively short span of time in historical terms,” he added.

On China, Zoellick said the appreciation of the yuan would be constructive, especially in helping tackle the country’s inflationary pressure.

On Australia, he said the country was in a much better position than other developed countries because it undertook structural reforms. On the fiscal side, he noted Australia’s debt was only 7 percent of gross domestic product and taking advantage of its position in the Asia Pacific..

Manufacturing activity barely grew in July, falling to the weakest level since just after the recession ended.

The Institute for Supply Management, a trade group of purchasing executives, said Monday that its index of manufacturing activity fell to 50.9 percent in July from 55.3 percent in June.

It was the 23rd straight month of growth. But the reading was the lowest reading since July 2009 — one month after the recession officially ended. Any level above 50 indicates growth.

New orders shrank for the first time since the recession ended. Companies slashed their inventories after building them up in June. Output, employment, and prices paid my manufacturers all grew more slowly in July.

The disappointing report on manufacturing is the first major report on how economy performed in July. It suggests the dismal economic growth in the first half of the year could extend into the July-September quarter.

“The ISM manufacturing report for July is a shocker and strongly suggests that the disappointing performance of the economy in the first half of the year was not just temporary,” said Paul Dales, a senior U.S. economist for Capital Economics.

Stocks fell after the report was released. They had risen ahead of the report on the expectation thatCongress will approve a deal Monday to increase the nation’s borrowing limit. The Dow Jones industrial average fell 60 points in early-morning trading, and broader indexes also declined.

In a separate report, the Commerce Department said builders began work on more projects in June, pushing construction spending higher for a third straight month.

Construction spending rose 0.2 percent in June, to a seasonally adjusted annual rate of $772.3 billion, the government said. But even with the gains, spending remains slightly above an 11-year low hit in March and is just half of the $1.5 trillion pace considered healthy by most economists.

The economy expanded at a dismal 1.3 percent annual rate in the April-June period after an even worse 0.4 percent increase in the first three months of the year, the government said Friday.

The factory sector has expanded in every month but one since the recession ended in June 2009. The ISM’s index topped 60 for four straight months at the start of the year.

But manufacturing has stumbled in recent months. A parts shortage stemming from Japan’s March 11 earthquake disrupted automakers’ supply chains, cutting into the output of new cars. And high gas prices left Americans with less money to spend on discretionary items, such as vacations, furniture and appliances.

The index fell in May to 53.5 from April’s reading of 60.4. That was the sharpest one-month drop since 1984.

Employers have responded by pulling back on hiring. The economy added just 18,000 net jobs in June, the fewest in nine months, and the unemployment rate rose to 9.2 percent. Hiring by manufacturers was nearly flat in the April-June period.

The government issues its July employment report on Friday.

Several regional manufacturing surveys for the month of July have been mixed. The Philadelphia Federal Reserve Bank said its manufacturing index rose to 3.2, signaling that the sector is growing again in that region. It had contracted in June for the first time in nine months.

And a private survey in Chicago showed that manufacturing expanded in July, but at a slower pace than in June.

Meanwhile, a survey by the New York Federal Reserve Bank found regional manufacturing activity shrank in July.

Manufacturing represents only about 11 percent of U.S. economic activity and can contribute only so much to the broader economic recovery. For unemployment to fall significantly, consumer income and spending also must pick up.

The ISM, a trade group of purchasing executives based in Tempe, Ariz., compiles its manufacturing index by surveying about 300 purchasing executives across the country.

]]> http://www.sutton-associates.net/blog/2011/08/01/ineffective-stimulus-part-infinity/feed/ 0 http://www.sutton-associates.net/blog/2011/07/19/andys-july-liberty-talk-radio-appearance/ http://www.sutton-associates.net/blog/2011/07/19/andys-july-liberty-talk-radio-appearance/#comments Wed, 20 Jul 2011 02:04:05 +0000 TwoCentsEditor http://www.sutton-associates.net/blog/?p=996 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.

But the two well-known inflation hedges were only temporarily dented by the tough talk; on Friday silver pushed above $40 a troy ounce for the first time since 1980 and gold pushed to a new all-time high in nominal terms at $1,474.19.

The metals’ rallies have clear links to rising fears about inflation. But recent predictions for silver to hit $50 and gold to breach $1,500 are based on more than just these fears.

“Both markets actually have surplus supply. Demand for both is good – particularly industrial demand for silver – but this isn’t enough to absorb all the supply,” says Suki Cooper, precious metals analyst at Barclays Capital. “That leaves the rest down to investor demand.”

Investors have indeed been piling in. Holdings of gold to back exchange-traded funds – the popular way for retail investors to gain exposure – jumped 19.9 tonnes on Thursday alone in the biggest single inflow since late January, according to Barclays. On the same day, holdings of silver jumped 42 tonnes to another record at 15,554 tonnes.

Interest itself has been triggered by a range of factors, not least geopolitical tensions. After a weak January, prices of the metals spiked higher in February when the unrest that toppled governments in Tunisia and then Egypt sent investors scrambling for havens.

During the financial crisis, investor fear manifested itself in strong demand for physical holdings. In spite of recent turmoil, there has not been the same scramble to buy physical supplies this time round.

“The fear factor is not as key right now,” says Osvaldo Canavosio, a hedge fund analyst at Man Investments in New York. “At the height of the financial crisis, in precious metals there was a bit of a panic to hold physical.”

Yet the haven buyers were out in force again on Friday, watchers said, as investors braced for a potential shutdown of the US government if last-ditch talks between Republicans and Democrats fail to reach agreement.

Retail investors are showing particular interest in silver coins in many countries, including the US. Last month the Utah state legislature passed a bill accepting US gold and silver coins as legal tender and other states are considering similar legislation in a direct rebuke to the Federal Reserve and its ultra-loose monetary policy.

“Utah has crossed the Rubicon, others are likely to follow suit,” says Daniel Brebner at Deutsche Bank.

Analysts and investors now see $1,500 gold and $50 silver as likely to be breached in the coming months, as the potential for looser monetary policy for longer in the US weighs on the dollar.

Commodities, including gold and silver, are typically priced in dollars so a weaker dollar boosts raw materials prices. The euro hit a 14-month high of $1.4443 against the dollar on Friday. Some gold bugs are even betting on a third round of quantitative easing, dubbed QE3, by the Federal Reserve, after its current scheme ends in June.

“Expectations that QE2 could be followed by QE3 are higher in the gold market than in other markets,” says Edel Tully, precious metals strategist at UBS.

This could leave gold investors setting themselves up for disappointment. “I would expect gold to march to $1,500 sooner rather than later,” says Ms Tully. “Towards the end of this quarter gold could hit a stumbling block if QE2 ends.”

An end to QE would tighten US monetary policy but it would be a small step compared with the inflationary impact of soaring oil and food prices, which have pushed real US interest rates – nominal rates minus inflation – to negative levels, analysts say.

“Gold is ultimately dependent upon real rates, which are a function of both inflation expectations and monetary policy,” says Jeffrey Currie, head of commodities research at Goldman Sachs, which forecasts gold will hit $1,625 by the end of the year. “A top in gold prices will only become apparent when the risks of sovereign default are behind us with a clear and successful exit of the stimulus we’ve seen over the last few years.”

Negative real rates are not just a US issue; the same is true in China – where demand for bullion is skyrocketing, bankers say.

“The cost of carry [the difference between interest on deposits and non-interest bearing gold] is zero,” says Walter de Wet, head of commodities research at Standard Bank. “It incentivises money to be invested in assets.”

Analysts are, however, less confident on silver, whose move higher has been so dramatic that many believe a sharp correction could soon be on the cards.

“I’m less convinced we’re going to remain so high, if only because we’re expecting a generous increase in mine supply,” says James Steel, commodities analyst at HSBC. “Short-term, we could go higher, but it’s increasingly vulnerable to a correction.”

The Federal Reserve announced Wednesday that it was declining an offer from American International Group [AIG  36.05  -0.13  (-0.36%)   ] to buy the mortgage-related assets it holds in its Maiden Lane II portfolio.

Instead of selling the assets as a block to a single buyer, the Fed says it will sell the assets in individually and in blocks in a “competitive process.” Earlier reports have said that the Fed was considering an auction for the assets.

The Fed acquired the mortgage-related assets in connection with the bailout of AIG in 2008. At the time, they were considered to be “toxic.”

AIG had offered $15.7 billion to purchase the assets, which have a face value of $30 billion. At that price, the Fed would have made a profit of over $1.5 billion.

“In light of improved conditions in the secondary market for non-agency residential mortgage backed securities (RMBS), and a high level of interest by investors, the Federal Reserve believes that conditions are right for ML II to begin more extensive asset sales while taking appropriate care at all times to avoid market disruption,” the Federal Reserve said.

Outside investors have privately indicated that they are very interested in buying the assets. Offering the assets in a segments or individually—rather than as a complete block—will allow smaller investors and hedge funds to make bids. The Fed believes this will create a large set of potential investors in the assets.

BlackRock Solutions [BLK  198.84  12.34  (+6.62%)   ] is expected to circulate the first bid list sale early next week.

The Republican from Youngsville has introduced a bill that would establish a legislative commission to study his plan for a state currency. He is also drafting a second bill that would require state government to accept gold and silver coins as payment for taxes and fees.

If the state treasurer starts accepting precious metals as payment, Bradley said that could prod the private sector to follow suit – potentially allowing residents to trade gold for groceries.

“I think we’re in the process of inflating a dollar bubble that could be very devastating,” said Bradley, a freshman legislator elected in November’s GOP tide. “The idea is once the study commission finishes its work, then we could build on top of the hard-money currency with an actual State Tender Act that will basically [issue currency] in correspondence to precious metals stored in the state treasury.”

Bradley’s bill has yet to attract any co-sponsors among his fellow Republicans.

Mike Walden, an economics professor at N.C. State University, said the notion of North Carolina reverting to having its own currency is outlandish.

“We dealt with this issue about 100 years ago when the Federal Reserve was established,” Walden said. “If North Carolina were to have its own currency, that would put us at an extreme competitive disadvantage vis-a-vis other parts of the country and other parts of the world.”

State Treasurer Janet Cowell joked that Bradley’s precious metals proposal could increase efficiency in state government by providing a good use for her department’s old basement vault, which is currently used for storage.

“I look forward to engaging in an important public policy debate about whose face should be on the gold coin,” quipped Cowell, a Democrat.

But Bradley predicts that world events could soon prove him prescient.

“I don’t necessarily believe [the Federal Reserve] is about to collapse right now,” said Bradley, 37. “There are still a few things they can do with qualitative easing to sort of extend their survival. It’s just a question of how long. Right know we have a lot of sovereign debt going to China and Japan. When that debt stops being purchased by foreign countries, that currency is going to flood back onto American shores, potentially creating hyperinflation and bursting the currency bubble we have coming in Federal Reserve notes today.”

The Austrian School

Bradley, a self-employed computer technician and former Marine, attended Southeastern Baptist Theological Seminary in Wake Forest until he could no longer afford tuition, he said. While he has not taken any in-depth classes in economics, Bradley described himself as a devotee of the Austrian School, a branch of economic thought that originated in Vienna and was influential before World War I. A gross mischaracterization of the Austrian School of Economics.

Back then the value of most of the world’s currencies were tied to the amount of the gold amassed in their national treasuries. The United States abandoned the gold standard in 1933, after it was blamed for worsening the Great Depression. More Propaganda

Though the ideas of the Austrian School have been rejected by mainstream economists for much of the last century, they are in vogue with Libertarians and some supporters of the tea party movement. Mainstream Keynesian economists, whose policies have caused the globe to be irretrievably riddled with debt.

The language of Bradley’s House Bill 301 predicts a dire future for the U.S. economy.

“Many widely recognized experts predict the inevitable destruction of the Federal Reserve System’s currency through hyperinflation in the foreseeable future,” the bill declares. “In the event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System, for which the State is not prepared, the State’s governmental finances and private economy will be thrown into chaos. …”

Asked who are the “widely recognized experts” to which his bill refers, Bradley cited U.S. Rep. Ron Paul of Texas and Peter Schiff, a precious-metals dealer and investor who regularly appears as a commentator on Fox News.

Walden, the economics professor, said the views espoused by adherents of the Austrian School are well outside the mainstream of modern economic thought.

Bradley’s ideas for taking the state back to the Gilded Age don’t end at economics.

About Commerce Clause

A strict Constitutionalist, he has also introduced bills to exempt North Carolina agricultural products and firearms manufactured in the state from federal regulation as long as they are not sold or exported across state lines, measures that fly in the face of more than a century of U.S. Supreme Court rulings interpreting the Commerce Clause of the U.S. Constitution.

“They’re wrong,” Bradley said confidently of generations of justices. “The 10th Amendment is quite clear that those powers not reserved in the Constitution for the federal government are reserved to the states. It’s doesn’t take a high-priced lawyer to interpret the Constitution.”

Rep. Becky Carney, a Charlotte Democrat, said she found Bradley’s currency bill “perplexing.”

“There has absolutely been no indication of the collapse of the Federal Reserve system,” said Carney, who serves on the House banking committee. “It sounds like the Chicken Little story about ‘the sky is falling.’” - Propaganda

The office of House Speaker Thom Tillis declined to say whether the GOP leadership supports Bradley’s proposal to create a state currency. His bill has been referred to the House rules committee, where legislation is sometimes sent to die.

“There are a lot of diverse opinions and diverse views in our caucus,” said Jordan Shaw, Tillis’ spokesman. “I don’t think we’re going to forecast what will happen.”

They will be discussing the economic ramifications of the ongoing crisis in Japan, and the multitude of other boiling points around the globe including the Middle East, Europe’s debt woes, and our own stateside fiscal situation. Click Here to Listen

Listeners are encouraged to call in – (888) 773-4496 or (646) 652-4620

A quick status update on the Original Model Portfolio: Currently, the dividend-producing segment has a total return of 15.67% including dividends. This while the major indexes are off around 15% during the same time period. The precious metals section is leading all segments, up 25% as some of the early silver purchases from last year are now up well over 100%.

This month’s newsletter focuses almost entirely on the food situation. It covers stockpiles, weather, monetary influences, farmland price trends, crop yields, and other valuable information you’ll need to make intelligent decisions regarding this key area.

With the world’s attention now focused in the Pacific, the Middle East situation that has been brewing for the past month or so is quickly accelerating towards all-out conflict. Saudi troops have now entered Bahrain, and the King’s attempts to buy his people’s allegiance failed. They protested anyway. When money failed, he then used bullets to quell dissent. Saudi Arabia remains a key area. Don’t be fooled by the one-track minded mainstream media. The situation in the Middle East as well as they European debt crisis are still there and not going away. Not to mention America’s fiscal woes as more and more states are passing legislation that is in some cases downright frightening in response to the financial distress.

I was simply unable to cover all of these topics thoroughly in March’s letter, and will be issuing at least one audiocast in the next several days to complete the analysis of the markets and cover the geopolitical and economic news you’ll need moving forward.

For more information or to subscriber, Click Here